ESOP Administration: Preliminary Diversification Forms

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Have you distributed your preliminary ESOP Diversification forms yet?

The ESOP Diversification rules provide that an ESOP must allow qualified participants to diversify a portion of the employer securities held in their account.  A “qualified participant” is an participant who has completed at least 10 years of participation in the plan and has attained age 55.

A “qualified participant” must be allowed to choose to diversify up to 25% (on a cumulative basis) of the total number of shares of Company Stock acquired by or contributed to the Plan that have ever been allocated to their Company Stock account during the first five years of the Eligible Period and up to 50% (on a cumulative basis) of the total number of shares of Company Stock acquired by or contributed to the Plan that have ever been allocated to their Company Stock account in the last year of the Eligible Period.

IRC Section 401(a)(28) requires that eligible participants be given an election to diversify during the first 90 days of the plan year.  Since the final account value will generally not be available within 90 days of the plan year end, it is a best practice to distribute a revocable preliminary diversification form to show a good faith effort to satisfy the 90-day election requirement.  After the final account values become available and diversification amounts are computed, Final Diversification Election Forms should be prepared and distributed to “qualified participants”.