Employee Stock Ownership Plans – New Anti-Cutback Relief
Notice 2013-17 offers certain ESOP sponsors anti-cutback relief if they amend their plan to eliminate a distribution option that met prior diversification requirements. The relief is for sponsors who must amend their ESOPs for the new diversification requirements of Internal Revenue Code Section 401(a)(35). The relief is available if the amendment is effective by the later of the:
- last day of the first plan year beginning on or after January 1, 2013, or
- end of the plan’s remedial amendment period for the new ESOP diversification requirements.
Generally, plans violate the anti-cutback rules if they:
- decrease a participant’s accrued benefit (IRC Section 411(d)(6)(A)), or
- eliminate an optional form of benefit (IRC Section 411(d)(6)(B)).
Qualifying plan amendment
Before the Pension Protection Act of 2006, all ESOPs had to meet diversification requirements by allowing participants to direct the investment of at least 25% percent of their account balance during the election period. The election period is the 90-day period following the close of each plan year in the 6-plan-year period beginning with the first plan year a participant:
- reaches age 55, and
- completes 10 years of plan participation (IRC Section 401(a)(28)(B)).
One way ESOPs could have met these diversification requirements was to offer participants a diversification election distribution option – an in-service distribution of at least 25% of their account balance within 90 days after the end of their election period (IRC Section 401(a)(28)(B)(i)). ESOPs were allowed to offer the diversification election distribution option even though this option may have otherwise violated the permissible distribution rules of IRC Sections 401(a) and 401(k).
After PPA, certain ESOPs that hold (or are treated as holding) publicly traded employer securities must satisfy new diversification requirements (IRC Section 401(a)(35)). Plans can’t satisfy the new diversification requirements by offering a diversification election distribution. In fact, doing so may violate the permissible distribution rules.
- Definition of Readily Tradable Employer Securities (EPN, March 2011)
- 401(a)(35) Final Regulations, Diversification Requirements for Certain Defined Contribution Plans
- ESOP home page