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Employee Plans Compliance Unit (EPCU) - Current Projects – Diversification of Employer Securities

Why did I receive a Compliance Check Letter?

You were a randomly selected sponsor of a large plan who reported on your 2011 Form 5500 Schedule H, line1d(1) that your plan held investments in employer securities at the end of the year.

What is EPCU attempting to determine?

First, we will use your responses to the questionnaire to determine if your plan is subject to Internal Revenue Code Section 401(a)(35), which applies if employer securities issued by the employer maintaining the plan or any controlled group member are publicly traded. If it is established that your plan is subject to Internal Revenue Code section 401(a)(35), we will then determine if your plan complies with the Internal Revenue Code and Treas. Regs. Section 1.401(a)(35)-1. More specifically, we will analyze your responses to determine if:

  • you have amended your plan for the required employer securities diversification provisions
  • participants are given the opportunity to exercise their employer securities divestment and reinvestment rights
  • your plan meets the “three investment option rule”
  • your plan complies with the “frequency of divestment and reinvestment” rule
  • any plan imposed conditions and restrictions satisfy the applicable requirements

What actions do I need to take?

Immediately forward the compliance check letter to the office or department with primary responsibility for the day-to-day administration of your employee benefit programs. You or your power of attorney can send us your responses by fax or mail. Please provide all the information requested and make every effort to be as complete and accurate as possible in your responses. You may also furnish any other documents or clarifying material that you believe will be helpful for us to review. If you need additional time, make sure to contact the person whose name is listed on the letter to request an extension prior to the due date of the response (15 days from the date of the letter). Failure to provide the information requested could result in further action or examination of your return.

What if I have questions?

Please e-mail us and we will be glad to answer any questions you have about the project and how it relates to your situation. Please write “Diversification of Employer Securities Project” in the subject line of the message. You may also contact the person listed in the cover letter with questions about this project.


Code section 401(a)(35), added by the Pension Protection Act of 2006, provides that plans must allow  participants, alternate payees and beneficiaries of participants to divest publicly traded employer securities held in their defined contribution accounts and reinvest the funds in alternative investments. The plan must:

  • permit Participants to select from at least three investment options when reinvesting funds, and each of these options must have materially different risk and return characteristics
  • provide opportunities to divest and reinvest at least quarterly
  • provide that  divestment and reinvestment rights will generally go into effect immediately for employer securities acquired with employee contributions, elective deferrals or rollover contributions
  • not impose a service requirement of more than three years before providing divestment and reinvestment rights for employer securities acquired with employer contributions
  • provide each Participant with a notice explaining his or her right to diversify no less than 30 days prior to the first day the individual has that right (ERISA Section 101(m)). You may use the IRS model notice in Notice 2007-37
  • generally not impose conditions or restrictions on stock investments that are not imposed on the investments of other plan assets (Treas. Regs. Section 1.401(a)(35)-1)

Section 1.401(a)(35)-1(f) of the Final Regulations provides that a security is publicly traded if it is traded on a national securities exchange registered under Section 6 of the Securities and Exchange Act of 1934, such as the New York Stock Exchange or NASDAQ. Under these regulations a security traded on a foreign national securities exchange is also publicly traded if it is included in the FTSE Group All-World Index.

Internal Revenue Code section 401(a)(35) is generally effective for plan years beginning after December 31, 2006. The Final Regulations went into effect for plan years beginning on or after January 1, 2011.

How will this compliance check end?

We will advise you on how to correct any the plan defects, if any, that we find during this compliance check. If you take appropriate actions to correct the plan defects, we will issue a closing letter notifying you that the compliance contact has been resolved.

We will also use information gathered from this project to issue a report describing responses and identifying areas where we need additional education, guidance, or outreach.

Other resources

IRC 401(a)(35) Final Regulations

Page Last Reviewed or Updated: 05-Sep-2014