What source to take the diversification election from in a MP ESOP?

[Richard Anderson]

In a money purchase ESOP plan about 15% of the assets of the plan are currently in the money purchase source. The MP source includes both employer stock and other investments. The ESOP loan has been paid, so there is no leveraged stock in the plan at this time.

An employee is eligible to make a diversification election for 25% of the employer stock in his account.

How do I determine what source to take that diversification election from? Pro-rata? Money purchase first? Money purchase last?

The employee has the option of taking a cash distribution or transferring to the employer's employee directed 401(k) plan. The plan does not specify any other options for divesification. Should it include an annuity option? Otherwise, without spousal consent, can the participant elect to diversify the MP portion?

If the transfer to the 401(k) plan includes assets from the MP source, does the 401(k) plan have to track it as MP source or something else, like rollover? If MP assets are transferred to the 401(k), does the spouse have to sign a J & S waiver? I would think so, unless the 401(k) plan tracks the transfer as MP source.

[RLL]

The ESOP plan document should specify which account(s) are used to satisfy the diversification requirement of IRC Section 401(a)(28)(B).

IRC Section 401(a)(11)© exempts the money purchase plan portion of an ESOP from the J & S annuity requirement which is generally applicable to pension plans, so spousal consent is not required with respect to the ESOP diversification election (unless otherwise provided in the plan document).