ESOP Particpant Diversification

[Guest DLH]

I have participant that is 55 years of age with over 20 years and is a participant in an ESOP plan. The stock is not publicly traded. The plan has been in existence for about 7 years. In the SPD it states that a participant that is 55 years of age and has ten years of participation in the ESOP plan can diversify out of the corp. stock. I don't believe I have ever seen it based on participation but rather years of service...although most of the ESOPs that I have dealt with have been older than 10 years.

Can an ESOP plan still require 10 years of plan participation for a participant that has reached 55 years of age and has over 20 years of service....even though the plan hasn't even been around for 10 years? Seems to put those participants that are nearing retirement age in a bad situation. The company is not in the best of financial shape.

[RLL]

Hi DLH ---

Section 401(a)(28)(B)(iii) of the Internal Revenue Code requires that an ESOP provide the diversification election for participants who have attained age 55 and completed 10 years of participation in the ESOP.....without regard to the participant's years of service. [For this purpose, "participation" may include participation under a "predecessor plan"....although this an unclear area].

There is nothing in current law that would require the ESOP to offer diversification to a participant with 20 years of service but less than 10 years of participation...but it is possible for an ESOP to be amended to allow for diversification to participants who meet specified requirements that are less stringent than section 401(a)(28)(B)(iii).

Remember, however, that a closely-held ESOP company is generally required to provide cash to fund the ESOP diversification election. If the company is not "in the best of financial shape," it would likely not want this additional cash burden.

[Guest DLH]

So even though the plan has not been in existence for 10 years they could still require a participant age 55 to wait until the plan had been inforce for 10 years before he could diversify?

He was a participant in a predecessor plan and has been a participant in the 401(k) for over 10 years. I would probably have to check the document on the predecessor plan provision Correct?

thanks

[RLL]

DLH ---

The IRC says "age 55 and ten years of participation" to be eligible for diversification. What does the plan document say? If there's no plan provision relating to the predecessor plan, the participant has no right to an earlier diversification election. [i'm assuming that the ESOP (in its present form) has an IRS determination letter that covers the diversification provision].