Diversification beyond the qualified election period?

[tghooper]

We have a plan (non leveraged) that allowed some participants to diversify beyond the statutory six years. We use the Corbel plan document. Are there any pitfalls or any considerations that we need to consider?

[ESOP Guy]

Not really. While not common it isn't rare to see such a thing.

Most of the issues tend to be discrimination rules-- you say some are allowed. Make sure the some aren't in effect all HCEs. That is a benefits, rights and features issue.

Obviously, more distributions can mean the company needs to put up more cash for those payments. i am assuming this is a private company. A good liquidity study should help you quantify that issue.

Make sure the plan document allows for it. That is plan 101 but it is stunning to see how often plans do things not in the plan.

In effect this is nothing more then a type of an in-service distribution rule in an ESOP.

[A Shot in the Dark]

I concur with ESOP Guy. We have a few ESOP clients that have elected to extend the diversification period.

Make sure the Plan is amended to provide for the extension so that you are not operating the Plan in violation of the Plan Provisions.

[GMK]

If the plan allows for it, then ESOP Guy's point about not favoring HCE's is probably the main issue.

When our ESOP started doing diversifications, someone got the timing wrong, and some people got a diversification distribution a year ahead of schedule. We later fixed it with a VCP. Since no one got more than they should have (just got it a little early), no one had to give any money back (whew).

If your plan says the QEP is for 6 years only, then you might want to consider fixing it and checking whether anyone got more than they were entitled.

[tghooper]

Thanks for the responses. Yes, the plan will be amended (I forgot to mention that). There's no issue with discrimination. Mostly a timing issue that resulted in going beyond the QEP.

[GMK]

Not being a lawyer, I'll ask if the amendment to extend the QEP is limited to only covering future diversification distributions, or if it is permitted that the amendment could be retroactively effective to cover the distributions that have already been made beyond the 6-year period.

[ESOP Guy]

I am sorry I just re-read the question. Are you saying they did it while the plan didn't allow it? That is to say there was an operational error?

if so, you should check to make legal thinks this can be self-corrected vs needing a VCP filing.

[tghooper]

ESOP Guy - that's correct. We're looking at all options at this point, including VCP. Thanks