IRS PROVIDES METHOD FOR AMENDING PLANS TO USE SIMPLIFIED METHOD OF DETERMINING HIGHLY COMPENSATED EMPLOYEES.

Rev. Proc. 95-34

SECTION 1. PURPOSE

.01 This revenue procedure provides a simplified method for sponsors of master and prototype plans ("M&P"), regional prototype plans, volume submitter specimen plans, individually designed plans (including volume submitter plans), and simplified employee pension plans ("SEPs"), that have received favorable opinion, notification, advisory, determination, or ruling letters that take into account the requirements of the Tax Reform Act of 1986, Pub. L. No. 99-514 ("TRA '86"), to amend their plans to use the simplified method of determining highly compensated employees ("HCEs") provided in Rev. Proc. 93-42, 1993-2 C.B. 540, by adopting either model plan language or a non-model amendment for approval by the Internal Revenue Service (the "Service").

.02 This revenue procedure makes conforming changes to Rev. Proc. 93-12, 1993-1 C.B. 479, Rev. Proc. 93-47, 1993-2 C.B. 578, Rev. Proc. 94-13, 1994-1 C.B. 566, as modified by Rev. Proc. 95-12, 1995-3 I.R.B. 24, and Rev. Proc. 95-6, 1995-1 I.R.B. 153.

.03 This revenue procedure modifies section 4.03 of Rev. Proc. 93-42, relating to plans that must be amended to use the simplified method of determining HCEs.

SECTION 2. BACKGROUND AND GENERAL INFORMATION

.01 Rev. Proc. 93-42 provides guidelines for substantiating compliance with the following nondiscrimination requirements: nondiscrimination as to coverage under section 410(b) of the Internal Revenue Code, including the determination of whether an employer operates qualified separate lines of business under section 414(r); nondiscrimination in the amount of contributions or benefits and the current availability of benefits, rights and features under section 401(a)(4); and nondiscrimination with regard to an alternative definition of compensation under section 1.414(s)-1(d)(3) of the Income Tax Regulations.

.02 Rev. Proc. 93-42 allows an employer to use alternative methods for substantiating compliance with the nondiscrimination requirements. Because these methods are intended to demonstrate whether there is a high likelihood that the plan satisfies the nondiscrimination requirements, Rev. Proc. 93-42 provides that the Service will treat a plan as satisfying the nondiscrimination requirements where the employer demonstrates compliance with those alternative methods.

.03 Section 3 of Rev. Proc. 93-42 permits an employer to substantiate compliance with the nondiscrimination requirements on the basis of snapshot testing, that is, on the basis of the employer's workforce on a single day during the plan year (the "snapshot day"), provided that day is reasonably representative of the employer's workforce and the plan's coverage throughout the year. The snapshot day selected generally must be consistent from year to year.

.04 Section 4 of Rev. Proc. 93-42 provides a simplified method of determining HCEs for purposes of testing for compliance with the nondiscrimination requirements. An employer that uses this simplified method of determining HCEs may choose also to apply the method on the basis of the employer's workforce as of a snapshot day. Rev. Proc. 93-42 allows the use of reasonably approximated or projected compensation as part of the simplified method of determining HCEs.

.05 Rev. Proc. 93-12 provides a model amendment and a limited amendment procedure for certain plan sponsors to amend their plans to comply with the requirements of section 401(a)(31), which was added by the Unemployment Compensation Amendments of 1992, Pub. L. 102-318.

.06 Rev. Proc. 93-47 provides a model amendment for certain plan sponsors to amend their plans to reflect the modifications made by Notice 93-26, 1993-1 C.B. 308, to the 30-day notice requirement under section 1.411(a)-11(c).

.07 Rev. Proc. 94-13, as modified by Rev. Proc. 95-12, provides a model amendment and a limited amendment procedure for certain plan sponsors to amend their plans to comply with the requirements of section 401(a)(17), which was amended by the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66 ("OBRA '93").

SECTION 3. GENERAL INSTRUCTIONS FOR AMENDMENTS

.01 Generally, a sponsor wishing to amend a plan must comply with the instructions in Rev. Proc. 89-9, 1989-1 C.B. 780, Rev. Proc. 89-13, 1989-1 C.B. 801, Rev. Proc. 93-39, 1993-2 C.B. 513, and Rev. Proc. 95-6, as appropriate, and pay the user fee set forth in Rev. Proc. 95-8, 1995-1 I.R.B. 187.

.02 Pursuant to section 4 of this revenue procedure, certain sponsors may adopt the model amendment set forth in the appendix to use the simplified method of determining HCEs and incur no user fee.

.03 Pursuant to section 5 of this revenue procedure, in lieu of the model amendment:

1 M&P, M&P mass submitter, and regional prototype mass submitter sponsors may adopt non-model language, as described in section 5(A), to use the simplified method of determining HCEs.

2 Regional prototype sponsors may adopt non-model language, as described in section 5(B), to use the simplified method of determining HCEs.

3 Volume submitter specimen plan sponsors may adopt non-model language, as described in section 5(C), to use the simplified method of determining HCEs.

4 Adopters of individually designed plans, including previously approved volume submitter plans, may adopt non-model language, as described in section 5(D), to use the simplified method of determining HCEs.

5 SEP sponsors may adopt non-model language, as described in section 5(E), to use the simplified method of determining HCEs.

SECTION 4. USE OF THE MODEL AMENDMENT

.01 All plans--Sponsors described in subsection .02 may amend their plans by adopting the model language in the appendix to this revenue procedure on a word-for-word basis, in accordance with the instructions in this revenue procedure. If a sponsor to whom the model language is available pursuant to subsection .02 adopts the model language, neither application to the Service nor a user fee is required. The Service will not issue new opinion, notification, advisory, or determination letters for plans that are amended solely to add the model language described in this section.

.011 The model language in the appendix contains 2 options for sponsors electing to use the simplified method of determining HCEs. Option 1 provides model language for sponsors that choose to apply this simplified method on the basis of the employer's workforce as of a snapshot day. If option 1 is selected, a snapshot day must be specified in the provided blank that is reasonably representative of the employer's workforce and the plan's coverage throughout the plan year. Option 2 may be used by sponsors that are not applying this method on the basis of a snapshot day. Neither option provides for the use of reasonably approximated or projected compensation as part of the simplified method of determining HCEs.

.02 The only sponsors to whom the model language is available are sponsors of M&P, regional prototype, volume submitter specimen, and individually designed plans (including volume submitter plans) and SEPs that have received favorable opinion, notification, advisory, determination, or ruling letters that take into account the requirements of TRA '86 under Rev. Proc. 87-50, 1987-2 C.B. 647, as modified; Rev. Proc. 89-9, as modified; Rev. Proc. 89-13, as modified; Rev. Proc. 90-20, 1990-1 C.B. 495; Rev. Proc. 91-41, 1991-2 C.B. 697; Rev. Proc. 91-66, 1991-2 C.B. 870; or Rev. Proc. 93-39.

.021 Sponsors of individually designed plans that are adopting the model language in the appendix must select between options 1 and 2 for inclusion in their plans. M&P and regional prototype plan sponsors may adopt both options and allow adopting employers to elect between those options in the adoption agreement.

.03 M&P and Regional Prototype Sponsors--M&P and regional prototype plan sponsors that use the model language must send copies of the amended plan or, if more convenient, the changed pages, to the appropriate Key District Director in accordance with section 10.10 of Rev. Proc. 89-9 and section 14 of Rev. Proc. 89-13 in order to notify the Service that they are using the model language. Sponsors should include a copy of the opinion or notification letter previously issued with "Highly Compensated Employee Model Amendment" printed clearly on the top of the copy of the letter. In addition, mass submitters must certify that all identical adopters of M&P mass submitter plans and regional prototype sponsors that use the mass submitter's plan will adopt the plan as amended. Sponsors must notify all adopting employers of the changes to their plans. If sponsors that either are identical adopters of an M&P mass submitter's plan or use a regional prototype mass submitter's plan do not adopt the plan as amended by the mass submitter, the adopting employer's plan will become individually designed.

.04 Volume Submitter Specimen Plans--Sponsors of volume submitter specimen plans that use the model language must send copies of the amended plan or, if more convenient, changed pages, to the appropriate Key District Director. Volume submitter specimen plan sponsors may only offer the amended specimen plan prospectively, as volume submitter specimen plan sponsors do not have the power to adopt amendments on behalf of employers. However, an employer that adopted a volume submitter specimen plan prior to this amendment of the specimen plan may individually adopt the model amendment and will not need to obtain a new determination letter.

SECTION 5. ALTERNATIVE AMENDMENT PROCEDURES FOR NON-MODEL AMENDMENTS

(A) LIMITED AMENDMENT PROCEDURES FOR M&P, M&P MASS SUBMITTER, AND REGIONAL PROTOTYPE MASS SUBMITTER PLANS

.01 This section 5(A) provides a limited amendment procedure under which sponsors of M&P, M&P mass submitter, and regional prototype mass submitter plans that have received a favorable opinion or notification letter can amend their plans to include the simplified method of determining HCEs using non-model language.

.02 An M&P, M&P mass submitter, or regional prototype mass submitter sponsor (other than an identical adopter of an M&P mass submitter plan) must apply to the National Office of the Service for approval of the non-model language. The application should include both the pink and white copies of page 1 of Form 4461 or Form 4461-A with "Highly Compensated Employee Amendment" printed clearly on the top of the white copy and a user fee of $400.00. Only one user fee is required for all plans submitted simultaneously by each sponsor, regardless of the number of plans affected.

.03 All changes made to include the simplified method of determining HCEs must be clearly described in a cover letter. A copy of the plan or, if more convenient, changed pages, must also be submitted. In addition, a copy of the most recent opinion or notification letter(s) must be included. All applicants must certify that no changes have been made other than those made to include the simplified method of determining HCEs under this revenue procedure, or those made under the limited amendment procedures described in section 6. Plans with amendments other than amendments provided in the preceding sentence will be returned to the sponsor. In addition, mass submitters must certify that all identical adopters of M&P mass submitter plans, and regional prototype sponsors that use the mass submitter's plan, will adopt the plan as amended.

.04 Upon receipt of an application, the National Office will issue an acknowledgement letter that confirms receipt of the application and informs the sponsor that the Service will notify the sponsor if any changes need to be made to the non-model language. If the Service does not notify the sponsor within 90 days of the date of the acknowledgement letter that changes to the non-model language are necessary, the sponsor may treat the non-model language as approved. In such case, the sponsor will receive no further correspondence from the Service regarding the aforementioned non-model language.

.05 Sponsors that either are identical adopters of an M&P mass submitter's plan or use a regional prototype mass submitter's plan must adopt the plan as amended by the mass submitter. If the mass submitter's amendment is treated as approved under subsection .04 above, the identical adopter may also treat the amendment as approved without submitting a separate application.

.06 Sponsors must notify all adopting employers of the change to their plans and must send copies of the amended plan or, if more convenient, changed pages, to the appropriate Key District Directors in accordance with Rev. Proc. 89-9 and Rev. Proc. 89-13.

(B) LIMITED AMENDMENT PROCEDURE FOR REGIONAL PROTOTYPE PLANS

.01 This section 5(B) provides a limited amendment procedure under which sponsors of regional prototype plans that have received favorable notification letters can amend their plans to include the simplified method of determining HCEs using non-model language.

.02 A regional prototype sponsor must apply to the Key District Office that issued the plan's notification letter for approval of the non-model language. The application should be addressed to the attention of the Volume Submitter Coordinator. The application should include both the pink and white copies of page 1 of Form 4461 or Form 4461-A with "Highly Compensated Employee Amendment" printed clearly on the top of the white copy, Form 8717 with a January 1994 revision date or later, and a user fee of $400.00.

.03 All changes made to include the simplified method of determining HCEs must be clearly described in a cover letter. A copy of the plan or, if more convenient, changed pages, must also be submitted. In addition, a copy of the most recent notification letter must be included. All applicants must certify that no changes have been made other than those made to include the simplified method of determining HCEs under this revenue procedure, or those made under the limited amendment procedures described in section 6. Plans with amendments other than amendments described in the preceding sentence will be returned to the sponsor.

.04 Upon approval of the non-model language submitted by a regional prototype sponsor, the Key District Office will issue a notification letter.

.05 Sponsors must notify all adopting employers of the change to their plans and must send copies of the amended plan or, if more convenient, changed pages, to the Key District Directors in accordance with Rev. Proc. 89-13.

(C) LIMITED AMENDMENT PROCEDURE FOR VOLUME SUBMITTER SPECIMEN PLANS

.01 This section 5(C) provides a limited amendment procedure under which sponsors of volume submitter specimen plans that have received favorable advisory letters can amend their plans to include the simplified method of determining HCEs using non-model language.

.02 A sponsor of a volume submitter specimen plan must apply to each of the Key District Offices that issued the original advisory letter(s) for approval of the non-model language. The application should be addressed to the attention of the Volume Submitter Coordinator identified in the advisory letter(s) and must include a cover letter with "Highly Compensated Employee Amendment" printed clearly on the top, Form 8717 with a January 1994 revision date or later, and a user fee of $400.00.

.03 All changes made to include the simplified method of determining HCEs must be clearly described in a cover letter. A copy of the plan or, if more convenient, changed pages, must also be submitted. In addition, a copy of the most recent advisory letter must be included. All applicants must certify that no changes have been made other than those made to include the simplified method of determining HCEs under this revenue procedure, or those made under the limited amendment procedures described in section 6. Plans with amendments other than amendments provided in the preceding sentence will be returned to the sponsor.

.04 Upon approval of the non-model language submitted by a volume submitter specimen plan sponsor, the Key District Office will issue an advisory letter.

.05 Volume submitter specimen plan sponsors may offer the amended specimen plan prospectively only, as volume submitter specimen plan sponsors do not have the power to adopt amendments on behalf of employers. However, an employer that adopted a volume submitter specimen plan prior to this amendment of the specimen plan may individually adopt non-model language in accordance with section 5(D) of this revenue procedure.

(D) LIMITED AMENDMENT PROCEDURE FOR ADOPTERS OF INDIVIDUALLY DESIGNED PLANS INCLUDING PREVIOUSLY APPROVED VOLUME SUBMITTER PLANS

.01 This section 5(D) provides a limited amendment procedure under which an employer that maintains an individually designed plan, including a previously approved volume submitter plan, that has received a favorable determination letter that takes into account TRA '86 and later laws, can amend its plan to include the simplified method of determining HCEs using non-model language. Section 4.01(2) of Rev. Proc. 93-42 permits the compensation used in the simplified method of determining HCEs to be compensation that reasonably approximates the employee's section 414(q)(7) compensation for the plan year. Section 4.02(2) of Rev. Proc. 93-42 provides that, if the determination of HCEs is made earlier than the last day of the plan year, the employee's compensation must be projected for a plan year under a reasonable method established by the employer. In order for approximated or projected compensation to be used as part of the simplified method of determining HCEs, the plan language incorporating the simplified method must specifically describe the method by which compensation will be approximated or projected by the employer in a manner that satisfies the requirement in section 1.401- 1(b) that a plan provide for the payment of definitely determinable retirement benefits.

.02 An employer maintaining an individually designed plan must apply to the Key District Director for the district in which the principal place of business of the employer (within the meaning of section 414(b), (c), and (m)) is located for approval of the non- model language. If the employer's principal place of business is not located within the United States, the application should be filed with the District Director of the Baltimore Key District Office. The application should include both the pink and white copies of page 1 of Form 6406 with "Highly Compensated Employee Amendment" printed clearly on the top of the white copy, Form 8717 with a January 1994 revision date or later, and a user fee of $125.00. For purposes of section 10 of Rev. Proc. 95-6, an amendment that merely adds the simplified method of determining HCEs to the plan is not considered a "complex amendment" that would render an employer ineligible to use the Form 6406, Short Form Application for Determination for Amendment of Employee Benefit Plan.

.03 An employer that has previously adopted a volume submitter's specimen plan, and that wishes to use the version of the specimen plan that includes the non-model amendment provided in section 5(C), must apply to the Key District Office for the district in which the principal place of business of the employer (within the meaning of section 414(b), (c), and (m)) is located for approval of the non-model language. The application should include both the pink and white copies of page 1 of Form 5307 with "Highly Compensated Employee Amendment" printed clearly on the top of the white copy, Form 8717 with a January 1994 revision date or later, and a user fee of $125.00.

.04 All changes to the plan must be clearly described in a cover letter. A copy of the plan or, if more convenient, changed pages, must also be submitted. In addition, a copy of the most recent determination letter must be included. All applicants must certify that no changes have been made other than those made to include the simplified method of determining HCEs under this revenue procedure or those made under the limited amendment procedures described in section 6. Plans with amendments other than amendments described in the preceding sentence will be returned to the employer.

.05 Upon approval of the non-model language submitted by an adopting employer, the Key District Office will issue a favorable determination letter.

.06 Adopting employers must notify interested parties of the application to the Service for an advance determination regarding the qualification of the amended plan in accordance with Section II of Rev. Proc. 95-6.

(E) LIMITED AMENDMENT PROCEDURES FOR SEPS

.01 This section 5(E) provides limited amendment procedures under which sponsors of SEPs (other than employers that have adopted model SEP Form 5305-SEP or 5305A-SEP) that have received favorable opinion or ruling letters can amend their plans to include the simplified method of determining HCEs using non-model language.

.02 A sponsor of a prototype SEP or SEP mass submitter must apply to the National Office for approval of the non-model language. The application should include the first page of Form 5306-SEP with "Highly Compensated Employee Amendment" printed clearly on the top of the Form and a user fee of $400.00. For all plans submitted simultaneously by each sponsor, only one user fee is required regardless of the number of plans affected.

.03 An employer that has adopted an individually designed SEP must apply to the National Office for a ruling letter on the non- model language in accordance with Rev. Proc. 87-50, as modified by Rev. Proc. 91-44, 1991-2 C.B. 733, and Rev. Proc. 95-4, 1995-1 I.R.B. 97, and pay a user fee of $400.00.

.04 All changes to include the simplified method of determining HCEs must clearly be described in a cover letter. A copy of the SEP or, if more convenient, changed pages, must also be submitted. In addition, a copy of the most recent opinion or ruling letter must be included. All applicants must certify that no changes have been made other than those made to include the simplified method of determining HCEs under this revenue procedure, or those made under the limited amendment procedures described in section 6. Plans with amendments other than amendments described in the preceding sentence will be returned to the employer.

.05 Upon receipt of an application for a SEP or SEP mass submitter, the National Office will issue an acknowledgement letter that confirms receipt of the application and informs the sponsor that the Service will notify the sponsor if any changes need to be made to the non-model language. If the Service does not notify the sponsor within 90 days of the date of the acknowledgement letter that changes to the non-model language are necessary, the sponsor may treat the non-model language as approved. In this case, the sponsor will receive no further correspondence from the Service regarding the aforementioned non-model language.

.06 Sponsors who use a SEP mass submitter's plan must adopt the plan as amended by the mass submitter. If the mass submitter's amendment is treated as approved under subsection .05 above, the identical adopter may also treat the amendment as approved without submitting a separate application.

.07 Sponsors must notify all adopting employers of the change to their plans and must send copies of the amended plan or, if more convenient, changed pages, to the applicable Key District Directors in accordance with Rev. Proc. 87-50, as modified.

SECTION 6. PLANS AMENDED UNDER THE LIMITED AMENDMENT PROCEDURES OF REV. PROC. 93-12, REV. PROC. 94-13, AND THIS REVENUE PROCEDURE.

A single submission for Service approval may be made for plan amendments to include the simplified method of determining HCEs pursuant to the limited amendment procedures contained in sections 5(A) through 5(E) of this revenue procedure and to include plan language required under section 401(a)(31) pursuant to the limited amendment procedures contained in sections 7 through 10 of Rev. Proc. 93-12, and to reflect the OBRA '93 changes to [?] 401(a)(17) pursuant to the limited amendment procedures contained in section E of Part IV of Rev. Proc. 94-13. In such a case, only one application and the user fee for a single amendment need be submitted. Applicants should print clearly "Highly Compensated Employee Amendment", "401(a)(17) Amendment" and "401(a)(31) Amendment", as applicable, on the top of the second copy of page 1 (the white copy) of the application.

SECTION 7. RELIANCE

Plans that are amended in accordance with sections 4 and 5 of this revenue procedure will not lose their otherwise applicable extended reliance period under Rev. Proc. 89-9 and Rev. Proc. 89-13, as modified by Rev. Proc. 93-9, 1993-1 C.B. 474, or section 13 of Rev. Proc. 93-39. Employers entitled to rely on an opinion, notification, advisory, determination, or ruling letter will not lose reliance on the letter merely because of these amendments. However, the model language in option 1 in the appendix to this revenue procedure may not be relied upon as to whether the snapshot day selected by the employer is reasonably representative of the employer's workforce and the plan's coverage throughout the plan year.

SECTION 8. MODIFICATION OF REV. PROC. 93-42

.01 Section 4.03 of Rev. Proc. 93-42 provides that, if a plan contains a definition of HCEs, an employer that uses the simplified method of determining HCEs under section 4 of Rev. Proc. 93-42 must amend the plan to incorporate this method, including the use of a snapshot day if applicable. This requirement applies even if HCE status does not affect the contributions or benefits provided under the plan.

.02 This revenue procedure modifies section 4.03 of Rev. Proc 93-42 to apply only in those cases in which HCE status can affect an employee's contributions or benefits under a plan, or the availability of other rights or features under the plan whether or not the plan contains a definition of HCE. For example, the results of the ADP test and the ACP test can affect the contributions of HCEs under a plan subject to those tests. If the simplified method of determining HCEs is used to determine contributions or benefits under the plan, or the availability of the other rights or features under the plan, the plan must include the simplified method.

.03 Section 4.03 of Rev. Proc. 93-42 is modified to read as follows:

".03 If HCE status affects an employee's contribution or benefits under a plan, or the availability of other rights or features under the plan, and if the employer chooses to use the simplified method of determining HCEs under this section for purposes of contributions, benefits, or other rights or features under the plan, the employer must amend the plan to incorporate this simplified method, including the use of the snapshot day if applicable. Thus, for example, if the simplified method of determining HCEs is used for purposes of the "ADP" test or the "ACP" test in section 401(k)(3) or (m)(2), the plan must be amended to incorporate this simplified method."

SECTION 9. MODIFICATIONS TO REV. PROC. 93-12, REV. PROC. 93-47, AND REV. PROC.94-13 REGARDING NOTICE TO INTERESTED PARTIES

.01 Rev. Proc. 93-12 is modified by deleting sections 6.05, 7.07, and 8.06 therein.

.02 Section 10.05 of Rev. Proc. 93-12 is modified to read as follows: "Adopting employers must notify interested parties of the application to the Service for an advance determination regarding the qualification of the amended plan in accordance with Section II of Rev. Proc. 95-6."

.03 Rev. Proc. 93-47 is modified by deleting section 3.04 therein.

.04 Rev. Proc. 94-13 is modified by deleting sections V.E.(1).07 and V.E.(2).06.

SECTION 10. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 89-9, Rev. Proc. 89-13, Rev. Proc. 93-12, Rev. Proc. 93-39, Rev. Proc. 93-42, Rev. Proc. 93-47, Rev. Proc. 95-8, and Rev. Proc. 94-13 are modified.

SEC. 11. EFFECTIVE DATE

This revenue procedure is effective July 17, 1995.

DRAFTING INFORMATION

The principal author of this revenue procedure is Kathleen Herrmann of the Employee Plans Division. For further information regarding this revenue procedure, contact the Employee Plans Division's telephone assistance service between 1:30 and 4:00 p.m., Eastern Time, Monday through Thursday on (202) 622-6074/6075 or Ms. Herrmann at (202) 622-6214. (These telephone numbers are not toll- free numbers.)

APPENDIX

MODEL LANGUAGE

(Note to Sponsor: The following two options are designed to be used by sponsors of plans with salary reduction, matching, or after-tax features that wish to amend their plans to use the simplified method of determining HCEs provided for in section 4 of Rev. Proc. 93-42, but may be used by sponsors of other plans. A plan sponsor may adopt either option 1 or option 2. Option 1 provides model language for sponsors using the simplified method of determining HCEs that choose to apply this simplified method on the basis of the employer's workforce as of a snapshot day. If option 1 is selected, the provided blank must be filled in with a snapshot day that is reasonably representative of the employer's workforce and the plan's coverage throughout the plan year. Option 2 may be used by sponsors that are not applying this method on the basis of a snapshot day. In determining whether the employee is a HCE, both options use compensation as defined under section 414(q)(7), and neither option allows the employer to use compensation that reasonably approximates the employee's section 414(q)(7) compensation for the plan year. (The model language contains 2 separate optional provisions. M&P and regional prototype plan sponsors may adopt both options and allow adopting employers to elect between those options in the adoption agreement. Sponsors of volume submitter specimen plans may prospectively offer both options in their specimen plan for adopting employers. Sponsors of individually designed plans (including adopters of previously approved volume submitter plans) should adopt only one option.)

Option 1 - Model Amendment to Use the Simplified Method of Determining Highly Compensated Employees and a Snapshot Day for Determining Highly Compensated Employees

This amendment is effective beginning on the first day of the following plan year: _______________.

The group of highly compensated employees ("HCEs") includes any employee who is employed by the employer on the snapshot day and who (i) is a 5-percent owner on the snapshot day, (ii) receives compensation for the plan year in excess of the section 414(q)(1)(B) amount for the plan year, (iii) receives compensation for the plan year in excess of the section 414(q)(1))(C) amount for the plan year and is a member of the top paid group of employees within the meaning of section 414(q)(4), or (iv) is an officer on the snapshot day and receives compensation during the plan year that is greater than 50 percent of the dollar limitation in effect under section 415(b)(1)(A). If no officer satisfies the compensation requirement of (iv) above, the highest paid officer for such plan year shall be treated as a HCE.

For purposes of determining who is a HCE, compensation means compensation within the meaning of section 415(c)(3) as set forth in the plan for purposes of determining the section 415 limits, except that amounts excluded pursuant to sections 125, 402(e)(3), 402(h)(1)(B) and 403(b) are included. If compensation used for purposes of determining the section 415 limits under the plan is not defined as total compensation as provided under section 415(c)(3) and the regulations thereunder, then for purposes of determining who is a HCE, compensation means compensation within the meaning of section 1.415-2(d)(11)(i)of the Income Tax Regulations, except that amounts excluded pursuant to sections 125, 402(e)(3), 402(h)(1)(B) and 403(b) are included.

If, as of the snapshot day, an employee is a family member of either a 5-percent owner (whether active or former) or a HCE who is one of the 10 most HCEs ranked on the basis of compensation paid by the employer during such year, then the family member and the 5- percent owner or top-ten HCE shall be aggregated. In such case, the family member and 5-percent owner or top-ten HCE shall be treated as a single employee receiving compensation and plan contributions or benefits equal to the sum of the compensation and contributions and benefits of the family member and 5-percent owner or top-ten HCE. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the employee or former employee, and the spouses of such ascendants and descendants.

The snapshot day will be __________________. (The date selected must be a single day during the plan year that is reasonably representative of the employer's workforce and the plan's coverage throughout the plan year. In addition, if the employer uses a snapshot day in substantiating compliance with the nondiscrimination requirements of sections 401(a)(4), 410(b), or 414(s), the same snapshot day must be used for purposes of determining the HCEs.)

The group of HCEs will also include any employee who during the plan year:

(a) terminated employment prior to the snapshot day and was a HCE in the prior plan year;

(b) terminated employment prior to the snapshot day and (i) was a 5-percent owner, or (ii) has compensation for the plan year which is greater than or equal to the compensation of any employee who is treated as a HCE on the snapshot day (except for employees who are HCEs solely because they are 5-percent owners or officers), or (iii) was an officer and has compensation greater than or equal to the compensation of any other officer who is a HCE on the snapshot day solely because that person is an officer; or

(c) becomes employed subsequent to the snapshot day during the plan year and (i) is a 5-percent owner, or (ii) has compensation for the plan year that is greater than or equal to the compensation of any employee who is treated as a HCE on the snapshot day (except employees who are HCEs solely because they are 5-percent owners or officers), or (iii) is an officer and has compensation that is greater than or equal to the compensation of any other officer who is a HCE on the snapshot day solely because that person is an officer.

The determination of who is a HCE, including the determinations of the number and identity of employees in the top paid group, the number of employees treated as officers and the compensation that is taken into account, will be made in accordance with section 414(q) and section 1.414(q)-1T of the temporary Income Tax Regulations to the extent they are not inconsistent with the method established above.

Option 2 - Model Amendment to Use the Simplified Method of Determining Highly Compensated Employees

This amendment is effective beginning on the first day of the following plan year: _______________.

The group of highly compensated employees ("HCEs") includes any employee who during the plan year performs services for the employer and who (i) is a 5-percent owner, (ii) receives compensation for the plan year in excess of the section 414(q)(1)(B) amount for the plan year, (iii) receives compensation for the plan year in excess of the section 414(q)(1))(C) amount for the plan year and is a member of the top paid group of employees within the meaning of section 414(q)(4), or (iv) is an officer and receives compensation during the plan year that is greater than 50 percent of the dollar limitation in effect under section 415(b)(1)(A). If no officer satisfies the compensation requirement during the plan year, the highest paid officer for such year shall be treated as a HCE.

For purposes of determining who is a HCE, compensation means compensation within the meaning of section 415(c)(3) as set forth in the plan for purposes of determining the section 415 limits, except that amounts excluded pursuant to sections 125, 402(e)(3), 402(h)(1)(B) and 403(b) are included. If compensation used for purposes of determining the section 415 limits under the plan is not defined as total compensation as provided under section 415(c)(3) and the regulations thereunder, then for purposes of determining who is a HCE, compensation means compensation within the meaning of section 1.415-2(d)(11)(i) of the Income Tax Regulations, except that amounts excluded pursuant to sections 125, 402(e)(3), 402(h)(1)(B) and 403(b) are included.

If an employee is a family member of either a 5-percent owner (whether active or former) or a HCE who is one of the 10 most HCEs ranked on the basis of compensation paid by the employer during such year, then the family member and the 5-percent owner or top-ten HCE shall be aggregated. In such case, the family member and 5-percent owner or top-ten HCE shall be treated as a single employee receiving compensation and plan contributions or benefits equal to the sum of the compensation and benefits of the family member and 5-percent owner or top-ten HCE. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the employee or former employee, and the spouses of such lineal ascendants and descendants.

The determination of who is a HCE, including the determinations of the number and identity of employees in the top paid group, the number of employees treated as officers and the compensation that is taken into account, shall be made in accordance with the section 414(q) and section 1.414(q)-1T of the temporary Income Tax Regulations to the extent they are not inconsistent with the method established above.