NONDISCRIMINATION RULES FOR QUALIFIED CASH OR DEFERRED ARRANGEMENTS AND MATCHING CONTRIBUTIONS.

SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR DEFERRED ARRANGEMENTS AND MATCHING CONTRIBUTIONS. (a) Alternative Methods of Satisfying Section 401(k) Nondiscrimination Tests.— Section 401(k) (relating to cash or deferred arrangements), as amended by section 1422, is amended by adding at the end the following new paragraph: “(12) Alternative methods of meeting nondiscrimination requirements.— “(A) In general.— A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement— “(i) meets the contribution requirements of subparagraph (B) or (C), and “(ii) meets the notice requirements of subparagraph (D). “(B) Matching contributions.— “(i) In general.— The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to— “(I) 100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee’s compensation, and “(II) 50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee’s compensation. “(ii) Rate for highly compensated employees.— The requirements of this subparagraph are not met if, under the arrangement, the rate of matchin contribution with respect to any elective contribution of a highly compensated employee at any rate of elective contribution is greater than that with respect to an employee who is not a highly compensated employee. “(iii) Alternative plan designs.— If the rate of any matching contribution with respect to any rate of elective contribution is not equal to the percentage required under clause (i), an arrangement shall not be treated as failing to meet the requirements of clause (i) if— 110 STAT. 1805 “(I) the rate of an employer’s matching contribution does not increase as an employee’s rate of elective contributions increase, and “(II) the aggregate amount of matching contributions at such rate of elective contribution is at least equal to the aggregate amount of matching contributions which would be made if matching contributions were made on the basis of the percentages described in clause (i). “(C) Nonelective contributions.— The requirements of this subparagraph are met if, under the arrangement, the employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation. “(D) Notice requirement.— An arrangement meets the requirements of this paragraph if, under the arrangement, each employee eligible to participate is, within a reasonable period before any year, given written notice of the employee’s rights and obligations under the arrangement which— “(i) is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and “(ii) is written in a manner calculated to be understood by the average employee eligible to participate. “(E) Other requirements.— “(i) Withdrawal and vesting restrictions.— An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) of this paragraph unless the requirements of subparagraphs (B) and (C) of paragraph (2) are met with respect to all employer contributions (including matching contributions) taken into account in determining whether the requirements of subparagraphs (B) and (C) of this paragraph are met. “(ii) Social security and similar contributions not taken into account.— An arrangement shall not be treated as meeting the requirements of subparagraph (B) or (C) unless such requirements are met without regard to subsection (l), and, for purposes of subsection (l), employer contributions under subparaff;,aph (B) or (C) shall not be taken into account. “(F) Other plans.— An arrangement shall be treated as meeting the requirements under subparagraph (A)(i) if any other plan maintained by the employer meets such requirements with respect to employees eligible under the arrangement.”. (b) Alternative Methods of Satisfying Section 401(m) Nondiscrimination Tests.— Section 401(m) (relating to nondiscrimination test for matching contributions and employee contributions), as amended by section 1422(b), is amended by redesignating paragraph (11) as paragraph (12) and by adding after paragraph (10) the following new paragraph: 110 STAT. 1806 “(11) Alternative method of satisfying tests.— “(A) In general.— A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan— “(i) meets the contribution requirements of subparagraph (B) or (C) of subsection (k)(12), “(ii) meets the notice requirements of subsection (k)(12)(D), and “(iii) meets the requirements of subparagraph (B). “(B) Limitation on matching contributions.— The requirements of this subparagraph are met if— “(i) matching contributions on behalf of any employee may not be made with respect to an employee’s contributions or elective deferrals in excess of 6 percent of the employee’s compensation, “(ii) the rate of an employer’s matching contribution does not increase as the rate of an employee’s contributions or elective deferrals increase, and “(iii) the matching contribution with respect to any highly compensated employee at any rate of an employee contribution or rate of elective deferral is not greater than that with respect to an employee who is not a highly compensated employee.”. (c) Year for Computing Nonhighly Compensated Employee Percentage.— (1) Cash or deferred arrangements.— Section 401(k)(3)(A) is amended— (A) by striking “such year” in clause (ii) and inserting “the plan year”, (B) by striking “for such plan year” in clause (ii) and inserting “for the preceding plan year”, and (C) by adding at the end the following new sentence: “An arrangement may apply clause (ii) by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary.”. (2) Matching and employee contributions.— Section 401(m)(2)(A) is amended— (A) by inserting “for such plan year” after “highly compensated employees”, (B) by inserting “for the preceding plan year” after “eligible employees” each place it appears in clause (i) and clause (ii), and (C) by adding at the end the following flush sentence: “This subparagraph may be applied by using the plan year rather than the preceding plan year if the employer so elects, except that if such an election is made, it may not be changed except as provided by the Secretary.”. (d) Special Rule for Determining Average Deferral Percentage for First Plan Year, Etc.— (1) Paragraph (3) of section 401(k) is amended by adding at the end the following new subparagraph: “(E) For purposes of this paragraph, in the case of the first plan year of any plan (other than a successor plan), the amount taken into account as the actual deferral percentage of nonhighly compensated employees for the preceding plan year shall be— 110 STAT. 1807 “(i) 3 percent, or “(ii) if the employer makes an election under this subclause, the actual deferral percentage of nonhighly compensated employees determined for such first plan year.”. (2) Paragraph (3) of section 401(m) is amended by adding at the end the following: “Rules similar to the rules of subsection (k)(3)(E) shall apply for purposes of this subsection.”. (e) Distribution of Excess Contributions and Excess Aggregate Contributions.— (1) Subparagraph (C) of section 401(k)(8) (relating to arrangement not disqualified if excess contributions distributed) is amended by striking “on the basis of the respective portions of the excess contributions attributable to each of such employees” and inserting “on the basis of the amount of contributions by, or on behalf of, each of such employees”. (2) Subparagraph (C) of section 401(m)(6) (relating to method of distributing excess aggregate contributions) is amended by striking “on the basis of the respective portions of such amounts attributable to each of such employees” and inserting “on the basis of the amount of contributions on behalf of, or by, each such employee”. (f) Effective Dates.— (1) In general.— The amendments made by this section shall apply to years beginning after December 31, 1998. (2) Exceptions.— The amendments made by subsections (c), (d), and (e) shall apply to years beginning after December 31, 1996.