Diversification when share value/allocation done after 6/30

[Guest crosseyetester]

For a non-public company's ESOP, the stock price is not determined until well beyond June 30. What is the general approach for diversifying:

1. Process diversification transaction by 6/30/07 using 12/31/05 share value and allocation.

2. Process diversification transaction after 6/30/07 using 12/31/06 share value and allocation.

3. Do step 1 and then do a final transaction after 6/30/07 if the allowable shares has increased? This would also mean making the difference up in the share price. For this client the company buys back the shares.

[stephen]

Generally, pratictioners do option 2.

If you do option 1 what happens if the share value drops? Do you think you can get money back from the participant?

[Guest tmills]

This comes up all the time at ESOP seminars. One can only hope that some day the IRS will come up with something that addresses the real world. The most common solution I've seen at seminars is for plans with this problem is to have participants do a preliminary diversification election w/in 90 days after plan year end as required by the code. This can be something as simple as a yes/no as to whether they want to diversify with no percent elected. ASAP after the valuation and allocation are complete, a final form is distributed to those who elected on the preliminary form to diversify. On this final form the participant either changes their mind and elects not to diversify or elects the % they wish to diversify. If there are options available for the diversification $ (transfer to 401(k), pay in cash, etc.) that is also done and the diversification transactions are completed.

Of course this process doesn't comply w/ the code, but it is reasonable. It also avoids 2 distributions and the problem of the share price declining. In any event, the client should consult counsel before adopting any procedure because whatever you come up with will not strictly comply with 401(a)(28).

[RLL]

Why not just obtain the updated valuation in time to process the diversification elections on a timely basis? There are many ESOP companies that are able to complete the valuation process within three months after year-end.

[Kevin C]

Please forgive a crazy question, but can you make the election period longer than the required 90 days?

The deadline for the distribution/diversification/transfer is 90 days after the last day of the period during which an election can be made.

[Guest bart]

No, you can't extend the 90 days.

[Kevin C]

Can you point me to something that says that? I'm trying to pull together information for a discussion in our office.

[Guest tmills]

Can you point me to something that says that? I'm trying to pull together information for a discussion in our office.

401(a)(28)(B)(i)