Guest Article

(From the March 14, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Defines "Readily Tradable" Employer Securities for ESOPs

In Notice 2011-19, the IRS advised that the definition of "readily tradable" employer securities it finalized in May 2010 for purposes of the diversification requirements that apply to certain defined contribution plans under Code § 401(a)(35) will also apply to the rules regarding employee stock ownership plans beginning in 2012. Plans that qualified for the special rule in Code § 409(l)(2) - which allows an employer's common stock to qualify as "employer securities" if neither the employer nor any member of its controlled group has common stock that is "readily tradable" - will have until 2013 to comply if the new definition makes the employer ineligible for the special rule because the definition of "readily tradable" now includes securities that are traded on a foreign national securities exchange.

In May 2010, the IRS finalized regulations under Code § 401(a)(35) to define a "readily tradable security on an established securities market" as a security that is traded on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 - or traded on a foreign national securities exchange that is officially recognized, sanctioned, or supervised by a governmental authority where the security is deemed by the Securities and Exchange Commission as having a ready market under SEC Rule 15c3-1. Treas. Reg. § 1.401(a)(35)-1(f)(5). The definition became effective in 2011 in applying the diversification requirements of Code § 401(a)(35) (which apply to certain defined contribution plans that hold publicly-traded employer securities).

Previously, in the absence of other guidance, in interpreting the meaning of "readily tradable" the definition of "publicly traded" under Treas. Reg. § 54.4975-7(b)(1)(iv) was commonly looked-to. That regulation, which addresses the statutory exemption for loans to employee stock ownership plans, defines a "publicly traded" security as one that is listed on a national securities exchange registered under section 6 of the Securities Exchange Act of 1934 - or that is quoted on a system sponsored by a national securities association registered under section 15A(b) of the Securities Exchange Act. Some uncertainty existed with this approach because of the potential distinction between employer securities that were "publicly traded" and those that were "readily tradable."

The new definition of "readily tradable" differs from the definition of "publicly traded" in that it does not include securities quoted on a system sponsored by a national securities association under section 15A(b) of the Securities Exchange Act (e.g., securities quoted on the OTC Bulletin Board), and includes securities traded on a foreign national securities exchange that is officially recognized, sanctioned or supervised by a governmental authority, and the SEC deems it to have a ready market under SEC rule 15c3-1.

Notice 2011-19 states that the new definition will apply for purposes of the:

Unless action is taken, plans with employer securities that are not readily tradable under the new definition (e.g., shares traded over-the-counter) will potentially be subject to the pass-through voting, independent appraisal, and put-option requirements when the new definition becomes effective with the plan year beginning in 2012. However, an additional year is provided for plans that on March 14, 2011 are sponsored by an employer that (together with its controlled group members) has no common stock that is traded on a national securities exchange registered under section 6 of the Securities Exchange Act - but the employer (or a member of the controlled group) has common stock traded on a foreign exchange, which now satisfies the definition of "readily tradable." Those plans will have until the plan year beginning in 2013 to comply.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.