What is trying to be explained here is that in an override directory, any file you retouch should be put in a folder with you template name in the directory you are working in.
The reason is when you do any upgrade you can simply upload the full contents of Zen Cart without the fear that you may overwrite any of your changes.
To answer your first question simply replace that file with the new one. If you don't want to do that because of changes that you made within that file, you will need to carry those changes over to the new file and disregard the old.
Removing that code from that file will cause problems with login.


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