Reg-136701-07 provides that a plan allowing participant company stock investments has to include provisions allowing the investor to sell off the company stock holdings and move the assets to another investment option. These rights must be provided to each participant, to each of the participant’s alternate payees who has an account under the plan, and to each beneficiary of a deceased participant, the proposed regulations said.
If a plan calls for employer contributions other than elective deferrals to be invested in employer stock, a divestment right must be provided to each participant who has at least three years of service, to each alternate payee who has an account under the plan with respect to a participant who has at least three years of service, and to each beneficiary of a deceased participant, regardless of whether the participant had at least 36 months with the company.
According to the proposal, a participant has three years of service on the last day of the plan’s vesting period that constitutes the completion of the third year of service or the employee’s third anniversary for a plan that either uses the elapsed time method or that does not define the vesting computation period because the plan calls for immediate vesting.
Further, the proposed regulations require a plan to provide participants granted diversification rights the opportunity at least four times a year to sell off their employer securities and reinvest the cash proceed in another investment.
The rule says the person should be able to choose from no fewer than three investment options, each of which is diversified and has materially different risk and return characteristics. Investment options constituting a broad range of investment alternatives under Department of Labor regulations are treated as being diversified and having materially different risk and return characteristics.
The latest IRS release of proposed regulations under Section 401(a)(35) came from Section 901 of the PPA and incorporate diversification guidance from Notice 2006-107 released in December 2006 (See IRS Issues Guidance on Employer Stock Account Diversification ), the IRS said.
Under the proposed regulations, a DC program which holds publicly-traded employer securities, referred to as an “applicable defined contribution plan,” is subject to the diversification requirements of Section 401(a)(35) unless it is exempted as a stand-alone employee stock ownership plan (ESOP) or as a one-participant retirement plan.
The proposal would go into effect January 1, 2009, and until that date, Notice 2006-107 will continue to apply. Written comments are due by April 2 to CC:PA:LPD:PR (Reg-136701-07), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.
The proposed rules are here .
One of the key drivers in enacting the PPA was the aspect of the Enron scandal that found many employees unable to divest out of company stock and ending up with largely worthless shares in their DC accounts, which caused many to lose thousands of dollars in retirement assets (See Everything You Wanted to Know About the PPA ).