<nobr>Jan 4, 2008</nobr>

IRS Proposes Diversification Rules for Qualified Defined Contribution Plans Holding Publicly Traded Employer Securities

The Treasury Department and IRS January 2 released proposed regulations under Internal Revenue Code section 401(a)(35) concerning diversification requirements for certain defined contribution plans and to publicly traded employer securities.

The Pension Protection Act added section 401(a)(35) to provide that for a defined contribution plan -- other than certain employee stock ownership plans -- to remain as a qualified plan under section 401(a), it must provide certain individuals with the right to divest employer securities in their accounts and reinvest those amounts in certain diversified investments. The diversification requirements generally are effective for plan years beginning after December 31, 2006.

The IRS in November 2006 issued Notice 2006-107, which described the individuals' rights and provided transitional guidance pending the issuance of regulations. Notice 2006-107 also included information provided by the Department of Labor concerning the date by which participants and beneficiaries must be notified of their new rights. According to the preamble, the proposed regulations incorporate much of the guidance provided under Notice 2007-106.

The regulations intend to clarify the scope of the rule in section 401(a)(35) that generally prohibits restrictions and conditions on investment in employer securities, but would specifically permit certain restrictions and conditions on such investments that are consistent with the statute, and would also define when employer securities are publicly traded on an established securities market.

The proposed effective date for the regulations is for plan years beginning on or after January 1, 2009. Until the regulations go into effect, Notice 2006-107 will continue to apply, including transition relief for the period before January 1, 2008, provided for in the notice.

Comments are requested on the proposed regulations (particularly with respect to the proposed definition of when securities are deemed to be publicly traded), and must be received by April 2, 2008.


Websites:

Proposed Regulations on Diversification Requirements

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