Diversification

[LIBERTYKID]

Can an ESOP eliminate the 10 year participation requirement and require that a participant only attain age 55 prior to being given the diversification election right. The "rights, benefits or features" regulations specifiy that the diversification election is exempt from testing only for "qualified participants", so I am concerned about messing with such definition but I can't see how being more liberal would be discriminatory.

[BeckyMiller]

1. You have to satisfy the general non-discrimination rules as you noted and Yes, this shouldn't be hard.

2. You have to satisfy the general rules regarding in-service distributions - participant in the plan for 5 years or funds in the plan for 2 years has been the traditional standard here. (Assuming diversification is handled with a distribution and not just a change of investments within the plan.)

3. You have to be able to deal with the potentially unexpected consequences on corporate cash flow to convert balances from stock to other assets. This is the most serious concern from my perspective.

4. Not sure on this one, but I know the SEC has taken a hands off policy about the statutory diversification rules and registration. Might want to check with securities counsel to see if they are comfortable that offering such a choice on a more liberal basis than required would trigger any kind of a securities event.

[Kirk Maldonado]

As to the registration issue, my personal view is that as long as the amounts are attributable to employer contributions, the right to diversify does not raise any registration issues.

As to any potential Section 16 issues, the SEC has informally indicated that expanding the class of persons eligible to diversify causes the loss of the Rule 16b-3 exemption.

If you aren't familiar with these two concepts, you might want to review Tax Management Portfolio # 362, Securities Laws Aspects of Employee Benefit Plans. In the interests of full disclosure, I must admit that I am the author.