<nobr>May 21, 2010</nobr>

IRS Issues Final Rules on Diversification Rules for DC Plans Holding Employer Stock

The Internal Revenue Service on May 19 published in the Federal Register final rules under Internal Revenue Code section 401(a)(35) regarding diversification requirements for defined contribution plans that hold employer stock.

Under the final regulation, defined contribution plan trusts can be disqualified unless those trusts satisfy the diversification requirements for elective deferrals and employee contributions, employer nonelective contributions, and investment options.

The regulations are effective May 19, 2010, and apply for plan years beginning on or after January 1, 2011. Highlights of the final rule are as follow:

• A plan is not permitted to impose restrictions or conditions with respect to the investment of employer stock that are not imposed on the investment of other assets in the plan. The final rule provides clarification with respect to frozen funds allowing the plan to permit reinvestment of dividends paid on employer securities and that this frozen fund exception is only available for a plan that does not have another employer securities fund.


• The final rules expand the special rule for a stable value fund or similar fund to allow transfers out of a stable value or similar fund more frequently than other funds.


• The final rules expand the list of permitted indirect restrictions to provide that a plan may provide for transfers out of a QDIA more frequently than a fund invested in employer securities.


• A plan is permitted to provide that an individual may not reinvest divested amounts in the same employer securities account, but is permitted to invest such divested amounts in another employer securities account where the only relevant difference between the separate accounts is the cost of the trust in the shares held in each account.


• The 7-day rule to limit trading is clarified as only an example of how to limit short-term trading and other short-term trading restrictions, such as restriction based on multiple trades within a specific period, are allowable if they meet the reasonably designed standard.

Questions or comments on the final rule should be addressed to Kathryn Ricard (kricard@eric.org).

Final Rule on Diversification Requirements

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