Blue Ridge ESOP Associates Industry News

Review Your Plan’s Language Regarding Diversification

Posted by Anthony Brunsvold

Feb 10, 2017 3:21:38 PM

For ESOPs whose stock isn’t publicly traded, the timing rules for diversification have historically been difficult to meet.   The law says the plan has to issue notices to participants who are eligible for a diversification within 90 days after the close of the plan year.  For those electing a diversification, the plan has until 180 days from the close of the prior plan year to make the payment.  Many ESOPs are not able to get the stock appraisal and annual work done in the 90 or 180 days to comply with the law.  The industry best practice has always been to issue a preliminary notice within the 90 day window informing a diversification eligible participant of their right to diversify.  After the annual work was done, plans would then issue the actual diversification notice and make the payments as soon as feasible thereafter.

When the IRS issued their model language for pre-approved ESOP documents, it included sample diversification language. The IRS’ model language states the participant has up to 90 days after the value of the shares subject to the diversification election is provided to the participant to make an election and the plan sponsor has the subsequent 90 days to make the payment. Since this language has the implied “blessing” of the IRS, we recommend plan sponsors review their document language and policies regarding diversifications to see if they ought to amend their plan to adopt this language.

As with all plan amendments you should consult your ERISA attorney.

Topics: IRS, Diversification