IRS Issues Guidance on Employer Stock Account Diversification

November 30, 2006 ( - The Treasury Department and IRS have issued Notice 2006-107 providing transition guidance on the provision of the Pension Protection Act of 2006 (PPA) relating to diversification rights of plan participants and beneficiaries who have accounts held in publicly traded employer securities.

By Rebecca Moore | November 30, 2006

The PPA requires that a defined contribution plan that holds publicly traded company stock permit participants to diversify the stock accounts after three years of service. The plans must give participants a notice of their diversification rights as well as educational material about the importance of diversification no later than 30 days before they are eligible for diversification rights.

The notice points out that some participants will be eligible for diversification rights under the PPA as early as January 1, 2007. However, plans with plan years beginning on or after January 1, 2007 and before February 1, 2007 are not required to provide participants with notification before January 1, 2007. The publication includes a model notice that can be used to satisfy the participant notification requirement.

In the guidance the IRS and Treasury define what is considered a publicly traded employer security as well as the individuals who have diversification rights in relation to the diversification provision. In addition, the notice provides rules for investments offered for diversification.

Permitted, as well as non-permitted, restrictions and conditions of divesture are spelled out for plan administrators and the IRS notice sets forth transition rules for existing limitations and grandfathered investments.

The notice is here .