IRS Guidance on Diversification Requirements for Defined Contribution Plans Holding Publicly Traded Employer Securities -- Notice 2006-107
Rev. 12/15/06, E-mail Alert 2006-23

The Pension Protection Act (PPA) introduced a requirement for defined contribution plans with publicly traded employer securities to permit participants to divest such stock and reinvest the proceeds in other plan investments. The rules do not apply to a traditional employer contribution only Employer Stock Ownership Plan (ESOP). Our article on this subject provides the details of these rules.

Diversification Notice – Short Postponement of Mailing Deadline
One requirement was to provide a notice to participants explaining their diversification rights no later than 30 days before the beginning of the 2007 plan year. The IRS has just released Notice 2006-107, which includes a model notice and provides a short extension of the initial deadline for calendar year plans. Specifically, a plan whose plan year begins on January 1, 2007, is not required to provide the model notice before January 31, 2007, although earlier compliance "is encouraged."

However, the 30-day notice requirement continues to apply to fiscal year plans. Thus, a plan with a plan year beginning on February 1, 2007 must provide the notice by January 1, 2007.

Transition Diversification Rules
Notice 2006-107 also provides for a period from January 1 to March 31, 2007 during which any restrictions on the sale of employer securities that were in effect on December 18, 2006 may be continued. However, such restrictions must be removed by April 1, 2007.

Employer Securities Definition Exclusions
The diversification rules of PPA apply to individual account defined contribution plans that hold publicly traded employer stock. The following investments in employer securities and defined contribution plans are not subject to these rules:

1. Plan investments in employer securities that are held in a mutual fund or a similar pooled investment vehicle that is regulated and subject to periodic State or Federal examination. Any investment in employer securities must be made in accordance with the stated investment objectives of the investment vehicle and made independent of the employer or any affiliate of the employer. In addition, the holdings of the investment vehicle must be diversified so to minimize the risk of large losses.
   
2. Plans that hold non-publicly traded stock are exempt. However, if the plan sponsor is a member of a controlled group of corporations and any one of the corporations within the group has issued publicly traded stock, then all the entities within the controlled group will be subject to the diversification rules.
   
3. ESOPs that do not permit elective deferrals, after-tax employee contributions, or matching contributions and which are maintained as a separate plan from any other plan maintained by the employer are also exempt from the diversification rules. (The reason for this exemption is that these plans have their own diversification requirements.)
   

Individuals who are entitled to receive a diversification notice:
For elective deferrals & employee contributions (after tax & rollovers), the requirements apply to:

1. any participant ,
   
2. any alternate payee who has an account under the plan, and
   
3. any beneficiary of a deceased participant.
   

For employer contributions:

1. a participant who has completed at least three years of service.
   
2. an alternate payee who has an account under the plan and the participant from whom the amount was paid had completed at least three years of service .
   
3. a beneficiary of a deceased participant.