XII. Limitations on employee — 0325 Publ 6087 (PDF)

Statement of Requirement: Code §§ 401(a)(4) and 401(m); Reg. § 1.401(m)-2; Rev. Proc. 2023-37, sec. 10.02(1)(b)

19 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

(Note to reviewer: The following provisions are generally required in all plans where Matching Contributions are provided, except a SIMPLE 401(k) plan, a Safe Harbor CODA or a qualified automatic contribution arrangement (“QACA”) which are all deemed to pass the Code § 401(m) nondiscrimination test. These provisions are also required if Employee Contributions subject to Code § 401(m) are permitted under the Plan.)

(Note to reviewer: Employee Contributions and Matching Contributions must meet the nondiscrimination requirements of Code § 401(a)(4), and the Actual Contribution Percentage ("ACP") test of § 401(m). If Employee Contributions (including any Elective Deferrals recharacterized as Employee Contributions) or Matching Contributions are made in conjunction with a CODA, then the ACP test is in addition to the ADP test under § 401(k). Qualified Matching Contributions (QMACs) and Qualified Nonelective Contributions (QNECs) used to satisfy the ADP test may not be used to satisfy the ACP test.)

(Note to reviewer: Any QMACs provided under this arrangement must be nonforfeitable and satisfy distribution requirements applicable to elective deferrals when allocated to Participants’ accounts in the Plan. See CODA LRM XI. See also CODA LRM XVII regarding other changes for QMACs and QNECs, in that they may be permissibly distributed as part of a hardship distribution for certain years.

The following provisions must be included in the plan and cannot be incorporated by reference.)

Sample Plan Language:

1.Prior Year Testing 1.1 The Actual Contribution Percentage ("ACP") for a Plan Year for participants who are Highly Compensated Employees for each Plan Year and the prior year's ACP for participants who were Non-highly Compensated Employees for the prior Plan Year must satisfy one of the following tests:

a) The ACP for a Plan Year for participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ACP for participants who were Non-highly Compensated Employees for the prior Plan Year multiplied by 1.25; or b) The ACP for a Plan Year for participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior year's ACP for participants who were Non-highly Compensated Employees for the prior Plan Year multiplied by 2, provided that the ACP for participants who are Highly Compensated Employees does not exceed the ACP for participants who were Non-highly Compensated Employees in the prior Plan Year by more than 2 percentage points.

20 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

1.2 For the first Plan Year, this Plan permits any participant to make Employee Contributions, provides for Matching Contributions or both, and this is not a successor plan, for purposes of the foregoing tests, the prior year's Non-highly Compensated Employees' ACP shall be 3 percent unless the Employer has elected in the adoption agreement to use the Plan Year's ACP for these participants.

2. Current Year Testing If elected by the Employer in the adoption agreement, the ACP tests in 1 and 2, above, will be applied by comparing the current Plan Year's ACP for participants who are Highly Compensated Employees for each Plan Year with the current Plan Year's ACP for participants who are Nonhighly Compensated Employees. Once made, the Employer can elect Prior Year Testing for a Plan Year only if the Plan has used Current Year Testing for each of the preceding 5 Plan Years (or if lesser, the number of Plan Years the Plan has been in existence) or if, as a result of a merger or acquisition described in Code section 410(b)(6)(C)(i), the Employer maintains both a plan using Prior Year Testing and a plan using Current Year Testing and the change is made within the transition period described in Code section 410(b)(6)(C)(ii).

Special Rules:

3.1. A participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year.

Similarly, a participant is a Non-highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.

3.2. For purposes of this section, the Contribution Percentage for any participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Code section 401(a), or arrangements described in Code section 401(k) that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan and arrangement. If a Highly Compensated Employee participates in two or more such plans or arrangements that have different plan years, all Contribution Percentage Amounts made during the Plan Year under all such plans and arrangements shall be aggregated. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code section 401(m).

3.3. In the event that this Plan satisfies the requirements of Code sections 401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ACP of employees as if all such plans were a single plan. If more than 10 percent of the Employer's Non-highly Compensated Employees are involved in a plan coverage change as defined in Regulation section 1.401(m)-2(c)(4), then any adjustments to

21 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

the Non-highly Compensated Employees' ACP for the prior year will be made in accordance with such Regulations, unless the Employer has elected in the adoption agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy section 401(m) only if they have the same Plan Year and use the same ACP testing method.

3.4. For purposes of the ACP test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the trust. Matching Contributions (including Qualified Matching Contributions) and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the 12-month period beginning on the day after the close of the Plan Year.

Definitions:

4.1. "Actual Contribution Percentage" ("ACP") shall mean, for a specified group of participants (either Highly Compensated Employees or Non-highly Compensated Employees) for a Plan Year, the average of the Contribution Percentages of the Eligible Participants in the group.

4.2. "Contribution Percentage" shall mean the ratio (expressed as a percentage) of the participant's Contribution Percentage Amounts to the participant's Compensation for the Plan Year.

(Note to reviewer: Compensation for purposes of section 4.2 is as defined in DC LRM 6.)

4.3. "Contribution Percentage Amounts" shall mean the sum of the Employee Contributions, Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. If so elected in the adoption agreement the Employer may include Qualified Nonelective Contributions in the Contribution Percentage Amounts. The Employer also may elect to use Elective Deferrals in the Contribution Percentage Amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test.

4.4. "Eligible Participant" shall mean any employee who is eligible to make an Employee Contribution, or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If an Employee Contribution is required as a condition of participation in the Plan, any employee who would be a participant in the Plan if such employee made such a contribution shall be treated as an eligible participant on behalf of whom no Employee Contributions are made.

22 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

4.5. "Employee Contribution" shall mean any contribution (other than Roth Elective Deferrals) made to the Plan by or on behalf of a participant that is included in the participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated.

4.6. "Matching Contribution" shall mean an employer contribution made to this or any other defined contribution plan on behalf of a participant on account of an Employee Contribution made by such participant, or on account of a participant's Elective Deferral, under a plan maintained by the Employer.

Sample Adoption Agreement Language:

[ ] If checked, this Plan is using the Current Year Testing method for purposes of the ADP and ACP tests. (This box cannot be "unchecked" for a Plan Year unless (1) the Plan has used Current Year Testing for each of the preceding 5 Plan Years (or if lesser, the number of Plan Years the Plan has been in existence) or (2) if, as a result of a merger or acquisition described in Code section 410(b)(6)(C)(i), the Employer maintains both a plan using Prior Year Testing and a plan using Current Year Testing and the change is made within the transition period described in section 410(b)(6)(C)(ii).)

[ ] If this is not a successor plan, then, if checked, for the first Plan Year this Plan permits any participant to make Employee Contributions, provides for Matching Contributions or both, the ACP used in the ACP test for participants who are Non-highly Compensated Employees shall be such first Plan Year's ACP. (Do not check this box if the Employer has elected in the adoption agreement to use the Current Year Testing method.)

( If neither of the above boxes is checked, the plan is deemed to use Prior Year Testing.)

(Note to reviewer: A Pre-approved Plan may use different testing methods for the ADP and ACP tests provided the Plan doesn't permit (1) recharacterization of Excess Contributions, (2) Elective Deferrals to be used in the ACP test or (3) QMACs to be used in the ADP test.)

(Note to reviewer: Adopting Employers of Nonstandardized Plans that are § 401(k) and/or § 401(m) plans may rely on an Opinion Letter with respect to whether the form of the plan satisfies the ADP and ACP tests of §§ 401(k)(3) and § 401(m)(2) respectively, if the employer elects to use a safe harbor definition of compensation in the test. Adopting Employers of Nonstandardized Plans described in § 401(k)(12) and/or § 401(m)(11) may rely on an Opinion Letter with respect to whether the form of the plan satisfies these requirements, unless the plan provides for the safe harbor contribution to be made under another plan. See also DC LRM 92.)