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Have ESOP Diversification Notice Requirements Changed?


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Code Section 401(a)(28)(B) requires an ESOP allow qualified participants to make a diversification election within 90 days after the close of each plan year and distribute or invest the amount to be diversified within the following 90 days. In my experience, privately held plan sponsors who may not have a valuation or allocation completed within the first 90 days have met this requirement by issuing a preliminary diversification notice in the first 90 days and following up with a final notice when allocations are complete. 

The IRS sample pre-approved ESOP language issued in 2015 allows for the 90 day election period after the close of the plan year to be extended, eliminating the need for a preliminary notice followed by a final notice. 

Does this extend to individually drafted ESOPs? I am somewhat uncomfortable with the assumption that it does, as the statute is very clear and I would appreciate hearing others' thoughts. 

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I haven't personally, but I know others who have received DLs on individually designed ESOPs with a diversification timeframe outside the statutory 90-day window. I believe in one case explicitly tied to 90-day period following the company's receipt of the valuation. But it's been a few years as these were DLs for ongoing plans. 

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Individually designed ESOPs must be amended to allow the plan sponsor to wait until the value is known.  As provided in the LRM-5:

Definitions

(a)    "Annual Election Period" means the 90-day period following the end of each Plan Year in the Qualified Election Period.

[Note to Reviewer: The Annual Election Period must begin on the first day following the end of each plan year in the Qualified Election Period, but the plan may provide that the Annual Election Period ends later than the 90th day following the end of each plan year in the Qualified Election Period. For example, a plan may provide that the Annual Election Period begins the day after the end of each plan year in the Qualified Election Period and ends 90 days after the date that the value of the shares subject to the diversification election is provided to the participant.]

Without this language, or something similar to this, it is my understanding those preliminary notices are still required to be provided to participants eligible to diversify.

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  • 3 weeks later...

I have two questions.

First, ESOPMomma states that individually designed ESOPS MUST be amended to allow diversification elections to be made until after the updated valuation is known.  The cited LRM-5 states that the plan "MAY provide" an extension until 90 days after the date that the value of the shares is provided to the participant.   Am I missing something?

Second, the post assumes that participants who are eligible to diversify are entitled to a  notice.  That is not in the Code or any published guidance that I have located.  What is the authority for this?

 

 

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