"Designed to invest primarily"

[Guest gaham]

We have a 401(k) plan with certain components of the plan being designated as an ESOP and certain components being designated as a non-ESOP. Because of the complexity of separately testing the ESOP and non-ESOP components of the plan, we are contemplating converting the entire plan to an ESOP. Except for certain plan assets derived from a DB reversion, participants are free to direct plan investments to a number of different investment funds including an employer stock fund. Right now, 90+% of total plan assets are invested in employer stock and we do not expect this to change. The plan assets that are required to remain invested in employer stock due to the DB reversion amount to about 39% of the total assets. If we convert the entire plan to an ESOP, do we have an issue as to whether the plan is "designed to invest primarily" in employer stock since participants, in theory, could redirect up to 61% of plan assets into non-employer stock investment funds. Bear in mind, we do not anticipate this happening - only that it can happen. Thoughts are appreciated. Thanks.

[Kirk Maldonado]

My interpretation is that the operative word is "designed" not "primarily."

Specifically, that the test is not that the plan assets "must" be invested primarily in employer stock; rather that the plan be "designed" to be primarily invested in employer stock.

[Guest gaham]

Kirk, that's exactly my concern. However, in my experience as long as the plan contains language that it is an ESOP designed to invest primarily... it becomes a numbers game; i.e., the IRS will not question you on this as long as most of the assets are invested in employer stock. Also, in my experience, in a standard vanilla ESOP where there is no investment choice by participants, most plan documents contain no requirement or mandate that the employer or other fiduciary invest and/or retain plan assets in employer stock (unless, of course, it is otherwise statutorily required). Rather, there is the standard ESOP designation and language that permits, but does not require, that plan assets be invested in employer stock. If this is okay and doesn't violate the "design" requirement why should a plan that simply permits participant direction automatically be violative?

Are you aware of any guidance on this issue?

[Kirk Maldonado]

The only guidance is that the DOL once said that the "primarily invested" test is applied over the lifetime of the plan; it is not a "snapshot" test.