Diversification Transfer to a 401(k) plan.

[Guest]

An employer maintains an ESOP and 401(k) plan. The ESOP diversification rules allow participants to diversify their assets by transferring ESOP funds into another DC plan maintained by the employer. Two questions:

1. Does the ESOP need language to allow a transfer out of the funds and does the DC plan need to have language to allow the transfer in?

Do any protected benefit rules apply to these funds or do they come over to the 401(k) "clean" as rollovers do? The ESOP does not allow withdrawals, so when the funds are transferred in to the 401(k) are withdrawals not allowed from those funds?

I know that 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).

[Guest Benefits Maven]

The ESOP plan would need language allowing the participant to transfer their funds to the 401(k) plan. The 401(k) plan can treat the funds as they would any other roll over and yes, they would come "clean". The 401(k)'s general withdrawal rules would apply - unless for some reason you want to set up this ESOP transfer as a separate source of money and give it different rules, in which case your 401(k) plan docs would have to reflect that. You can go either way, depending on how you set up your plan doc.