What to do when employee entitled to distribution and diversification

[Guest tldresch]

Our ESOP loan has been paid off, so we are ready to start making distributions to terminated participants. The question is what to do for participants who are also entitled to diversification. Our plan document provides that distributions will be made over 5 years (20% each year). If, for example, a participant receives a 20% distribution of his account in the first year that he is eligible for diversification (but does not elect to diversify in this first year), and he elects to diversify all 25% in the second year, may he only diversify 5% (25% minus the 20% he received in the distribution), or may he diversify another full 25% on top of the 20% distribution he received in year one?

Any help would be much appreciated.

[RLL]

Hi tldresch ---

The participant is entitled to receive both the "regular" installment distribution and the diversification distribution.

[Guest tldresch]

Thank you very much for your reply. Just to clarify, you mean that the participant is entitled to the FULL 25% for diversification? Can you point me to somewhere in the regs or other guidance where this is explained? I reviewed Notice 88-56, but could not find anything definitive.

tldresch

[RLL]

Hi tldresch ---

What does the ESOP plan document provide? Unless there is a provision which "offsets" one benefit distribution right against the other, the participant is entitled to both. The plan document controls (I assume that there is a determination letter from the IRS).