Does a plan cease to be an ESOP when only 50% of its assets are invest

[Guest Fred Benefits]

A plan began as an ESOP with most of its assets in employer stock. Over time, however, the plan has come to hold about 50% of its assets in employer stock, and 50% of its assets in unrelated investments.

Is this plan still an ESOP? If it's not an ESOP, do ERISA's diversification rules apply to all the assets in the plan's trust, such that with respect to the 50% of the assets that remain in employer stock, the plan may now fail to satisfy ERISA's diversification requirements?

[RLL]

Hi Fred ---

An ESOP must be "designed" to invest primarily in employer stock. A temporary situation where the ESOP has only "about 50% of its assets" in employer will not result in the loss of ESOP status. If this situation will continue for the foreseeable future, it would be best to take some action to assure contination of ESOP status or to plan for the loss of ESOP status.

If the plan ceases to be an ESOP under IRC Section 4975(e)(7), it could still be a stock bonus plan under IRC Section 401(a).....except to the extent that the ESOP included a money purchase plan portion. A non-ESOP stock bonus plan can still be an "eligible individual account plan" under ERISA Section 407(d) and, thus, remain exempt from the ERISA diversification requirement to the extent of investments in employer stock.

You should think about why the plan is an "ESOP" and whether ESOP status is necessary or whether a non-ESOP stock bonus plan can be used in this situation. If ESOP status must be maintained, it might be appropriate to "spin off" all or a portion of the assets other than employer stock into a new or existing profit sharing plan.

[Guest Fred Benefits]

Thank you, RLL. The 50% status is not temporary. This is due primarily to the steady decline in the value of the company's stock (during the bull market for stocks overall) over several years.

It wasn't clear to me whether you were addressing my ultimate question: if the plan is no longer an ESOP, does ERISA's diversification rule now apply to investment of 50% of the plan's assets? (The stock of the employer, by the way, is not publicly traded.)

[RLL]

Fred ---

Whether or not the plan is an ESOP, the ERISA diversification requirement applies to the investment of assets other than employer stock. An ESOP (or other "eligible individual account plan") is exempt from the ERISA diversification rule only to the extent of investments in employer stock.

As I stated above, even if the plan ceases to be an ESOP, it can still be a stock bonus plan which is an "eligible individual account plan" under ERISA.