Abstract
Sponsors of employee stock ownership plans (ESOPs) are already accustomed to satisfying diversification rules under the Internal Revenue Code. However, ESOPs that are sponsored by publicly traded companies may become subject to the more stringent diversification requirements under the Pension Protection Act of 2006 (PPA). This article discusses the PPA’s diversification requirements, as implemented by the final regulations issued in 2010, and how an ESOP sponsor can prepare if its ESOP becomes subject to the PPA’s requirements.
References
1.
75 F.R. 27927.
2.
Code Section 401(a)(35)(E)(ii). Elective deferrals, either pre-tax or after-tax, are subject to Code Sections 401(k) and 401(m), respectively. Rollovers into a plan are not subject to Section 401(k) or 401(m) testing, so an ESOP that accepts rollovers will not become subject to Code Section 401(a)(35) solely for this reason.
3.
Code Section 401(a)(28)(B)(iii).
4.
An ESOP that is less than 10 years old could have qualified participants, for example, if accounts were merged into the ESOP and individuals have a total of 10 or more years of participation under the plans.
5.
Code Section 401(a)(28)(B)(ii).
6.
Code Section 401(a)(28)(B)(i).
7.
Code Section 401(a)(28)(B)(ii).
8.
Treas. Reg. Section 1.401(a)(35)-1(f)(5).
9.
Treas. Reg. Section 1.401(a)(35)-1(f)(2)(iv)(A).
10.
Treas. Reg. Section 1.401(a)(35)-1(e)(2)(iii)(A).
11.
Code Section 401(a)(35)(B).
12.
Treas. Reg. Section 1.401(a)(35)-1(b)(2).
13.
Code Section 401(a)(35)(C)(i).
14.
Treas. Reg. Section 1.401(a)(35)-1(c)(2)(ii) and Code Section 401(a)(35)(C)(ii).
15.
Treas. Reg. Section 1.401(a)(35)-1(c)(3). The regulation also provides that in plans that use the elapsed time method of computing service for vesting purposes, or plans with no vesting requirement, a participant completes 3 years of service on the day immediately before the third anniversary of the participant’s date of hire.
16.
Treas. Reg. Section 1.401(a)(35)-1(b)(1) and (c)(1).
17.
Treas. Reg. Section 1.401(a)(35)-1(d).
18.
Treas. Reg. Section 1.401(a)(35)-1(e)(1).
19.
Treas. Reg. Section 1.401(a)(35)-1(e)(1)(i).
20.
Treas. Reg. Section 1.401(a)(35)-1(e)(1)(ii)(A).
21.
Treas. Reg. Section 1.401(a)(35)-1(e)(1)(ii)(B).
22.
Treas. Reg. Section 1.401(a)(35)-1(e)(1)(ii)(C).
23.
Id.
24.
Treas. Reg. Section 1.401(a)(35)-1(e)(2)(ii).
25.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(iv).
26.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(v).
27.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(vi).
28.
29 C.F.R. 2550.404c-5(c)(5)(ii).
29.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(iii).
30.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(ii).
31.
Id.
32.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(vii)(A).
33.
Id.
34.
Id.
35.
Treas. Reg. Section 1.401(a)(35)-1(e)(3)(vii)(B).
36.
75 F.R. 27930.
37.
Treas. Reg. Section 1.401(a)(35)-1(e)(1)(ii)(C).
38.
ESOPs are entitled to an exemption to ERISA’s prohibited transaction rules that generally prohibit a plan from borrowing money from the plan’s sponsor. An ESOP may borrow money from the sponsor to buy shares in the sponsor. Those shares are initially held in an unallocated "suspense account." These shares are released from the suspense account and allocated to participants under the ESOP’s allocation formula as the acquisition loan is repaid.