10% Limit on Qualifying Employer Securities

[Scott]

A DB plan acquires qualifying employer securities, and immediately after the acquisition the FMV of the securities does not exceed 10% of the FMV of the assets of the plan. Over time, the securities appreciate and the other plan assets depreciate, so that now the FMV of the securities exceeds 10% of plan assets. Must the plan divest itself of enough of the securities to get back below the 10% threshold?

[david rigby]

Several prior discussion threads on this topic. For example:

http://www.benefitslink.com/boards/index.p...ST&f=20&t=14565

http://www.benefitslink.com/boards/index.p...ST&f=22&t=18394

In general, you might the search feature (with keywords such as “qualifying employer”)

http://www.benefitslink.com/boards/index.p...p?act=Search&f=

[Scott]

Thanks, but neither of those threads, nor anything my searches produced, answer my specific question. I was hoping it was a simple yes or no.

[Kirk Maldonado]

My recollection, dating back almost 20 years ago, was that the DOL cut the employer some slack on this issue. Did you look at the regulations?

[Scott]

I did review the regulations, but they aren't too helpful. I think the answer is that divestiture is not required, but I'm just looking for some confirmation.

ERISA Section 407(a)(1) prohibits a plan from holding non-qualifying employer securities. No problem here.

407(a)(2) provides that a plan may not acquire qualifying employer securities if immediately after the acquisition, the FMV of qualifying employer securities exceeds 10% of the FMV of plan assets. I don't believe this provision is violated because it prohibits the "acquisition" but not specifically the "holding" of qualifying employer securities greater than 10%. If the initial acquisition was less than 10%, this provision doesn't appear to be violated merely because the change in value of the securities and other plan assets now causes the FMV of the securities to exceed 10% of plan assets.

407(a)(3) and (4) apply to plans holding securities as of 1984 and 1979 (not applicable).

Section 406(a)(2) prohibits a fiduciary from permitting a plan to hold any employer security if he knows or should know that holding such security violates Section 407(a). Obviously this means that a fiduciary cannot allow a plan to hold non-qualifying employer securities in violation of 407(a)(1), but I just want to make sure that this provision doesn't somehow impose a 10% "holding" limitation that's not otherwise present under 407(a)(2).

Does this thinking sound right? Anything I'm missing?

[david rigby]

Sorry if nothing was on point. I thought there was explicit regulatory statement that no divestiture was required. The answer is "no" (I think).

[Guest Harry O]

I agree with Pax. The DOL regulations apply the 10% test at the time of acquisition. You need to look at the regulations. I am at home without regs handy . . .

[Guest asire2002]

I know the question is whether holdings in excess of 10% is permitted under law, but I believe the plan document may also impact this situation: does the document permit it?