Diversification Requirement

[RLL]

What do you mean by "All of the participants will be fully diversified in Company A stock which they hold in the plan" ? Presumably, Company A will be liquidated following the sale of its assets and the Company A stock will be converted into cash.

If the assets of the Company A Plan are transferred to the Company B Plan, the IRS would likely say that Company A Plan is a "predecessor plan" to the Company B Plan and participation in the Company A Plan would count as participation under IRC Sec. 401(a)(28)(B) for purposes of Company B Plan's ESOP diversification election. The law is not totally clear on this point, however, and it may be possible to avoid this result (if that's what you want to do) by obtaining an IRS determination letter on plan provisions which deny such treatment.

Note that the diversification requirement of Sec. 401(a)(28)(B) is based on "participation," not "service."

[This message has been edited by RLL (edited 03-02-2000).]

[Guest Sheila S]

Company A maintains a plan with an ESOP feature (match is made with employer stock). The assets of Copany A are acquired by Company B which also maintains a plan with an ESOP feature. The assets from Company A Plan will be transferred to Company B Plan. The participants in Company A plan will now be participants in Company B Plan effective 1/1/00. All of the participants will be fully diversified in Company A stock which they hold in the plan. For purposes of 401(a)(28), must the service which a participant had in the Company A Plan be added to the service a Participant has in the Company B Plan (i.e. is tacking done) for purposes of determining if a Participant has the 10 years of service needed to make he or she eligible to diversify in accordance with 401(a)(28) (i.e., 55 years old and 10 years with the plan)?