Deadline Nears for Diversification of Employer Securities in Retirement Plans
03/14/2007Retirement plan sponsors are reminded that March 30, 2007 is the deadline for compliance with the Pension Protection Act (PPA) requirement that certain qualified defined contribution plans with accounts invested in publicly traded employer securities give participants the right to diversify their holdings in employer securities. The PPA also added a requirement that participants be given notice of these diversification rights. Sponsors of qualified defined contribution plans that offer investment in employer stock should review their plans to ensure compliance with these new requirements. Administrative procedures may need to be established or modified, and amendment of the plan may be necessary to comply with the new diversification rights. The diversification requirements are effective for plan years beginning on or after January 1, 2007. However, the IRS provided a transition rule in Notice 2006-107 for the continuation of existing restrictions or conditions on diversification rights until March 30, 2007.
In brief, certain defined contribution plans that hold publicly traded stock are required to permit diversification of amounts invested in employer stock. ESOPs are generally not subject to the new diversification requirements provided that the ESOP is a stand-alone plan and does not hold employee elective deferrals or employer matching contributions. The affected plans are required to permit participants and certain beneficiaries to direct that the portion of their account invested in employer stock be reinvested among a choice of at least three investment options other than employer stock which are diverse and have materially different risk and return features.
The IRS issued a model notice to satisfy the diversification notice requirement. In most cases the model notice will need modifications to conform to the plan’s specific provisions. If, prior to January 1, 2007, the plan already permitted diversification in compliance with the PPA requirements, the notice may be provided with the quarterly participant statements.
