ESOP Diversification Qualified Election Period and Notice 88-56

[Guest ERISAk]

I'm having trouble with an old IRS Notice (88-56) which provides an example on the "qualified election period". The qualified election period noted in the IRS Notice does not look like it is correct per the requirements of Code section 401(a)(28)(B)(iv). Can anyone shed any light on this IRS Notice Q&A-12 -- see references to both the Code and the IRS Notice below.

(iv) Qualified election period.— For purposes of this subparagraph, the term "qualified election period" means the 6-plan-year period beginning with the later of—

(I) the 1st plan year in which the individual first became a qualified participant, or

(II) the 1st plan year beginning after December 31, 1986.

For purposes of the preceding sentence, an employer may elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having become a participant in the 1st plan year beginning in 1988.

IRS Notice 88-56 Q&A-12 provides as follows:

Q-12: When is a participant eligible to make diversification elections with respect to his ESOP account?

A-12: Pursuant to section 401(a)(28)(B), a qualified participant must be able to elect to diversify the appropriate portion of his ESOP account balance (as determined under Q&A-9 of this notice) within 90 days after the close of each plan year during the participant's "qualified election period." A "qualified participant" (as defined in section 401(a)(28)(B)(iii)) means any employee who has completed at least ten years of participation under the plan and has attained 55 years of age.

Generally, a participant's qualified election period consists of the 5 plan year period beginning with the plan year after the plan year in which the participant first becomes a qualified participant.

 However, the qualified election period of any employee who became a qualified participant before January 1, 1987, shall not begin before the first plan year beginning after December 31, 1986 and shall continue thereafter for a complete 5 plan year period.

For example, a participant in an ESOP (which uses a calendar plan year) who becomes a qualified participant during 1987 will first be eligible to make a diversification election within the first 90 days of 1989 (within 90 days following the close of the first plan year beginning after 12/31/87). The qualified participant's qualified election period begins in the 1988 plan year and ends with the 1992 plan year. The qualified participant's last diversification election will be within the first 90 days of 1993.

Similarly, for example, in the case of an employee who first became a qualified participant in 1986 or any prior year, the participant's qualified election period would begin with the 1987 plan year and close with the 1991 plan year. The qualified participant must first be given a diversification election within the first 90 days of 1988.

Notwithstanding the foregoing, in the case of an employee who became a qualified participant before January 1, 1987, a plan will not fail to meet the requirements of section 401(a)(28)(B) if such qualified participant is eligible to make the first diversification election no later than September 6, 1988. In addition, for purposes of this paragraph, an employee who became a qualified participant in 1987 and who was treated under the plan, prior to April 9, 1988 as eligible to make the first diversification election on or before June 8, 1988 may be treated as an employee who became a qualified participant before January 1, 1987.

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[ESOP Guy]

I am not sure I understand the questions.

[Guest ERISAk]

Here is my question -- the IRS Notice provides: Generally, a participant's qualified election period consists of the 5 plan year period beginning with the plan year after the plan year in which the participant first becomes a qualified participant. [HOWEVER, CODE SECTION 401(a)(28)(B)(iv) PROVIDES THAT ELECTION PERIOD BEGINS IN THE FIRST PLAN YEAR IN WHICH THE PARTICIPANT BECOMES A QUALIFIED PARTICIPANT (AS OPPOSED TO THE PLAN YEAR AFTER THE PLAN YEAR IN WHICH THE PARTICIPANT BECOMES A QUALIFIED PARTICIPANT)] However, the qualified election period of any employee who became a qualified participant before January 1, 1987, shall not begin before the first plan year beginning after December 31, 1986 and shall continue thereafter for a complete 5 plan year period.

[GMK]

The first plan year in a participant's qualified election period is the plan year in which the participant became a qualified participant (unless that happened a long, long time ago). So, when that first plan year of the qualified election period is done, the qualified participant can take a diversification distribution for that just-completed plan year.

If the participant reaches age 55 and has 10 years of participation on any give day in 2012, then (for a calendar year plan) the first year of the Qual Elect Period is 2012. When 2012 is finished, the participant can take a diversification distribution in early 2013 for Plan Year 2012.

You don't wait another plan year. It's not the first full plan year after the participant becomes a qualified participant. It's the year in which you become a qualified participant. Clear? or isn't that your question?

edit: used to say "10 years of service" in paragraph 2

[Guest ERISAk]

Thank you. That is what I thought, but that IRS Notice seems to say it is the year after.