Section 4. Definitions.

Section 4.1. Annual additions: The sum of the following amounts credited to a participant's account for the limitation year:

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(a) employer contributions;

(b) employee contributions;

(c) forfeitures;

(d) amounts allocated to an individual medical account, as defined in section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the employer;

(e) are treated as annual additions to a defined contribution plan. Also amounts derived from c ontributions paid or accrued which are attributablet o provide post- retirement medical benefits, allocated to the separate account of a key employee, as defined in section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the employer are treated as annual additions to a defined contribution plan; and

(f) allocations under a simplified employee pension.

Section 4.2. Compensation: One of the following as elected by the employer in section _____ of the adoption agreement:

(Note to reviewer: The blank should be filled in with the section number of the adoption agreement where the employer selects the definition of compensation that will be used for purposes of the plan’s Code § 415 limitations and that corresponds to paragraph B of the sample adoption agreement provisions of this LRM.)

(a) Information required to be reported under sections 6041, 6051, and 6052 of the Internal Revenue Code (wages, tips, and other compensation as reported on Form W-2). Compensation is defined as wages, within the meaning of section 3401(a), and all other payments of compensation to an employee by the employer (in the course of the employer's trade or business) for which the employer is required to furnish the employee a written statement under sections 6041(d), 6051(a)(3), and 6052. Compensation shall be determined without regard to any rules under section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2).) Compensation shall be determined without regard to designated Roth matching contributions and designated Roth nonelective contributions made to this plan after December 31, 2022.

(b) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2).) Compensation shall be determined without

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regard to designated Roth matching contributions and designated Roth nonelective contributions made to this plan or to a SIMPLE IRA or a Simplified Employee Pension after Iember 31, 2022.

(c) 415 safe-harbor compensation. Compensation is defined as wages, salaries, differential wage payments under section 3401(h), and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements, or other expense allowances under a nonaccountable plan (as described in section 1.62-2(c) of the Regulations)), and excluding the following:

(i) Employer contributions (other than elective contributions described in sections 402(e)(3), 408(k)(6), 408(p)(2)(A)(i), or 457(b) of the Code) to a plan of deferred compensation (including a simplified employee pension described in section 408(k) or a simple retirement account described in section 408(p), and whether or not qualified) to the extent such contributions are not includible in the employee’s gross income for the taxable year in which contributed, and any distributions (whether or not includible in gross income when distributed) from a plan of deferred compensation (whether or not qualified), other than, if the employer so elects in section _____ of the adoption agreement, amounts received during the year by an employee pursuant to a nonqualified unfunded deferred compensation plan to the extent includible in gross income;

(Note to reviewer: The blank should be filled in with the section number of the adoption agreement where the employer may elect to include in compensation distributions from a nonqualified unfunded plan of deferred compensation that are includible in gross income. See paragraph B of the sample adoption agreement provisions of this LRM.)

(ii) Amounts realized from the exercise of a non-statutory stock option (that is, an option other than a statutory stock option as defined in section 1.421-1(b) of the Regulations), or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a statutory stock option;

(iv) Other amounts that receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the employee and are not salary reduction amounts that are described in section 125);

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(v) Designated Roth matching contributions and designated Roth nonelective contributions made to this plan after December 31, 2022; and

(vi) Other items of remuneration that are similar to any of the items listed in (i) through (v).

For any self-employed individual, compensation shall mean earned income.

Compensation or earned income includes difficulty of care payments under Code section 131(c)(1)(A) that are otherwise excludable from income.

(Note to reviewer: Code § 415(c)(8) provides that all plans must include difficulty of care payments in a participant’s compensation for purposes of calculating the annual additions limit of Code § 415(c)(1). See Notice 2020-68, Section E.)

Except as provided herein, compensation for a limitation year is the compensation actually paid or made available during such limitation year. If elected by the employer in section _____ of the adoption agreement, compensation for a limitation year shall include amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly situated employees, and no compensation is included in more than one limitation year.

(Note to reviewer: The blank above should be filled in with the section of the adoption agreement where the employer may elect to include compensation earned in the limitation year but not paid in that limitation year solely because of the timing of pay periods and pay dates. See paragraph C of the sample adoption agreement provisions of this LRM.)

Compensation for a limitation year shall also include compensation paid by the later of 2½ months after an employee’s severance from employment with the employer maintaining the plan or the end of the limitation year that includes the date of the employee’s severance from employment with the employer maintaining the plan, if:

(a) the payment is regular compensation for services during the employee’s regular working hours, or compensation for services outside the employee’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and, absent a severance from employment, the payments would have been paid to the employee while the employee continued in employment with the employer; or, if the employer so elects in section _____ of the adoption agreement,

(Note to reviewer: The blank should be filled in with the section number of the adoption agreement where the employer may elect to include in compensation certain post-severance pay for unused accrued leave as well as post-severance

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payments from a nonqualified unfunded plan of deferred compensation. See paragraph D of the sample adoption agreement provisions of this LRM.)

(b) the payment is for unused accrued bona fide sick, vacation, or other leave that the employee would have been able to use if employment had continued; or

(c) the payment is received by the employee pursuant to a nonqualified unfunded deferred compensation plan and would have been paid at the same time if employment had continued, but only to the extent includible in gross income.

Any payments not described above shall not be considered compensation if paid after severance from employment, even if they are paid by the later of 2 ½ months after the date of severance from employment or the end of the limitation year that includes the date of severance from employment, except, if elected by the employer in section _____ of the adoption agreement, compensation paid to a participant who is permanently and totally disabled, as defined in section 22(e)(3) of the Code, provided, as elected by the employer in section _____ of the adoption agreement, salary continuation applies to all participants who are permanently and totally disabled for a fixed or determinable period, or the participant was not a highly compensated employee, as defined in section 414(q) of the Code, immediately before becoming disabled.

Back pay, within the meaning of section 1.415(c)-2(g)(8) of the Regulations, shall be treated as compensation for the limitation year to which the back pay relates to the extent the back pay represents wages and compensation that would otherwise be included under this definition.

(Note to reviewer: The 1 ^st blank should be filled in with the section number of the adoption agreement where the employer may elect to include in compensation certain salary continuation payments to individuals who are permanently and totally disabled. The 2nd blank should be filled in with the section of the adoption agreement where the employer elects whether the inclusion in compensation of salary continuation payments to permanently and totally disabled participants, if applicable, shall apply with respect to all such participants or with respect to all such participants who were not highly compensated employees immediately before becoming disabled. See section E of the sample adoption agreement provisions of this LRM.)

Compensation paid or made available during a limitation year shall include amounts that would otherwise be included in compensation but for an election under sections 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b) of the Code.

Unless the employer elects otherwise in section _____ of the adoption agreement, compensation shall also include deemed section 125 compensation. “Deemed section 125 compensation” is an amount that is excludable under section 106 that is not available

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to a participant in cash in lieu of group health coverage under a section 125 arrangement solely because the participant is unable to certify that he or she has other health coverage. Amounts are deemed section 125 compensation only if the employer does not request or otherwise collect information regarding the participant’s other health coverage as part of the enrollment process for the health plan.

(Note to reviewer: The blank should be filled in with the section number of the adoption agreement where the employer may elect to exclude deemed § 125 compensation from compensation. See paragraph F of the sample adoption agreement provisions of this LRM.)

If elected by the employer in section _____ of the adoption agreement, compensation shall not include amounts paid as compensation to a nonresident alien, as defined in section 7701(b)(1)(B) of the Code, who is not a participant in the plan to the extent the compensation is excludable from gross income and is not effectively connected with the conduct of a trade or business within the United States.

(Note to reviewer: This election is provided as a rule of administrative convenience for purposes of determining who is a key employee for purposes of § 416 and who is a highly compensated employee as defined in § 414(q). The blank should be filled in with the section number of the adoption agreement where the employer may elect to exclude non-participant compensation. See paragraph G of the sample adoption agreement provisions of this LRM.)

(Note to reviewer: For plans that are sponsored by Indian tribal governments, effective for taxable years ending on or after November 15, 2013, proposed regulations clarify that compensation received by Indian tribal members for services rendered in performing certain fishing rights-related activities may be treated as compensation for purposes of applying § 415 limitations, even though these payments might otherwise be excludible from gross income. These regulations clarify that exclusion notwithstanding, fishing rights-related income is includible in § 415 compensation and amounts may be contributed to a qualified retirement plan based on this income. Under these regulations, fishing rights-related activity with respect to Indian tribes includes any activity directly related to (a) harvesting, processing or transporting fish harvested in the exercise of a recognized fishing right of the tribe; or (b) selling such fish but only if substantially all of such harvesting was performed by members of such tribe. See Prop Reg § 1.415(c)- 2(g)(9).)

Section 4.3 Defined contribution dollar limitation: $40,000, as adjusted under section 415(d) of the Code.

(Note to reviewer: For 2023, the Code § 415(c) annual additions dollar limit is $66,000. This amount can be inserted in Sections 4.3 and Section 4.7 in place of the

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statutory amount.)

Section 4.4 Employer: For purposes of this article, employer shall mean the employer that adopts this plan, and all members of a controlled group of corporations (as defined in section 414(b) of the Code as modified by section 415(h)), all commonly controlled trades or businesses (as defined in section 414(c) as modified by section 415(h)) or affiliated service groups (as defined in section 414(m)) of which the adopting employer is a part, and any other entity required to be aggregated with the employer pursuant to regulations under section 414(o).

Section 4.5. Limitation year: A calendar year, or the 12-consecutive month period elected by the employer in section _____ of the adoption agreement. All qualified plans maintained by the employer must use the same limitation year. If the limitation year is amended to a different 12-consecutive month period, the new limitation year must begin on a date within the limitation year in which the amendment is made.

(Note to reviewer: The blank should be filled in with the section of the adoption agreement that corresponds to paragraph H of the adoption agreement.)

Section 4.6. Pre-approved Plan: A plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service.

Section 4.7. Maximum Annual Additions:

Except for catch up contributions described in section 414(v) of the Code, the annual addition that may be contributed or allocated to a participant’s account under the plan for any limitation year shall not exceed the lesser of:

(c) $40,000, as adjusted for increases in the cost- of-living under § 415(d) of the Codet he defined contribution dollar limitation described in Section 4.3, or

(d) 100 percent of the participant’s compensation for the limitation year.

The compensation limit referred to in (b) shall not apply to any contribution for medical benefits after separation from service (within the meaning of sections 401(h) or 419A(f)(2) of the Code) which is otherwise treated as an annual addition.

If a short limitation year is created because of an amendment changing the limitation year to a different 12-consecutive month period, the maximum permissible amount will not exceed the defined contribution dollar limitation multiplied by the following fraction:

Number of months in the short limitation year

12

If the plan is terminated as of a date other than the last day of the limitation year, the plan is deemed to have been amended to change its limitation year and the maximum

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permissible amount shall be prorated for the resulting short limitation year.

Sample Adoption Agreement Language:

A. If the employer maintains or ever maintained another qualified plan in which any participant in this plan is (or was) a participant or could become a participant, the employer must complete this section.

If the participant is covered under another qualified defined contribution plan maintained by the employer, other than a Pre-approved Plan:

( ) The provisions of section 2 of Article _____ will apply as if the other plan were a Pre-approved Plan.

( ) (Provide the method under which the plans will limit total annual additions to the maximum permissible amount, and will properly reduce any excess amounts, in a manner that precludes employer discretion.)

(Note to reviewer: The Provider should leave space for the adopting employer to provide language which will satisfy the limitation for defined contribution plans in Code § 415(c). Such language must preclude employer discretion.)

B. Compensation shall mean all of each participant's:

( ) Wages, tips, and other compensation as reported on Form W-2

( ) Section 3401(a) wages

( ) Section 415 safe-harbor compensation

(Note to reviewer: Code § 3401(h) provides that a differential wage payment shall be treated as a payment of wages under § 3401(a) for a payment made after December 31, 2008.)

(Note to reviewer: As added by the HEART Act, § 3401(h) provides that a differential wage payment shall be treated as a payment of wages under § 3401(a) for a payment made after December 31, 2008. Also, these payments must be treated as compensation under Code § 415(c)(3) and Reg. § 1.415-2(d), but they are not required to be treated as compensation for purposes of determining contributions and benefits under a plan. See Notice 2010-15, Q&A-9 for guidance.)

If compensation is defined as “Section 415 safe-harbor compensation,” amounts received by an employee pursuant to a nonqualified unfunded deferred compensation plan

( ) shall

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( ) shall not

be considered compensation in the year the amounts are actually received. Such amounts may be considered compensation only to the extent includible in gross income.

C. Amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates

( ) shall be included in compensation for the limitation year, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly situated employees, and no compensation is included in more than one limitation year.

( ) shall not be included in compensation for the limitation year.

D. Compensation

( ) shall

( ) shall not

include amounts paid within 2 ½ months after severance from employment (or the end of the limitation year that includes the date of severance) for unused accrued bona fide sick, vacation or other leave that the employee would have been able to use if employment had continued; and amounts received by an employee pursuant to a nonqualified unfunded deferred compensation plan which would have been paid at the same time if employment had continued, but only to the extent includible in gross income.

E. Compensation shall include post-severance compensation paid to (check one or neither)

( ) any participant who is permanently and totally disabled. (Check this box only if salary continuation applies to all participants who are permanently and totally disabled for a fixed or determinable period.)

( ) any permanently and totally disabled participant who, immediately before becoming so disabled, was not a highly compensated employee.

F. (Complete this section to exclude deemed section 125 compensation from the plan’s definition of compensation.)

_____ (Check if this section applies.) Compensation shall not include deemed section 125 compensation.

G. (Complete this section to exclude non-participant compensation.)

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_____ (Check if this section applies.) Compensation shall not include amounts paid as compensation to nonresident aliens who do not participate in the plan to the extent the compensation is excludable from gross income and not effectively connected with a U.S. trade or business.

H. The limitation year is the following 12-consecutive month period: ____________

(Note to reviewer: A plan sponsor may be able to correct excess annual additions through the Employee Plans Compliance Resolution System (EPCRS). See Rev. Proc. 2021-30, 2021-31 I.R.B. 172, as periodically amended. See also Notice 2023-43, 2023-24 I.R.B. 919, for guidance related to the expansion of EPCRS provided by Section 305 of the SECURE 2.0 Act of 2022. Under the Act and this guidance, eligible inadvertent failures may be self-corrected by the sponsor.)