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Employer stock in 401(k) Plan

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The subsidiary of a public company offers stock of the parent as an investment option in a 401(k) plan.  The subsidiary is sold to another company, but plan participants are allowed to keep their stock in the parent after the acquisition.  At what point in time does the stock of the former parent company no longer qualify as “company stock”?  Asking for a friend, of course.  Thanks!

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Immediately, would be my guess.

Then the issue becomes one of prudency for maintaining a non-diversified fund.

I recall a large employer court case of a similar nature, don't remember the companies or how it resolved, but this is not a unique issue.


Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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A few court decisions about a fiduciary’s decision-making regarding a security that is no longer an employer security after a spin-off are:

Young v. Gen. Motors Inv. Mgmt. Corp., 325 F. App’x 31, 32 (2d Cir. May 6, 2009) (a fiduciary’s duty of diversification applies to the plan as a whole).

Usenko v. MEMC LLC, 926 F.3d 468 (8th Cir. June 4, 2019) (applying a presumption that a publicly-traded security trades at efficient-market prices; allegations were insufficient to make plausible an assertion that it was imprudent to continue a security, no longer an employer security, as an investment alternative).

Schweitzer v. The Investment Committee of the Phillips 66 Savings Plan, 960 F.3d 190 (5th Cir. May 22, 2020) (Construing the present-tense word “acting” in ERISA § 3(5)’s definition of an employer, the former employer’s stock no longer was employer securities of the spun-off employer) (For a plan that provides participant-directed investment, a fiduciary need only provide investment alternatives that enable a participant to create a diversified portfolio; the fiduciary need not ensure that participants actually diversify their portfolios.), cert. denied, No. 20-1255 (Dec. 13, 2021).

Stegemann v. Gannett Company, Inc., 970 F.3d 465 (4th Cir. Aug. 11, 2020) (The complaint alleged enough facts to assert a plausible claim that a fiduciary failed to monitor a nondiversified investment alternative.), petition for rehearing en banc denied, No. 19-1212 ECF No. 48 (Sept. 22, 2020), cert. petition filed sub nom. Gannet Co. Inc. v. Quatrone, No. 20-609 (Oct. 30, 2020) {On April 19, 2021, the Court invited the Acting Solicitor General’s brief. On November 9, 2021, the United States filed a brief arguing that the Fourth Circuit’s decision was correct (at least on the particular alleged facts), and that what the fiduciary described as a circuit split did not need review.}, cert. denied sub nom. Gannett Co., Inc. v. Quatrone, No. 20-609, 142 S. Ct. 707 (Dec. 13, 2021), Civil Action 1:18-cv-325-AJT/JFA, 2023 U.S. Dist. LEXIS 216644, 2023 WL 8436056 (E.D. Va. Dec. 5, 2023) (by Judge Anthony J. Trenga) (after a bench trial, finding no breach of diversification or prudence) (“[A] prudent fiduciary considering the timing and other circumstances of divestiture would have weighed the risks of single stock fund holdings against the risks of forced and/or rapid divestiture.”).

Snider v. Administrative Committee, Seventy-Seven Energy, Inc. Retirement & Savings Plan, No. Civ-20-977-D, slip op. pages 14-17 (W.D. Okla. Oct. 8, 2021) (Rule 12(b)(6) permits a dismissal of a claim as barred by an affirmative defense only when the complaint and properly considered materials admit all elements of the affirmative defense by alleging the factual basis of those elements.).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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The core issue from a participant's perspective about is the stock is or is not company stock is whether the participant can take an in-kind distribution of the stock from the plan and be able to exclude the stock's net unrealized appreciation from taxation at the time of distribution and also get favorable capital gains treatment upon distribution of the stock.

If you have access to the EOB, I suggest reading CHAPTER 7 TAXATION RULES Article 1. Calculating NUA.  The topic as it relates to corporate transactions is too complex for a simple post here.

You will see in the discussion that there are rules that are applicable to spinoffs and to acquisitions where employer securities are swapped out or are transferred in-kind.  Under certain circumstances, the character of the stock as employer securities is preserved and NUA treatment remains available.

For the most part, the circumstances involve both employers to structure their plans to preserve the status of the stock as employer securities and to coordinate any movement of employer securities.  This is not something an individual participant can do (with a possible exception if leaving the participant's total account balance and employer securities in seller's plan.)




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jRegarding Paul I's pint on NUA, I recall seeing IRS Revenue Rulings from the 1970s in which te IRS concluded that an in-kind distribution of the former employer's stock allowed rthe participant to be taxed on thd NUA. However, I am not sure whether that remains the current state of the law. You should consult IRS Pub 590-B to find out if thst remains true today.

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