Notification Required under ESOP Diversification Rules

[Guest Edward McElroy]

I've seen a number of links here to questions involving notice requirements applicable to the ESOP diversification rules. While most SPDs contain information regarding this qualification requirement, I was recently contacted by a Company that did not provide an additional notification. Is anyone aware of the IRS' position on this issue? After the fact, can an otherwise qualified participant argue that an ESOP administrator should have provided diversification materials? Thanks in advance. Ed

[stephen]

Many compaines consider the SPD as meeting the notification requirement. That said, we provided a list of particpants eligble to diversify as part of our allocation report so the client could notify the participants as soon as administratively feasible following the completion fo the allocation.

I am not sure of the IRS position on this particular issue, perhaps Becky Miller or RLL have experience with this.

[BeckyMiller]

I have never discovered any formal requirement to provide the participant with a notice of their right to diversify. The little guidance on this point - 2 notices and the IRS examination manual, do not require any separate notice. In fact, if you look at the IRS manual at 4.72.4.2.14, all it tells the agent to check is whether or not the plan provides for such provision. I would expect a good agent to see if people are electing to diversify, but the manual doesn't say that.

Having said all that, I think that it is good practice to give such notices. If you want your ESOP to really work, you need to keep it in front of the folks. The diversification period gives the employer a chance to talk about the benefit.