IRS Position on Rebalancing and/or Segregation Plan Provisions
The IRS has been informally stating that they are holding approval of plan documents containing Provisions for Account Segregation and/or Rebalancing. Corey Rosen explores the issue further in ESOP Account Segregation and Rebalancing Sense and Nonsense. He discusses the issue and notes that he and many ESOP experts feel the provisions are legal:
The IRS apparently is not so sure. In informal (and I stress, only informal) conversations, they have indicated they won't be accepting letters of determination with these provisions. They won't be saying you can't do it either. It's just that their sensibilities are apparently offended here that a company might do something that is actually prudent and in line with the spirit of the law, but, under one interpretation anyway, not exactly what they see as the letter of the law saying.
The large majority of ESOP attorneys I know believe that these provisions can be justified by the law, and so do I. They also are well justified by common sense. Companies that have these provisions already do not need to change them, at least not yet. Companies submitting letters of determination could still follow these practices--no one has said it is illegal yet. But companies doing that should discuss this with their attorneys to see what possible risks there might be and if there has been any clarity coming from the IRS.
If the IRS continues to maintain this position without providing any formal guidance, it appears inevitable that the issue will be challenged, and an ESOP with reasonable and nondiscriminatory plan provisions should have a strong case.