Employee Stock Ownership Plans - New Anti-Cutback Relief

Taken from the April 24, 2013 Edition of the IRS Employee Plans News

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.

Anti-cutback rules

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)) - see below. Plans can't satisfy the new diversification requirements by offering a diversification election distribution. In fact, doing so may violate the permissible distribution rules.

(Italics Added)

Final Regulations on Investment Diversification Requirements

Taken From Employee Plans News - Summer Edition

Overview of IRC Section 401(a)(35)

On May 18, 2010, the IRS and the Treasury Department released final regulations on Code §401(a)(35) investment diversification requirements for certain defined contribution plans with publicly traded employer securities.  DC plans holding publicly traded employer securities are considered "applicable defined contribution plans" and subject to the diversification requirements of Code §401(a)(35). These plans must contain at least three investment options other than employer securities.

The diversification requirement applies to:

• employee contributions; and
• employer contributions allocated to participants (or their beneficiaries) with at least three years of service.

A plan can't restrict a participant's right to invest in or to divest employer securities any more than it restricts any other plan investment options. However, the final regulations modify some of the permitted restrictions:

• A plan may have more frequent transfers to and from stable value funds and qualified default investment alternatives than a fund invested in employer securities.
• A plan may not allow reinvestment of divested amounts in the same employer securities account, but may allow investment of those amounts in another employer securities account if the only difference between the two accounts is the Code §402(e)(4) cost or other basis.
• Under a transitional rule, certain leveraged ESOPs may allocate matching contributions to an otherwise frozen employer stock fund.

Exceptions to the diversification requirements include a:

• stand-alone ESOP that does not hold amounts attributable to §§401(k) or (m);
• one-participant retirement plan; or
• plan with an investment fund holding employer securities as part of a broader fund is not treated as holding employer securities if the:
• investment was independent of the employer;
• employer's securities did not exceed 10% of the fund; and
• employer securities were held indirectly through:
• an investment company registered under the Investment Company Act of 1940;
• a common or collective trust fund or pooled investment fund maintained by a bank or trust company supervised by a state or federal agency;
• a qualified insurance company's pooled investment fund; or
• any other IRS-designated investment fund.

The final regulations:

• do not treat a multiemployer plan as holding employer securities if they are held indirectly through an investment fund managed by an independent investment manager and do not exceed 10% of the fund;
• extend the types of allowed investment companies to include certain exchange traded funds;
• state that in determining whether the value of employer securities exceeds 10% of the fund's investment's total value for a plan year, use the value at the end of the preceding plan year; and
• provide that if a fund that indirectly holds employer securities doesn't meet the "independent of the employer" requirement, it meets the diversification requirements even if the plan doesn't offer diversification rights to the participants for up to 90 days after it is found to hold employer securities.

The final regulations are effective May 19, 2010, and apply for plan years beginning on or after January 1, 2011.

Page Last Reviewed or Updated by IRS: 2012-08-03 

FAQS ABOUT AFFORDABLE CARE ACT IMPLEMENTATION (PART XIV)

The Departments of Labor, Health and Human Services (HHS), and the Treasury (collectively, the Departments) have prepared and released another set of Frequently Asked Questions (FAQs) on the Affordable Care Act (ACA) Implementation (Part XIV).  The FAQs address changes to the summary of benefit and coverage (SBC).  Also an updated SBC template and a completed SBC template have been issued.  For previous articles on ACA FAQs visit our website.  

What's in the FAQ?  

·         Updated SBC Template (and sample completed SBC) are now available.  The updated template requires the addition of whether the plan or coverage provides minimal essential coverage (MEC) and satisfies the minimal value (MV) requirements.  The Departments will not take any enforcement action for using the previous template provided that the SBC is furnished with a cover letter or similar disclosure indicating the necessary MEC and MV information. 

Model language:

 Does this Coverage Provide Minimum Essential Coverage?  

The Affordable Care Act requires most people to have health care coverage that qualifies as "minimum essential coverage."  This plan or policy [does/does not] provide minimum essential coverage.

Does this Coverage Meet th Minimum Value Standard?   

The Affordable Care Act establishes a minimum value standard of benefits of a health

plan. The minimum value standard is 60% (actuarial value). This health coverage

[does/does not] meet the minimum value standard for the benefits it provides.

·         There were no changes to the uniform glossary, the Instructions for Completing the SBC or to the Coverage Examples.

·         Annual limits on essential health benefits have not changed.

·         Coverage Examples have not changed.

·         Safe Harbor and other enforcement relief will be extended to ensure a smooth transition to new market changes in 2014, the Departments' believe it is prudent to extend the following enforcement relief to apply to ACA Implementation through the end of the second year of applicability:

o   FAQs Part VIII, Q2 - (the Departments' basic approach to implementation of the SBC requirements during the first year of applicability);

o   FAQs Part IX, Q1 - (circumstances in which an SBC may be provided electronically);

o   FAQs Part IX, Q8 - (penalties for failure to provide the SBC or uniform glossary); and 

o   FAQs Part IX, Q9 - (coverage examples calculator and related information related to the use of the coverage examples calculator.