Diversification Requirements for Certain Defined Contribution Plans, 27927-27934 [2010-11924]
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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations
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• Amendment 25–72 for §§ 25.783(g)
and 25.177.
• Amendment 25–75 for § 25.729(e).
• Amendment 25–79 for
§ 25.811(e)(2).
• Amendment 25–80 for § 25.1316.
In addition, the certification basis
includes certain special conditions,
exemptions, or later amended sections
of the applicable part that are not
relevant to this proposed special
condition.
If the Administrator finds that the
applicable airworthiness regulations
(i.e., part 25) do not contain adequate or
appropriate safety standards for the
Falcon Model 2000EX because of a
novel or unusual design feature, special
conditions are prescribed under the
provisions of § 21.16.
In addition to the applicable
airworthiness regulations and special
conditions, the Falcon Model 2000EX
must comply with the fuel-vent and
exhaust-emission requirements of 14
CFR part 34 and the noise certification
requirements of 14 CFR part 36.
The FAA issues special conditions, as
defined in 14 CFR 11.19, in accordance
with § 11.38, and they become part of
the type-certification basis under
§ 21.101.
Special conditions are initially
applicable to the model for which they
are issued. Should the type certificate
for that model be amended later to
include any other model that
incorporates the same novel or unusual
design feature, or should any other
model already included on the same
type certificate be modified to
incorporate the same novel or unusual
design feature, the special conditions
would also apply to the other model
under § 21.101.
Novel or Unusual Design Features
The Falcon Model 2000EX will
incorporate the following novel or
unusual design features:
The airplane will be equipped with an
automatic braking system, which is a
pilot-selectable function that allows
earlier maximum braking at landing
without pilot pedal input. When the
autobrake system is armed before
landing, it automatically commands
maximum braking at main wheels
touchdown. This will cause a high nose
gear sink rate, and potentially higher
gear and airframe loads than would
occur with a traditional braking system.
Therefore, the FAA has determined that
a special condition is needed.
Discussion
The special condition defines a
landing pitchover condition that takes
into account the effects of the automatic
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braking system. The special condition
defines the airplane configuration,
speeds, and other parameters necessary
to develop airframe and nose gear loads
for this condition. The special condition
requires that the airplane be designed to
support the resulting limit and ultimate
loads as defined in § 25.305.
Discussion of Comments
Notice of proposed special conditions
No. 25–09–13–SC for the Dassault
Aviation Falcon Model 2000EX
airplanes was published in the Federal
Register on December 10, 2009. No
comments were received, and the
special conditions are adopted as
proposed.
Applicability
As discussed above, these special
conditions are applicable to the Falcon
Model 2000EX. Should Dassault
Aviation apply at a later date for a
change to the type certificate to include
another model on the same type
certificate incorporating the same novel
or unusual design feature, the special
conditions would apply to that model as
well.
Conclusion
This action affects only certain novel
or unusual design features on one model
of airplanes. It is not a rule of general
applicability.
List of Subjects in 14 CFR Part 25
Aircraft, Aviation safety, Reporting
and recordkeeping requirements.
The authority citation for these
special conditions is as follows:
Authority: 49 U.S.C. 106(g), 40113, 44701,
44702, 44704.
The Special Conditions
Accordingly, pursuant to the
authority delegated to me by the
Administrator, the following special
conditions are issued as part of the type
certification basis for Dassault Aviation
Falcon Model 2000EX airplanes.
Landing Pitchover Condition
A landing pitchover condition must
be addressed that takes into account the
effect of the autobrake system. The
airplane is assumed to be at the design
maximum landing weight, or at the
maximum weight allowed with the
autobrake system on. The airplane is
assumed to land in a tail-down attitude
and at the speeds defined in § 25.481.
Following main gear contact, the
airplane is assumed to rotate about the
main gear wheels at the highest pitch
rate allowed by the autobrake system.
This is considered a limit load
condition from which ultimate loads
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27927
must also be determined. Loads must be
determined for critical fuel and payload
distributions and centers of gravity.
Nose gear loads, as well as airframe
loads, must be determined. The airplane
must support these loads as described in
§ 25.305.
Issued in Renton, Washington, on May 12,
2010.
Ali Bahrami,
Manager, Transport Airplane Directorate,
Aircraft Certification Service.
[FR Doc. 2010–11932 Filed 5–18–10; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9484]
RIN 1545–BH04
Diversification Requirements for
Certain Defined Contribution Plans
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations under section 401(a)(35) of
the Internal Revenue Code (Code)
relating to diversification requirements
for certain defined contribution plans
holding publicly traded employer
securities. These regulations will affect
administrators of, employers
maintaining, participants in, and
beneficiaries of defined contribution
plans that are invested in employer
securities.
DATES: Effective date: These regulations
are effective on May 19, 2010.
Applicability date: These regulations
apply for plan years beginning on or
after January 1, 2011.
FOR FURTHER INFORMATION CONTACT: R.
Lisa Mojiri-Azad or Jamie Dvoretzky at
(202) 622–6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final
regulations under section 401(a)(35) of
the Code, which was added by section
901 of the Pension Protection Act of
2006, Public Law 109–280 (120 Stat. 780
(2006)) (PPA ’06).1
1 Section 901 of PPA ’06 also added a parallel
provision to section 401(a)(35) at section 204(j) of
the Employee Retirement Income Security Act of
1974, Public Law 93–406 (88 Stat. 829 (1974))
(ERISA). Under section 101 of Reorganization Plan
No. 4 of 1978 (43 FR 47713), the Secretary of
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Section 401(a)(35)(A) provides that a
trust which is part of an applicable
defined contribution plan is not a
qualified trust under section 401(a)
unless the plan satisfies the
diversification requirements of section
401(a)(35)(B), (C), and (D). Under
section 401(a)(35)(B), each individual
must have the right to direct the plan to
divest employer securities allocated to
the individual’s account that are
attributable to employee contributions
or elective deferrals and to reinvest an
equivalent amount in other investment
options meeting the requirements of
section 401(a)(35)(D).2
Under section 401(a)(35)(C), each
individual who is a participant who has
completed at least three years of service,
a beneficiary of a participant who has
completed at least three years of service,
or a beneficiary of a deceased
participant must be permitted to elect to
direct the plan to divest employer
securities allocated to the individual’s
account and to reinvest an equivalent
amount in other investment options
meeting the requirements of section
401(a)(35)(D).
Section 401(a)(35)(D)(i) requires an
applicable defined contribution plan to
offer individuals not less than three
investment options, other than
employer securities, to which the
individuals may direct the proceeds
from the divestment of employer
securities, each of which is diversified
and has materially different risk and
return characteristics.
Under section 401(a)(35)(D)(ii)(I), a
plan does not fail to meet the
requirements of section 401(a)(35)(D) if
it allows individuals to divest employer
securities and reinvest the proceeds at
periodic, reasonable opportunities
occurring no less frequently than
quarterly.
Under section 401(a)(35)(D)(ii)(II), a
plan is not permitted to impose
restrictions or conditions with respect to
the investment of employer securities
that are not imposed on the investment
of other assets of the plan. However, this
rule does not apply to restrictions or
conditions imposed to comply with
securities laws. The Secretary is
authorized to issue regulations
Treasury has interpretative jurisdiction over the
subject matter addressed in these final regulations
for purposes of section 204(j) of ERISA. Thus, the
guidance provided in these final regulations with
respect to section 401(a)(35) of the Code also
applies for purposes of section 204(j) of ERISA.
2 Section 401(a)(28)(B) provides certain
diversification rights to participants in an employee
stock ownership plan within the meaning of section
4975(e)(7) (ESOP). Section 401(a)(28)(B)(v), as
added by section 901(a)(2)(A) of PPA ’06, provides
that section 401(a)(28)(B) does not to apply to a
plan to which section 401(a)(35) applies.
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providing additional exceptions to the
requirements of section
401(a)(35)(D)(ii)(II).
An applicable defined contribution
plan under section 401(a)(35) is a
defined contribution plan that holds any
publicly traded employer securities. A
publicly traded employer security is
defined as an employer security under
section 407(d)(1) of the Employee
Retirement Income Security Act of 1974,
Public Law 93–406 (88 Stat. 829 (1974))
(ERISA) which is readily tradable on an
established securities market. Section
401(a)(35)(F)(i) provides that a plan that
holds employer securities that are not
publicly traded employer securities is
nevertheless treated as holding publicly
traded employer securities if any
employer corporation or any member of
a controlled group of corporations
which includes the employer
(determined by applying section
1563(a), except substituting 50 percent
for 80 percent) has issued a class of
stock that is a publicly traded employer
security. However, section 401(a)(35)(F)
does not apply to a plan if no employer
corporation, or parent corporation (as
defined in section 424(e)) of an
employer corporation, has issued any
publicly traded employer security and
no employer or parent corporation has
issued any special class of stock which
grants particular rights to, or bears
particular risks for, the holder or issuer
with respect to any corporation
described in section 401(a)(35)(F)(i)
which has issued any publicly traded
employer security.
Section 401(a)(35)(E) provides that
section 401(a)(35) does not apply to an
employee stock ownership plan within
the meaning of section 4975(e)(7)
(ESOP) that holds no contributions (or
earnings thereunder) that are subject to
section 401(k) or (m) (generally relating
to elective deferrals and matching and
employee after-tax contributions) and
the ESOP is a separate plan for purposes
of section 414(l) with respect to any
other defined benefit plan or defined
contribution plan maintained by the
same employer or employers. Section
401(a)(35)(E) further provides that
section 401(a)(35) does not apply to oneparticipant retirement plans (within the
meaning of section 401(a)(35)(E)(iv)).
Section 401(a)(35) is generally
effective for plan years beginning after
December 31, 2006. Section
401(a)(35)(H) generally provides a three
year phase-in rule with respect to an
individual’s right to direct the
divestment of employer securities
attributable to employer contributions,
except with respect to certain
participants who have attained age 55.
Section 901(c)(2) of PPA ’06 includes a
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special rule for a plan maintained
pursuant to one or more collective
bargaining agreements between
employee representatives and one or
more employers that was ratified on or
before August 17, 2006. Under this rule,
section 401(a)(35) is not effective until
plan years beginning after the earlier of
(1) the later of (a) December 31, 2007 or
(b) the date on which the last of such
collective bargaining agreements
terminates (determined without regard
to any extension thereof after August 17,
2006) or (2) December 31, 2008.
Section 101(m) of ERISA as amended
by section 507 of PPA ’06 requires the
plan administrator to furnish a notice to
individuals not later than 30 days before
the first date on which an individual is
eligible to exercise his or her right to
divest employer securities with respect
to any type of contribution. The notice
must set forth the diversification rights
under section 204(j) of ERISA (which is
the parallel provision in ERISA to
section 401(a)(35)) and describe the
importance of diversifying the
investment of retirement account assets.
Notice 2006–107 (2006–2 CB 1114
(December 18, 2006)), (see
§ 601.601(d)(2)(ii)(b)) includes guidance
and transitional rules with respect to the
diversification requirements of section
401(a)(35). Notice 2006–107 also
includes guidance regarding the related
notice requirements of section 101(m) of
ERISA, including a model notice. Notice
2008–7 (2008–3 IRB 276 (January 22,
2008)), (see § 601.601(d)(2)(ii)(b))
extends the transitional guidance and
transitional relief that was included in
Notice 2006–107 until the final
regulations become effective.
Notice 2009–97 (2009–52 IRB 972
(December 28, 2009)), (see
§ 601.601(d)(2)(ii)(b)) extends the
deadline for adopting an interim or
discretionary plan amendment under
certain provisions of PPA ’06, including
section 401(a)(35), to the last day of the
first plan year that begins on or after
January 1, 2010.
On January 3, 2008, proposed
regulations (REG–136701–07) under
section 401(a)(35) of the Code were
published in the Federal Register (73
FR 421). No public hearing was
requested. Written comments
responding to the notice of proposed
rulemaking were received. After
consideration of all the comments, the
proposed regulations are adopted, as
amended by this Treasury decision. The
most significant revisions are discussed
in the Summary of Comments and
Explanation of Revisions.
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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations
Summary of Comments and
Explanation of Revisions
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Certain Defined Contribution Plans or
Investment Funds Not Treated as
Holding Employer Securities
The proposed regulations provided
that certain investment funds that
include employer securities as part of a
broader fund were treated as not
holding employer securities. This
exception was limited to the extent the
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 a Federal agency; a pooled
investment fund of an insurance
company that is qualified to do business
in a State; or any other investment fund
designated by the Commissioner in
revenue rulings, notices, or other
guidance published in the Internal
Revenue Bulletin. The proposed
regulations also provided that this
exception was limited to funds where
the investment is independent of the
employer and where the employer
securities do not exceed 10 percent of
the fund.
Commentators requested that this
exception be broadened to include
funds that are managed by an
investment manager within the meaning
of section 3(38) of ERISA. The final
regulations do not provide for this
expansion because such a fund would
not necessarily be holding employer
securities only as an indirect result of its
investment policy. However, the final
regulations provide that, in the case of
a multiemployer plan, an investment
option will not be treated as holding
employer securities to the extent the
employer securities are held indirectly
through an investment fund managed by
an investment manager if the
investment is independent of the
employer and the percentage limitation
rule is satisfied.
The final regulations replace the
reference to a fund that is an investment
company registered under the
Investment Company Act of 1940 with
a regulated investment company as
described in Code section 851(a). This
change extends the types of investment
companies to include exchange traded
funds, which are unit investment trusts
if they satisfy section 851(a). The final
regulations also retain the rule from the
proposed regulations that allows the
Commissioner to designate additional
types of funds as eligible for this
exception.
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Commentators requested that the
percentage limitation rule be
eliminated. They argued that it would
be difficult and costly to monitor the
investment fund to ensure that the
aggregate value of the employer
securities held in such fund was not in
excess of 10 percent of the total assets
of all the fund’s investments. In
response to these comments, the final
regulations provide that the
determination of whether the value of
employer securities exceeds 10 percent
of the total value of the fund’s
investments is made for the plan year as
of the end of the preceding plan year.
The determination can be based on the
information in the latest disclosure of
the fund’s portfolio holdings (for
example, Form N–CSR, ‘‘Certified
Shareholder Report of Registered
Management Investment Companies’’)
that was filed with the Securities and
Exchange Commission in that preceding
plan year.
The final regulations also provide that
in a case where a fund that indirectly
holds employer securities fails to meet
the requirement that the investment be
independent of the employer (including
the situation where the fund no longer
meets the percentage limitation rule),
the plan does not fail to satisfy the
diversification requirements under
section 401(a)(35) merely because it
does not offer those rights for up to 90
days after the investment fund is treated
as holding employer securities.
Prohibition on Restrictions or
Conditions
Section 401(a)(35)(D)(ii)(II) provides
that a plan is not permitted to impose
restrictions or conditions with respect to
the investment of employer securities
that are not imposed on the investment
of other assets of the plan. Like the
proposed regulations, the final
regulations provide that the prohibition
on restrictions or conditions with
respect to the investment of employer
securities applies to any direct or
indirect restriction on an individual’s
right to divest an investment in
employer securities that is not imposed
on an investment that is not employer
securities, as well as a direct or indirect
benefit that is conditioned on
investment in employer securities.
The proposed regulations provided
for a number of permitted restrictions
and conditions. The proposed
regulations would have permitted a plan
to impose a restriction or condition
either directly or indirectly because of
applicable securities laws or because the
plan becomes an applicable defined
contribution plan, limits investments in
employer securities, limits trading
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27929
frequency, does not permit investment
in a frozen fund, imposes a fee on other
investment options that is not imposed
on the investment in employer
securities or imposes a reasonable fee on
the divestment of employer securities,
or allows investments to be made in a
stable value or similar fund more
frequently than other investment funds.
A commentator requested clarification
with respect to the exception for frozen
funds. The commentator requested that
a frozen fund include a plan that
reinvests employer security dividends
in additional employer securities as
long as the plan does not permit any
further investment in employer
securities. The final regulations clarify
that the plan is permitted to allow
reinvestment of dividends paid on
employer securities. The final
regulations also clarify that the frozen
fund exception is only available for a
plan that does not have another
employer securities fund.
Commentators requested that the list
for permitted indirect restrictions or
conditions be expanded to include
certain defined contribution plans that
make matching contributions in
employer securities and allow
participants to divest employer
securities attributable to such
contributions, but do not permit
participants to later elect to reinvest any
portion of their account balances in
employer stock. The final regulations do
not adopt this suggestion. The IRS and
the Treasury Department (Treasury)
have concluded that the inability to
reinvest in employer securities generally
acts as a material deterrent to an
individual who might otherwise have
elected to diversify his or her account
balance of employer securities.
However, the final regulations provide a
transitional rule for certain leveraged
ESOPs. An employer stock fund does
not fail to be a frozen fund merely
because of the allocation of employer
securities that are released as matching
contributions from the plan’s suspense
account that holds employer securities
acquired with an exempt loan under
section 4975(d)(3). This transitional rule
only applies to employer securities that
were acquired in a plan year beginning
before January 1, 2007, with the
proceeds of an exempt loan within the
meaning of section 4975(d)(3) which is
not refinanced after the end of the last
plan year beginning before January 1,
2007. This transitional rule was added
because these leveraged ESOPs cannot
cease allocations of employer securities
acquired with an exempt loan that are
held in a suspense account without
significant effect on the company’s debt
arrangements.
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Commentators suggested that the
special rule for a stable value or similar
fund be expanded to allow transfers out
of a stable value fund or similar fund
more frequently than other funds. In
response to comments, the final
regulations provide that a plan is
generally permitted to allow transfers to
be made into or out of a stable value
fund more frequently than a fund
invested in employer securities. Thus, a
plan that includes a broad range of
investment alternatives as described in
section 401(a)(35)(D)(i), including a
stable value or similar fund, does not
impose an impermissible restriction
merely because it permits transfers into
and out of the stable value or similar
fund more frequently than the other
funds (taking into account any
restrictions or conditions imposed with
respect to the other investment options
under the plan).
Commentators requested clarification
as to the meaning of a stable value or
similar fund. The final regulations
provide that a stable value or similar
fund means an investment product or
fund designed to preserve or guarantee
principal and provide a reasonable rate
of return, while providing liquidity for
benefit distributions or transfers to other
investment alternatives (such as a
product or fund described in
Department of Labor Regulation section
2550.404c–5(e)(4)(iv)(A) or (v)(A)).
One commentator noted that the
Department of Labor regulations for
qualified default investment alternatives
(QDIAs) require QDIAs to be restrictionfree for 90 days. The commentator
requested clarification that the
restriction-free 90-day period does not
cause a plan to violate the prohibition
on imposing a restriction or condition
with respect to employer securities that
is not imposed on other investments.
However, the commentator further
stated that service providers will have
difficulty administering restrictions
only after 90 days and therefore
requested that the final regulations
permit restriction-free transfers for
QDIAs permanently. The final
regulations expand the list of permitted
indirect restrictions to provide that a
plan may provide for transfers out of a
QDIA (within the meaning of
Department of Labor Regulation section
2550.404c–5(e)) more frequently than a
fund invested in employer securities.
A commentator requested clarification
concerning plans being permitted to
restrict reinvestments in only one
employer stock fund when the plan
allows investment in another employer
stock fund, provided that the stock
contained in each fund has the same
characteristics except for differences in
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the tax cost basis of the trust. The final
regulations provide that any applicable
tax consequences are disregarded in
determining whether a plan imposes an
indirect restriction or condition on an
individual’s right to divest an
investment in employer securities.
Accordingly, 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 section 402(e)(4) cost (or
other basis) of the trust in the shares
held in each account.
Several commentators requested
clarification regarding the 7-day rule in
the proposed regulations. The preamble
to the proposed regulations explained
that the 7-day rule was an example and
not the exclusive method to limit
trading frequency. The permitted
restriction for trading frequency
provides that a plan is permitted to
impose reasonable restrictions that are
designed to limit short-term trading in
employer securities. Thus, the 7-day
rule, which was mentioned in the
preamble to the proposed regulations, is
an example and other short-term trading
restrictions (such as a restriction based
on multiple trades within a specified
period) are allowable if they meet the
reasonably designed standard.
distribution option available for ESOPs
subject to the diversification
requirements under section 401(a)(28),
as permitted under section 1107 of PPA
’06, would not violate the anti-cutback
rules under section 411(d)(6).
In addition, it is expected that
guidance will be issued in the near
future exercising the authority under
§ 1.411(d)–4, A–2(d)(4), to permit
elimination of such a distribution
option with respect to an ESOP that is
subject to section 401(a)(35) after the
end of the limited period to which
section 1107 of PPA ’06 applies. The
guidance will permit elimination of
such a distribution option during the
extended remedial amendment period
permitted with respect to section
401(a)(35) under Notice 2009–97, that
is, to the last day of the first plan year
that begins on or after January 1, 2010.
Miscellaneous
Commentators requested clarification
with respect to an ESOP that has been
satisfying the diversification
requirements under section 401(a)(28)
by distributing the portion of the
participant’s account covered by an
election within 90 days after the period
during which the election may be made,
but which is now subject to the
diversification requirements under
section 401(a)(35). Such a distribution
option does not satisfy the
diversification requirements under
section 401(a)(35). These commentators
were concerned that an amendment
which eliminates this distribution
option would be a violation of the anticutback rules under section 411(d)(6).
Section 1107 of PPA ’06 provides that
any amendment which is made
pursuant to a provision of PPA ’06 will
not fail to meet the requirements of
section 411(d)(6) unless otherwise
provided by the Secretary of the
Treasury.3 Thus, an amendment to an
ESOP which is now subject to the
diversification requirements under
section 401(a)(35) that eliminates the
Special Analyses
It has been determined that these final
regulations are not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and, because
§ 1.401(a)(35)–1 would not impose a
collection of information on small
entities, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking
preceding this regulation was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comments on its impact on small
business.
3 See
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also section 411(d)(6)(C)(ii).
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Effective/Applicability Date
The final regulations are effective and
applicable for plan years beginning on
or after January 1, 2011.
For the period after the statutory
effective date and before the regulatory
effective date set forth in the preceding
sentence, a plan must comply with
section 401(a)(35). During this period, a
plan is permitted to rely on Notice
2006–107, the proposed regulations, or
these final regulations for purposes of
satisfying the requirements of section
401(a)(35).
Drafting Information
The principal authors of these
regulations are Dana A. Barry, formerly
of the Office of Division Counsel/
Associate Chief Counsel (Tax Exempt
and Government Entities), and R. Lisa
Mojiri-Azad, Office of Division Counsel/
Associate Chief Counsel (Tax Exempt
and Government Entities). However,
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other personnel from the IRS and the
Treasury Department participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
■
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read as follows:
■
Authority: 26 U.S.C. 7805 * * *
Section 1.401(a)(35)–1 is also issued under
26 U.S.C. 401(a)(35). * * *
Par. 2. Section 1.401(a)(35)–1 is added
to read as follows:
■
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§ 1.401(a)(35)–1 Diversification
requirements for certain defined
contribution plans.
(a) General rule—(1) Diversification
requirements. Section 401(a)(35)
imposes diversification requirements on
applicable defined contribution plans. A
trust that is part of an applicable
defined contribution plan is not a
qualified trust under section 401(a)
unless the plan—
(i) Satisfies the diversification
election requirements for elective
deferrals and employee contributions
set forth in paragraph (b) of this section;
(ii) Satisfies the diversification
election requirements for employer
nonelective contributions set forth in
paragraph (c) of this section;
(iii) Satisfies the investment option
requirement set forth in paragraph (d) of
this section; and
(iv) Does not apply any restrictions or
conditions on investments in employer
securities that violate the requirements
of paragraph (e) of this section.
(2) Definitions, effective dates, and
transition rules. The definitions of
applicable defined contribution plan,
employer security, parent corporation,
and publicly traded are set forth in
paragraph (f) of this section.
Applicability dates and transition rules
are set forth in paragraph (g) of this
section.
(b) Diversification requirements for
elective deferrals and employee
contributions invested in employer
securities—(1) General rule. With
respect to any individual described in
paragraph (b)(2) of this section, if any
portion of the individual’s account
under an applicable defined
contribution plan attributable to elective
deferrals (as described in section
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13:05 May 18, 2010
Jkt 220001
402(g)(3)(A)), employee contributions,
or rollover contributions is invested in
employer securities, then the plan
satisfies the requirements of this
paragraph (b) if the individual may elect
to divest those employer securities and
reinvest an equivalent amount in other
investment options. The plan may limit
the time for divestment and
reinvestment to periodic, reasonable
opportunities occurring no less
frequently than quarterly.
(2) Applicable individual with respect
to elective deferrals and employee
contributions. An individual is
described in this paragraph (b)(2) if the
individual is—
(i) A participant;
(ii) An alternate payee who has an
account under the plan; or
(iii) A beneficiary of a deceased
participant.
(c) Diversification requirements for
employer nonelective contributions
invested in employer securities—(1)
General rule. With respect to any
individual described in paragraph (c)(2)
of this section, if a portion of the
individual’s account under an
applicable defined contribution plan
attributable to employer nonelective
contributions is invested in employer
securities, then the plan satisfies the
requirements of this paragraph (c) if the
individual may elect to divest those
employer securities and reinvest an
equivalent amount in other investment
options. The plan may limit the time for
divestment and reinvestment to
periodic, reasonable opportunities
occurring no less frequently than
quarterly.
(2) Applicable individual with respect
to employer nonelective contributions.
An individual is described in this
paragraph (c)(2) if the individual is—
(i) A participant who has completed
at least three years of service;
(ii) An alternate payee who has an
account under the plan with respect to
a participant who has completed at least
three years of service; or
(iii) A beneficiary of a deceased
participant.
(3) Completion of three years of
service. For purposes of paragraph (c)(2)
of this section, a participant completes
three years of service on the last day of
the vesting computation period
provided for under the plan that
constitutes the completion of the third
year of service under section 411(a)(5).
However, for a plan that uses the
elapsed time method of crediting service
for vesting purposes (or a plan that
provides for immediate vesting without
using a vesting computation period or
the elapsed time method of determining
vesting), a participant completes three
PO 00000
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27931
years of service on the day immediately
preceding the third anniversary of the
participant’s date of hire.
(d) Investment options. An applicable
defined contribution plan must offer not
less than three investment options,
other than employer securities, to which
an individual who has the right to
divest under paragraph (b)(1) or (c)(1) of
this section may direct the proceeds
from the divestment of employer
securities. Each of the three investment
options must be diversified and have
materially different risk and return
characteristics. For this purpose,
investment options that constitute a
broad range of investment alternatives
within the meaning of Department of
Labor Regulation section 2550.404c–
1(b)(3) are treated as being diversified
and having materially different risk and
return characteristics.
(e) Restrictions or conditions on
investments in employer securities—(1)
Impermissible restrictions or
conditions—(i) General rule. Except as
provided in paragraph (e)(2) of this
section, an applicable defined
contribution plan violates the
requirements of this paragraph (e) if the
plan imposes restrictions or conditions
with respect to the investment of
employer securities that are not
imposed on the investment of other
assets of the plan. A restriction or
condition with respect to employer
securities means—
(A) A restriction on an individual’s
right to divest an investment in
employer securities that is not imposed
on an investment that is not employer
securities; or
(B) A benefit that is conditioned on
investment in employer securities.
(ii) Indirect restrictions or
conditions—(A) Except as provided in
paragraph (e)(3) of this section, a plan
violates the requirements of this
paragraph (e) if the plan imposes a
restriction or condition described in
paragraph (e)(1)(i)(A) or (B) of this
section either directly or indirectly.
(B) A plan imposes an indirect
restriction on an individual’s right to
divest an investment in employer
securities if, for example, the plan
provides that a participant who divests
his or her account balance with respect
to the investment in employer securities
is not permitted for a period of time
thereafter to reinvest in employer
securities.
(C) A plan does not impose an
indirect restriction or condition merely
because there are tax consequences that
result from an individual’s divestment
of an investment in employer securities.
Thus, the loss of the special treatment
for net unrealized appreciation provided
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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations
under section 402(e)(4) with respect to
employer securities is disregarded.
Similarly, a plan does not impose an
impermissible restriction or condition
merely because it provides 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 section
402(e)(4) cost (or other basis) of the trust
in the shares held in each account. (See
§ 1.402(a)–1(b) for rules regarding
section 402(e)(4).)
(2) Permitted restrictions or
conditions—(i) In general. An
applicable defined contribution plan
does not violate the requirements of this
paragraph (e) merely because it imposes
a restriction or a condition set forth in
paragraph (e)(2)(ii) or (e)(2)(iii) of this
section.
(ii) Securities laws. A plan is
permitted to impose a restriction or
condition on the divestiture of employer
securities that is either required in order
to ensure compliance with applicable
securities laws or is reasonably designed
to ensure compliance with applicable
securities laws. For example, it is
permissible for a plan to limit
divestiture rights for participants who
are subject to section 16(b) of the
Securities Exchange Act of 1934 (15
U.S.C. 78f) to a reasonable period (such
as 3 to 12 days) following publication of
the employer’s quarterly earnings
statements because it is reasonably
designed to ensure compliance with
Rule 10b–5 of the Securities and
Exchange Commission.
(iii) Deferred application of the
diversification requirements—(A)
Becoming an applicable defined
contribution plan. An applicable
defined contribution plan is permitted
to restrict the application of the
diversification requirements of section
401(a)(35) and this section for up to 90
days after the plan becomes an
applicable defined contribution plan
(for example, a plan becoming an
applicable defined contribution plan
because the employer securities held
under the plan become publicly traded).
(B) Loss of exception for indirect
investments. In the case where an
investment fund described in paragraph
(f)(3)(ii)(A) of this section no longer
meets the requirement in paragraph
(f)(3)(ii)(B) of this section that the
investment must be independent of the
employer (including the situation where
the fund no longer meets the percentage
limitation rule in paragraph (f)(3)(ii)(C)
of this section), the plan does not fail to
satisfy the diversification requirements
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13:05 May 18, 2010
Jkt 220001
of section 401(a)(35) and this section
merely because it does not offer those
rights with respect to that investment
fund for up to 90 days after the
investment fund ceases to meet those
requirements.
(3) Permitted indirect restrictions or
conditions—(i) In general. An
applicable defined contribution plan
does not violate the requirements of this
paragraph (e) merely because it imposes
an indirect restriction or condition set
forth in this paragraph (e)(3).
(ii) Limitation on investment in
employer securities. A plan is permitted
to limit the extent to which an
individual’s account balance can be
invested in employer securities,
provided the limitation applies without
regard to a prior exercise of rights to
divest employer securities. For example,
a plan does not impose a restriction that
violates this paragraph (e) merely
because the plan prohibits a participant
from investing additional amounts in
employer securities if more than 10
percent of that participant’s account
balance is invested in employer
securities.
(iii) Trading frequency. A plan is
permitted to impose reasonable
restrictions on the timing and number of
investment elections that an individual
can make to invest in employer
securities, provided that the restrictions
are designed to limit short-term trading
in the employer securities. For example,
a plan could provide that a participant
may not elect to invest in employer
securities if the employee has elected to
divest employer securities within a
short period of time, such as seven days,
prior to the election to invest in
employer securities.
(iv) Fees. The plan has not provided
an indirect benefit that is conditioned
on investment in employer securities
merely because the plan imposes fees on
other investment options that are not
imposed on the investment in employer
securities. In addition, the plan has not
provided a restriction on the right to
divest an investment in employer
securities merely because the plan
imposes a reasonable fee for the
divestment of employer securities.
(v) Stable value or similar fund. A
plan is permitted to allow transfers to be
made into or out of a stable value or
similar fund more frequently than a
fund invested in employer securities for
purposes of paragraph (e)(1)(ii) of this
section. Thus, a plan that includes a
broad range of investment alternatives
as described in paragraph (d) of this
section, including a stable value or
similar fund, does not impose an
impermissible restriction under
paragraph (e)(1)(ii) of this section
PO 00000
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Fmt 4700
Sfmt 4700
merely because it permits transfers into
or out of that fund more frequently than
other funds under the plan, provided
that the plan would otherwise satisfy
this paragraph (e) (taking into account
any restrictions or conditions imposed
with respect to the other investment
options under the plan). For purposes of
this section, a stable value fund or
similar fund means an investment
product or fund designed to preserve or
guarantee principal and provide a
reasonable rate of return, while
providing liquidity for benefit
distributions or transfers to other
investment alternatives (such as a
product or fund described in
Department of Labor Regulation
§ 2550.404c–5(e)(4)(iv)(A) or (v)(A)).
(vi) Transfers out of a qualified
default investment alternative (QDIA). A
plan is permitted to provide for transfers
out of a QDIA within the meaning of
Department of Labor Regulation section
2550.404c–5(e) more frequently than a
fund invested in employer securities.
(vii) Frozen funds—(A) General rule.
A plan is permitted to prohibit any
further investment in employer
securities. Thus, a plan is not treated as
imposing an indirect restriction merely
because it provides that an employee
that divests an investment in employer
securities is not permitted to reinvest in
employer securities, but only if the plan
does not permit additional contributions
or other investments to be invested in
employer securities. For this purpose, a
plan does not provide for further
investment in employer securities
merely because dividends paid on
employer securities under the plan are
reinvested in employer securities.
(B) Transitional relief for certain
leveraged employee stock ownership
plans (ESOPs). An employer stock fund
does not fail to be a frozen fund under
this paragraph (e)(3)(vii) merely because
of the allocation of employer securities
that are released as matching
contributions from the plan’s suspense
account that holds employer securities
acquired with an exempt loan under
section 4975(d)(3). This paragraph
(e)(3)(vii)(B) only applies to employer
securities that were acquired in a plan
year beginning before January 1, 2007,
with the proceeds of an exempt loan
within the meaning of section
4975(d)(3) which is not refinanced after
the end of the last plan year beginning
before January 1, 2007.
(4) Delegation of authority to
Commissioner. The Commissioner may
provide for additional permitted
restrictions or conditions or permitted
indirect restrictions or conditions in
revenue rulings, notices, or other
E:\FR\FM\19MYR1.SGM
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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations
guidance published in the Internal
Revenue Bulletin.
(f) Definitions—(1) Application of
definitions. This paragraph (f) contains
definitions that are applicable for
purposes of this section.
(2) Applicable defined contribution
plan—(i) General rule. Except as
provided in this paragraph (f)(2), an
applicable defined contribution plan
means any defined contribution plan
which holds employer securities that
are publicly traded. See paragraph
(f)(2)(iv) of this section for a special rule
that treats certain plans that hold
employer securities that are not publicly
traded as applicable defined
contribution plans and paragraph
(f)(3)(ii) of this section for a special rule
that treats certain plans as not holding
publicly traded employer securities for
purposes of this section.
(ii) Exception for certain ESOPs. An
employee stock ownership plan (ESOP),
as defined in section 4975(e)(7), is not
an applicable defined contribution plan
if the plan is a separate plan for
purposes of section 414(l) with respect
to any other defined benefit plan or
defined contribution plan maintained
by the same employer or employers and
holds no contributions (or earnings
thereunder) that are (or were ever)
subject to section 401(k) or 401(m).
Thus, an ESOP is an applicable defined
contribution plan if the ESOP is a
portion of a larger plan (whether or not
that larger plan includes contributions
that are subject to section 401(k) or
401(m)). For purposes of this paragraph
(f)(2)(ii), a plan is not considered to hold
amounts ever subject to section 401(k)
or 401(m) merely because the plan holds
amounts attributable to rollover
amounts in a separate account that were
previously subject to section 401(k) or
401(m).
(iii) Exception for one-participant
plans. A one-participant plan, as
defined in section 401(a)(35)(E)(iv), is
not an applicable defined contribution
plan.
(iv) Certain defined contribution
plans treated as holding publicly traded
employer securities—(A) General rule. A
defined contribution plan holding
employer securities that are not publicly
traded is treated as an applicable
defined contribution plan if any
employer maintaining the plan or any
member of a controlled group of
corporations that includes such
employer has issued a class of stock
which is publicly traded. For purposes
of this paragraph (f)(2)(iv), a controlled
group of corporations has the meaning
given such term by section 1563(a),
except that ‘‘50 percent’’ is substituted
for ‘‘80 percent’’ each place it appears.
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13:05 May 18, 2010
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(B) Exception for certain plans.
Paragraph (f)(2)(iv)(A) of this section
does not apply to a plan if—
(1) No employer maintaining the plan
(or a parent corporation with respect to
such employer) has issued stock that is
publicly traded; and
(2) No employer maintaining the plan
(or parent corporation with respect to
such employer) has issued any special
class of stock which grants to the holder
or issuer particular rights, or bears
particular risks for the holder or issuer,
with respect to any employer
maintaining the plan (or any member of
a controlled group of corporations that
includes such employer) which has
issued any stock that is publicly traded.
(3) Employer security—(i) General
rule. Employer security has the meaning
given such term by section 407(d)(1) of
the Employee Retirement Income
Security Act of 1974, as amended
(ERISA).
(ii) Certain defined contribution plans
or investment funds not treated as
holding employer securities—(A)
Exception for certain indirect
investments. Subject to paragraphs
(f)(3)(ii)(B) and (C) of this section, a plan
(and an investment option described in
paragraph (d) of this section) is not
treated as holding employer securities
for purposes of this section to the extent
the employer securities are held
indirectly as part of a broader fund that
is—
(1) A regulated investment company
described in section 851(a);
(2) A common or collective trust fund
or pooled investment fund maintained
by a bank or trust company supervised
by a State or a Federal agency;
(3) A pooled investment fund of an
insurance company that is qualified to
do business in a State;
(4) An investment fund managed by
an investment manager within the
meaning of section 3(38) of ERISA for a
multiemployer plan; or
(5) Any other investment fund
designated by the Commissioner in
revenue rulings, notices, or other
guidance published in the Internal
Revenue Bulletin.
(B) Investment must be independent.
The exception set forth in paragraph
(f)(3)(ii)(A) of this section applies only
if the investment in the employer
securities is held in a fund under
which—
(1) There are stated investment
objectives of the fund; and
(2) The investment is independent of
the employer (or employers) and any
affiliate thereof.
(C) Percentage limitation rule. For
purposes of paragraph (f)(3)(ii)(B)(2) of
this section, an investment in employer
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27933
securities in a fund is not considered to
be independent of the employer (or
employers) and any affiliate thereof if
the aggregate value of the employer
securities held in the fund is in excess
of 10 percent of the total value of all of
the fund’s investments for the plan year.
The determination of whether the value
of employer securities exceeds 10
percent of the total value of the fund’s
investments for the plan year is made as
of the end of the preceding plan year.
The determination can be based on the
information in the latest disclosure of
the fund’s portfolio holdings that was
filed with the Securities and Exchange
Commission (SEC) in that preceding
plan year.
(4) Parent corporation. Parent
corporation has the meaning given such
term by section 424(e).
(5) Publicly traded—(i) In general. A
security is publicly traded if it is readily
tradable on an established securities
market.
(ii) Readily tradable on an established
securities market. For purposes of this
paragraph (f)(5), except as provided by
the Commissioner in revenue rulings,
notices, or other guidance published in
the Internal Revenue Bulletin, a security
is readily tradable on an established
securities market if—
(A) The security is traded on a
national securities exchange that is
registered under section 6 of the
Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(B) The security is traded on a foreign
national securities exchange that is
officially recognized, sanctioned, or
supervised by a governmental authority
and the security is deemed by the SEC
as having a ‘‘ready market’’ under SEC
Rule 15c3–1 (17 CFR 240.15c3–1).
(g) Applicability date and transition
rules—(1) Statutory effective date—(i)
General rule. Except as otherwise
provided in this paragraph (g) and
section 901(c)(3)(A) and (B) of the
Pension Protection Act of 2006, Public
Law 109–280 (120 Stat. 780 (2006))
(PPA ’06), section 401(a)(35) is effective
for plan years beginning after December
31, 2006.
(ii) Collectively bargained plans—(A)
Delayed statutory effective date. In the
case of a plan maintained pursuant to
one or more collective bargaining
agreements between employee
representatives and one or more
employers ratified on or before August
17, 2006, section 401(a)(35) is effective
for plan years beginning after the earlier
of—
(1) The later of—
(i) December 31, 2007; or
(ii) The date on which the last such
collective bargaining agreement
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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations
terminates (determined without regard
to any extension thereof); or
(2) December 31, 2008.
(B) Treatment of plans with both
collectively bargained and noncollectively bargained employees. If a
collective bargaining agreement applies
to some, but not all, of the plan
participants, the definition of whether
the plan is considered a collectively
bargained plan for purposes of this
paragraph (g)(1)(ii) is made in the same
manner as the definition of whether a
plan is collectively bargained under
section 436(f)(3).
(2) Regulatory effective/applicability
date. This section is effective and
applicable for plan years beginning on
or after January 1, 2011.
(3) Statutory transition rules—(i)
General rule. Pursuant to section
401(a)(35)(H), in the case of the portion
of an account to which paragraph (c) of
this section applies and that consists of
employer securities acquired in a plan
year beginning before January 1, 2007,
the requirements of paragraph (c) of this
section only apply to the applicable
percentage of such securities.
(ii) Applicable percentage—(A)
Phase-in percentage. For purposes of
this paragraph (g)(3), the applicable
percentage is determined as follows—
Plan year to which paragraph (c) of this section
applies:
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1st .....................................
2nd ....................................
3rd and following ..............
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: May 5, 2010.
Michael F. Mundaca,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2010–11924 Filed 5–18–10; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9483]
RIN 1545–BH65
Qualified Nonpersonal Use Vehicles
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to qualified
nonpersonal use vehicles as defined in
section 274(i). Qualified nonpersonal
use vehicles are excepted from the
substantiation requirements of section
274(d)(4) that apply to listed property as
defined in section 280F(d)(4). These
final regulations add clearly marked
public safety officer vehicles as a new
The applicable
type of qualified nonpersonal use
percentage is:
vehicle. These final regulations affect
employers that provide their employees
33
66 with qualified nonpersonal use vehicles
100 and the employees who use such
vehicles.
(B) Special rule. For a plan for which
the special effective date under section
901(c)(3) of PPA ’06 applies, the
applicable percentage under this
paragraph (g)(3)(ii) is determined
without regard to the delayed effective
date in section 901(c)(3)(A) and (B) of
PPA ’06.
(iii) Nonapplication for participants
age 55 with three years of service.
Paragraph (g)(3)(i) of this section does
not apply to an individual who is a
participant who attained age 55 and had
completed at least three years of service
(as defined in paragraph (c)(3) of this
section) before the first day of the first
plan year beginning after December 31,
2005.
(iv) Separate application by class of
securities. This paragraph (g)(3) applies
VerDate Mar<15>2010
separately with respect to each class of
securities.
13:05 May 18, 2010
Jkt 220001
DATES: Effective Date: These regulations
are effective on May 19, 2010.
Applicability Date: These regulations
apply to uses of clearly marked public
safety officer vehicles occurring after
May 19, 2010.
FOR FURTHER INFORMATION CONTACT: Don
Parkinson at (202) 622–6040 (not a tollfree number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final Income
Tax Regulations under section 274(i)
added by section 2(b) of Public Law 99–
44 (May 24, 1985), which provides a
definition of qualified nonpersonal use
vehicle. Temporary Regulation § 1.274–
5T(k), identifying categories of qualified
nonpersonal use vehicles and
Temporary Regulation § 1.274–5T(l),
providing for definitions of the terms
‘‘automobile,’’ ‘‘vehicle,’’ ‘‘employer,’’
‘‘employee,’’ and ‘‘personal use’’ were
PO 00000
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Fmt 4700
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issued in 1985. (TD 8061 1982–5 CB 93
(1985)). A notice of proposed
rulemaking was issued by crossreference to Temporary Regulation
§ 1.274–5T(k). (LR–145–84, 50 FR
46088, 1985–2 CB 809 (1985)).
On June 9, 2008, proposed regulations
(REG–106897–08) were published in the
Federal Register (73 FR 32500). The
proposed regulations incorporated the
text of § 1.274–5T(k) and added clearly
marked public safety officer vehicles as
a new type of qualified nonpersonal use
vehicle, listed along with clearly
marked police and fire vehicles at
§ 1.274–5(k)(2)(ii)(A). A definition of
clearly marked public safety officer
vehicles was added to the provision
defining clearly marked police and fire
vehicles at § 1.274–5(k)(3), and an
example illustrating application of the
rules to a public safety officer vehicle
was added at § 1.274–5(k)(8) Example 3.
The proposed regulations incorporated
the text of § 1.274–5T(l) with no
changes. The corresponding provisions
of the proposed regulations in LR–145–
84 were withdrawn on June 8, 2008.
Written public comments on the
proposed regulations at § 1.274–5(k) and
(l) were received and no hearing was
requested. After consideration of all the
comments, these final regulations adopt
the provisions of the proposed
regulations with an amendment to
Example 3 and the provision of a new
Example 4 in § 1.274–5(k)(8) which are
intended to assist taxpayers in
determining whether individual
employees meet the definition of public
safety officer. The temporary regulations
at § 1.274–5T(k) and (l) are withdrawn
concurrently with the publication of
these final regulations in the Federal
Register. The remaining temporary
regulations at § 1.274–5T are unaffected
by this Treasury decision.
Summary of Comments and
Explanation of Provisions
Section 274(d) provides that a
taxpayer is not allowed a deduction or
credit for certain expenses unless the
expenses are substantiated. These
substantiation requirements apply to
expenses incurred in the of use of any
listed property (defined in section
280F(d)(4)), which includes any
passenger automobile and any other
property used as a means of
transportation. Section 274(d) does not
apply to any qualified nonpersonal use
vehicle as defined in section 274(i).
Both business and personal use of a
vehicle that meets the criteria to be a
qualified nonpersonal use vehicle under
section 274(i) will also qualify as a
working condition fringe benefit that is
excluded from the recipient’s income
E:\FR\FM\19MYR1.SGM
19MYR1
]]>Agencies
[Federal Register Volume 75, Number 96 (Wednesday, May 19, 2010)]
[Rules and Regulations]
[Pages 27927-27934]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-11924]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9484]
RIN 1545-BH04
Diversification Requirements for Certain Defined Contribution
Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section
401(a)(35) of the Internal Revenue Code (Code) relating to
diversification requirements for certain defined contribution plans
holding publicly traded employer securities. These regulations will
affect administrators of, employers maintaining, participants in, and
beneficiaries of defined contribution plans that are invested in
employer securities.
DATES: Effective date: These regulations are effective on May 19, 2010.
Applicability date: These regulations apply for plan years
beginning on or after January 1, 2011.
FOR FURTHER INFORMATION CONTACT: R. Lisa Mojiri-Azad or Jamie Dvoretzky
at (202) 622-6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations under section 401(a)(35)
of the Code, which was added by section 901 of the Pension Protection
Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA '06).\1\
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\1\ Section 901 of PPA '06 also added a parallel provision to
section 401(a)(35) at section 204(j) of the Employee Retirement
Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974))
(ERISA). Under section 101 of Reorganization Plan No. 4 of 1978 (43
FR 47713), the Secretary of Treasury has interpretative jurisdiction
over the subject matter addressed in these final regulations for
purposes of section 204(j) of ERISA. Thus, the guidance provided in
these final regulations with respect to section 401(a)(35) of the
Code also applies for purposes of section 204(j) of ERISA.
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[[Page 27928]]
Section 401(a)(35)(A) provides that a trust which is part of an
applicable defined contribution plan is not a qualified trust under
section 401(a) unless the plan satisfies the diversification
requirements of section 401(a)(35)(B), (C), and (D). Under section
401(a)(35)(B), each individual must have the right to direct the plan
to divest employer securities allocated to the individual's account
that are attributable to employee contributions or elective deferrals
and to reinvest an equivalent amount in other investment options
meeting the requirements of section 401(a)(35)(D).\2\
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\2\ Section 401(a)(28)(B) provides certain diversification
rights to participants in an employee stock ownership plan within
the meaning of section 4975(e)(7) (ESOP). Section 401(a)(28)(B)(v),
as added by section 901(a)(2)(A) of PPA '06, provides that section
401(a)(28)(B) does not to apply to a plan to which section
401(a)(35) applies.
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Under section 401(a)(35)(C), each individual who is a participant
who has completed at least three years of service, a beneficiary of a
participant who has completed at least three years of service, or a
beneficiary of a deceased participant must be permitted to elect to
direct the plan to divest employer securities allocated to the
individual's account and to reinvest an equivalent amount in other
investment options meeting the requirements of section 401(a)(35)(D).
Section 401(a)(35)(D)(i) requires an applicable defined
contribution plan to offer individuals not less than three investment
options, other than employer securities, to which the individuals may
direct the proceeds from the divestment of employer securities, each of
which is diversified and has materially different risk and return
characteristics.
Under section 401(a)(35)(D)(ii)(I), a plan does not fail to meet
the requirements of section 401(a)(35)(D) if it allows individuals to
divest employer securities and reinvest the proceeds at periodic,
reasonable opportunities occurring no less frequently than quarterly.
Under section 401(a)(35)(D)(ii)(II), a plan is not permitted to
impose restrictions or conditions with respect to the investment of
employer securities that are not imposed on the investment of other
assets of the plan. However, this rule does not apply to restrictions
or conditions imposed to comply with securities laws. The Secretary is
authorized to issue regulations providing additional exceptions to the
requirements of section 401(a)(35)(D)(ii)(II).
An applicable defined contribution plan under section 401(a)(35) is
a defined contribution plan that holds any publicly traded employer
securities. A publicly traded employer security is defined as an
employer security under section 407(d)(1) of the Employee Retirement
Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974))
(ERISA) which is readily tradable on an established securities market.
Section 401(a)(35)(F)(i) provides that a plan that holds employer
securities that are not publicly traded employer securities is
nevertheless treated as holding publicly traded employer securities if
any employer corporation or any member of a controlled group of
corporations which includes the employer (determined by applying
section 1563(a), except substituting 50 percent for 80 percent) has
issued a class of stock that is a publicly traded employer security.
However, section 401(a)(35)(F) does not apply to a plan if no employer
corporation, or parent corporation (as defined in section 424(e)) of an
employer corporation, has issued any publicly traded employer security
and no employer or parent corporation has issued any special class of
stock which grants particular rights to, or bears particular risks for,
the holder or issuer with respect to any corporation described in
section 401(a)(35)(F)(i) which has issued any publicly traded employer
security.
Section 401(a)(35)(E) provides that section 401(a)(35) does not
apply to an employee stock ownership plan within the meaning of section
4975(e)(7) (ESOP) that holds no contributions (or earnings thereunder)
that are subject to section 401(k) or (m) (generally relating to
elective deferrals and matching and employee after-tax contributions)
and the ESOP is a separate plan for purposes of section 414(l) with
respect to any other defined benefit plan or defined contribution plan
maintained by the same employer or employers. Section 401(a)(35)(E)
further provides that section 401(a)(35) does not apply to one-
participant retirement plans (within the meaning of section
401(a)(35)(E)(iv)).
Section 401(a)(35) is generally effective for plan years beginning
after December 31, 2006. Section 401(a)(35)(H) generally provides a
three year phase-in rule with respect to an individual's right to
direct the divestment of employer securities attributable to employer
contributions, except with respect to certain participants who have
attained age 55. Section 901(c)(2) of PPA '06 includes a special rule
for a plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
that was ratified on or before August 17, 2006. Under this rule,
section 401(a)(35) is not effective until plan years beginning after
the earlier of (1) the later of (a) December 31, 2007 or (b) the date
on which the last of such collective bargaining agreements terminates
(determined without regard to any extension thereof after August 17,
2006) or (2) December 31, 2008.
Section 101(m) of ERISA as amended by section 507 of PPA '06
requires the plan administrator to furnish a notice to individuals not
later than 30 days before the first date on which an individual is
eligible to exercise his or her right to divest employer securities
with respect to any type of contribution. The notice must set forth the
diversification rights under section 204(j) of ERISA (which is the
parallel provision in ERISA to section 401(a)(35)) and describe the
importance of diversifying the investment of retirement account assets.
Notice 2006-107 (2006-2 CB 1114 (December 18, 2006)), (see Sec.
601.601(d)(2)(ii)(b)) includes guidance and transitional rules with
respect to the diversification requirements of section 401(a)(35).
Notice 2006-107 also includes guidance regarding the related notice
requirements of section 101(m) of ERISA, including a model notice.
Notice 2008-7 (2008-3 IRB 276 (January 22, 2008)), (see Sec.
601.601(d)(2)(ii)(b)) extends the transitional guidance and
transitional relief that was included in Notice 2006-107 until the
final regulations become effective.
Notice 2009-97 (2009-52 IRB 972 (December 28, 2009)), (see Sec.
601.601(d)(2)(ii)(b)) extends the deadline for adopting an interim or
discretionary plan amendment under certain provisions of PPA '06,
including section 401(a)(35), to the last day of the first plan year
that begins on or after January 1, 2010.
On January 3, 2008, proposed regulations (REG-136701-07) under
section 401(a)(35) of the Code were published in the Federal Register
(73 FR 421). No public hearing was requested. Written comments
responding to the notice of proposed rulemaking were received. After
consideration of all the comments, the proposed regulations are
adopted, as amended by this Treasury decision. The most significant
revisions are discussed in the Summary of Comments and Explanation of
Revisions.
[[Page 27929]]
Summary of Comments and Explanation of Revisions
Certain Defined Contribution Plans or Investment Funds Not Treated as
Holding Employer Securities
The proposed regulations provided that certain investment funds
that include employer securities as part of a broader fund were treated
as not holding employer securities. This exception was limited to the
extent the 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 a Federal agency; a
pooled investment fund of an insurance company that is qualified to do
business in a State; or any other investment fund designated by the
Commissioner in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin. The proposed regulations also
provided that this exception was limited to funds where the investment
is independent of the employer and where the employer securities do not
exceed 10 percent of the fund.
Commentators requested that this exception be broadened to include
funds that are managed by an investment manager within the meaning of
section 3(38) of ERISA. The final regulations do not provide for this
expansion because such a fund would not necessarily be holding employer
securities only as an indirect result of its investment policy.
However, the final regulations provide that, in the case of a
multiemployer plan, an investment option will not be treated as holding
employer securities to the extent the employer securities are held
indirectly through an investment fund managed by an investment manager
if the investment is independent of the employer and the percentage
limitation rule is satisfied.
The final regulations replace the reference to a fund that is an
investment company registered under the Investment Company Act of 1940
with a regulated investment company as described in Code section
851(a). This change extends the types of investment companies to
include exchange traded funds, which are unit investment trusts if they
satisfy section 851(a). The final regulations also retain the rule from
the proposed regulations that allows the Commissioner to designate
additional types of funds as eligible for this exception.
Commentators requested that the percentage limitation rule be
eliminated. They argued that it would be difficult and costly to
monitor the investment fund to ensure that the aggregate value of the
employer securities held in such fund was not in excess of 10 percent
of the total assets of all the fund's investments. In response to these
comments, the final regulations provide that the determination of
whether the value of employer securities exceeds 10 percent of the
total value of the fund's investments is made for the plan year as of
the end of the preceding plan year. The determination can be based on
the information in the latest disclosure of the fund's portfolio
holdings (for example, Form N-CSR, ``Certified Shareholder Report of
Registered Management Investment Companies'') that was filed with the
Securities and Exchange Commission in that preceding plan year.
The final regulations also provide that in a case where a fund that
indirectly holds employer securities fails to meet the requirement that
the investment be independent of the employer (including the situation
where the fund no longer meets the percentage limitation rule), the
plan does not fail to satisfy the diversification requirements under
section 401(a)(35) merely because it does not offer those rights for up
to 90 days after the investment fund is treated as holding employer
securities.
Prohibition on Restrictions or Conditions
Section 401(a)(35)(D)(ii)(II) provides that a plan is not permitted
to impose restrictions or conditions with respect to the investment of
employer securities that are not imposed on the investment of other
assets of the plan. Like the proposed regulations, the final
regulations provide that the prohibition on restrictions or conditions
with respect to the investment of employer securities applies to any
direct or indirect restriction on an individual's right to divest an
investment in employer securities that is not imposed on an investment
that is not employer securities, as well as a direct or indirect
benefit that is conditioned on investment in employer securities.
The proposed regulations provided for a number of permitted
restrictions and conditions. The proposed regulations would have
permitted a plan to impose a restriction or condition either directly
or indirectly because of applicable securities laws or because the plan
becomes an applicable defined contribution plan, limits investments in
employer securities, limits trading frequency, does not permit
investment in a frozen fund, imposes a fee on other investment options
that is not imposed on the investment in employer securities or imposes
a reasonable fee on the divestment of employer securities, or allows
investments to be made in a stable value or similar fund more
frequently than other investment funds.
A commentator requested clarification with respect to the exception
for frozen funds. The commentator requested that a frozen fund include
a plan that reinvests employer security dividends in additional
employer securities as long as the plan does not permit any further
investment in employer securities. The final regulations clarify that
the plan is permitted to allow reinvestment of dividends paid on
employer securities. The final regulations also clarify that the frozen
fund exception is only available for a plan that does not have another
employer securities fund.
Commentators requested that the list for permitted indirect
restrictions or conditions be expanded to include certain defined
contribution plans that make matching contributions in employer
securities and allow participants to divest employer securities
attributable to such contributions, but do not permit participants to
later elect to reinvest any portion of their account balances in
employer stock. The final regulations do not adopt this suggestion. The
IRS and the Treasury Department (Treasury) have concluded that the
inability to reinvest in employer securities generally acts as a
material deterrent to an individual who might otherwise have elected to
diversify his or her account balance of employer securities. However,
the final regulations provide a transitional rule for certain leveraged
ESOPs. An employer stock fund does not fail to be a frozen fund merely
because of the allocation of employer securities that are released as
matching contributions from the plan's suspense account that holds
employer securities acquired with an exempt loan under section
4975(d)(3). This transitional rule only applies to employer securities
that were acquired in a plan year beginning before January 1, 2007,
with the proceeds of an exempt loan within the meaning of section
4975(d)(3) which is not refinanced after the end of the last plan year
beginning before January 1, 2007. This transitional rule was added
because these leveraged ESOPs cannot cease allocations of employer
securities acquired with an exempt loan that are held in a suspense
account without significant effect on the company's debt arrangements.
[[Page 27930]]
Commentators suggested that the special rule for a stable value or
similar fund be expanded to allow transfers out of a stable value fund
or similar fund more frequently than other funds. In response to
comments, the final regulations provide that a plan is generally
permitted to allow transfers to be made into or out of a stable value
fund more frequently than a fund invested in employer securities. Thus,
a plan that includes a broad range of investment alternatives as
described in section 401(a)(35)(D)(i), including a stable value or
similar fund, does not impose an impermissible restriction merely
because it permits transfers into and out of the stable value or
similar fund more frequently than the other funds (taking into account
any restrictions or conditions imposed with respect to the other
investment options under the plan).
Commentators requested clarification as to the meaning of a stable
value or similar fund. The final regulations provide that a stable
value or similar fund means an investment product or fund designed to
preserve or guarantee principal and provide a reasonable rate of
return, while providing liquidity for benefit distributions or
transfers to other investment alternatives (such as a product or fund
described in Department of Labor Regulation section 2550.404c-
5(e)(4)(iv)(A) or (v)(A)).
One commentator noted that the Department of Labor regulations for
qualified default investment alternatives (QDIAs) require QDIAs to be
restriction-free for 90 days. The commentator requested clarification
that the restriction-free 90-day period does not cause a plan to
violate the prohibition on imposing a restriction or condition with
respect to employer securities that is not imposed on other
investments. However, the commentator further stated that service
providers will have difficulty administering restrictions only after 90
days and therefore requested that the final regulations permit
restriction-free transfers for QDIAs permanently. The final regulations
expand the list of permitted indirect restrictions to provide that a
plan may provide for transfers out of a QDIA (within the meaning of
Department of Labor Regulation section 2550.404c-5(e)) more frequently
than a fund invested in employer securities.
A commentator requested clarification concerning plans being
permitted to restrict reinvestments in only one employer stock fund
when the plan allows investment in another employer stock fund,
provided that the stock contained in each fund has the same
characteristics except for differences in the tax cost basis of the
trust. The final regulations provide that any applicable tax
consequences are disregarded in determining whether a plan imposes an
indirect restriction or condition on an individual's right to divest an
investment in employer securities. Accordingly, 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 section
402(e)(4) cost (or other basis) of the trust in the shares held in each
account.
Several commentators requested clarification regarding the 7-day
rule in the proposed regulations. The preamble to the proposed
regulations explained that the 7-day rule was an example and not the
exclusive method to limit trading frequency. The permitted restriction
for trading frequency provides that a plan is permitted to impose
reasonable restrictions that are designed to limit short-term trading
in employer securities. Thus, the 7-day rule, which was mentioned in
the preamble to the proposed regulations, is an example and other
short-term trading restrictions (such as a restriction based on
multiple trades within a specified period) are allowable if they meet
the reasonably designed standard.
Miscellaneous
Commentators requested clarification with respect to an ESOP that
has been satisfying the diversification requirements under section
401(a)(28) by distributing the portion of the participant's account
covered by an election within 90 days after the period during which the
election may be made, but which is now subject to the diversification
requirements under section 401(a)(35). Such a distribution option does
not satisfy the diversification requirements under section 401(a)(35).
These commentators were concerned that an amendment which eliminates
this distribution option would be a violation of the anti-cutback rules
under section 411(d)(6). Section 1107 of PPA '06 provides that any
amendment which is made pursuant to a provision of PPA '06 will not
fail to meet the requirements of section 411(d)(6) unless otherwise
provided by the Secretary of the Treasury.\3\ Thus, an amendment to an
ESOP which is now subject to the diversification requirements under
section 401(a)(35) that eliminates the distribution option available
for ESOPs subject to the diversification requirements under section
401(a)(28), as permitted under section 1107 of PPA '06, would not
violate the anti-cutback rules under section 411(d)(6).
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\3\ See also section 411(d)(6)(C)(ii).
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In addition, it is expected that guidance will be issued in the
near future exercising the authority under Sec. 1.411(d)-4, A-2(d)(4),
to permit elimination of such a distribution option with respect to an
ESOP that is subject to section 401(a)(35) after the end of the limited
period to which section 1107 of PPA '06 applies. The guidance will
permit elimination of such a distribution option during the extended
remedial amendment period permitted with respect to section 401(a)(35)
under Notice 2009-97, that is, to the last day of the first plan year
that begins on or after January 1, 2010.
Effective/Applicability Date
The final regulations are effective and applicable for plan years
beginning on or after January 1, 2011.
For the period after the statutory effective date and before the
regulatory effective date set forth in the preceding sentence, a plan
must comply with section 401(a)(35). During this period, a plan is
permitted to rely on Notice 2006-107, the proposed regulations, or
these final regulations for purposes of satisfying the requirements of
section 401(a)(35).
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and, because
Sec. 1.401(a)(35)-1 would not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding this regulation was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comments on its impact on small business.
Drafting Information
The principal authors of these regulations are Dana A. Barry,
formerly of the Office of Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), and R. Lisa Mojiri-Azad, Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). However,
[[Page 27931]]
other personnel from the IRS and the Treasury Department participated
in the development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.401(a)(35)-1 is also issued under 26 U.S.C.
401(a)(35). * * *
0
Par. 2. Section 1.401(a)(35)-1 is added to read as follows:
Sec. 1.401(a)(35)-1 Diversification requirements for certain defined
contribution plans.
(a) General rule--(1) Diversification requirements. Section
401(a)(35) imposes diversification requirements on applicable defined
contribution plans. A trust that is part of an applicable defined
contribution plan is not a qualified trust under section 401(a) unless
the plan--
(i) Satisfies the diversification election requirements for
elective deferrals and employee contributions set forth in paragraph
(b) of this section;
(ii) Satisfies the diversification election requirements for
employer nonelective contributions set forth in paragraph (c) of this
section;
(iii) Satisfies the investment option requirement set forth in
paragraph (d) of this section; and
(iv) Does not apply any restrictions or conditions on investments
in employer securities that violate the requirements of paragraph (e)
of this section.
(2) Definitions, effective dates, and transition rules. The
definitions of applicable defined contribution plan, employer security,
parent corporation, and publicly traded are set forth in paragraph (f)
of this section. Applicability dates and transition rules are set forth
in paragraph (g) of this section.
(b) Diversification requirements for elective deferrals and
employee contributions invested in employer securities--(1) General
rule. With respect to any individual described in paragraph (b)(2) of
this section, if any portion of the individual's account under an
applicable defined contribution plan attributable to elective deferrals
(as described in section 402(g)(3)(A)), employee contributions, or
rollover contributions is invested in employer securities, then the
plan satisfies the requirements of this paragraph (b) if the individual
may elect to divest those employer securities and reinvest an
equivalent amount in other investment options. The plan may limit the
time for divestment and reinvestment to periodic, reasonable
opportunities occurring no less frequently than quarterly.
(2) Applicable individual with respect to elective deferrals and
employee contributions. An individual is described in this paragraph
(b)(2) if the individual is--
(i) A participant;
(ii) An alternate payee who has an account under the plan; or
(iii) A beneficiary of a deceased participant.
(c) Diversification requirements for employer nonelective
contributions invested in employer securities--(1) General rule. With
respect to any individual described in paragraph (c)(2) of this
section, if a portion of the individual's account under an applicable
defined contribution plan attributable to employer nonelective
contributions is invested in employer securities, then the plan
satisfies the requirements of this paragraph (c) if the individual may
elect to divest those employer securities and reinvest an equivalent
amount in other investment options. The plan may limit the time for
divestment and reinvestment to periodic, reasonable opportunities
occurring no less frequently than quarterly.
(2) Applicable individual with respect to employer nonelective
contributions. An individual is described in this paragraph (c)(2) if
the individual is--
(i) A participant who has completed at least three years of
service;
(ii) An alternate payee who has an account under the plan with
respect to a participant who has completed at least three years of
service; or
(iii) A beneficiary of a deceased participant.
(3) Completion of three years of service. For purposes of paragraph
(c)(2) of this section, a participant completes three years of service
on the last day of the vesting computation period provided for under
the plan that constitutes the completion of the third year of service
under section 411(a)(5). However, for a plan that uses the elapsed time
method of crediting service for vesting purposes (or a plan that
provides for immediate vesting without using a vesting computation
period or the elapsed time method of determining vesting), a
participant completes three years of service on the day immediately
preceding the third anniversary of the participant's date of hire.
(d) Investment options. An applicable defined contribution plan
must offer not less than three investment options, other than employer
securities, to which an individual who has the right to divest under
paragraph (b)(1) or (c)(1) of this section may direct the proceeds from
the divestment of employer securities. Each of the three investment
options must be diversified and have materially different risk and
return characteristics. For this purpose, investment options that
constitute a broad range of investment alternatives within the meaning
of Department of Labor Regulation section 2550.404c-1(b)(3) are treated
as being diversified and having materially different risk and return
characteristics.
(e) Restrictions or conditions on investments in employer
securities--(1) Impermissible restrictions or conditions--(i) General
rule. Except as provided in paragraph (e)(2) of this section, an
applicable defined contribution plan violates the requirements of this
paragraph (e) if the plan imposes restrictions or conditions with
respect to the investment of employer securities that are not imposed
on the investment of other assets of the plan. A restriction or
condition with respect to employer securities means--
(A) A restriction on an individual's right to divest an investment
in employer securities that is not imposed on an investment that is not
employer securities; or
(B) A benefit that is conditioned on investment in employer
securities.
(ii) Indirect restrictions or conditions--(A) Except as provided in
paragraph (e)(3) of this section, a plan violates the requirements of
this paragraph (e) if the plan imposes a restriction or condition
described in paragraph (e)(1)(i)(A) or (B) of this section either
directly or indirectly.
(B) A plan imposes an indirect restriction on an individual's right
to divest an investment in employer securities if, for example, the
plan provides that a participant who divests his or her account balance
with respect to the investment in employer securities is not permitted
for a period of time thereafter to reinvest in employer securities.
(C) A plan does not impose an indirect restriction or condition
merely because there are tax consequences that result from an
individual's divestment of an investment in employer securities. Thus,
the loss of the special treatment for net unrealized appreciation
provided
[[Page 27932]]
under section 402(e)(4) with respect to employer securities is
disregarded. Similarly, a plan does not impose an impermissible
restriction or condition merely because it provides 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 section 402(e)(4) cost (or other basis) of
the trust in the shares held in each account. (See Sec. 1.402(a)-1(b)
for rules regarding section 402(e)(4).)
(2) Permitted restrictions or conditions--(i) In general. An
applicable defined contribution plan does not violate the requirements
of this paragraph (e) merely because it imposes a restriction or a
condition set forth in paragraph (e)(2)(ii) or (e)(2)(iii) of this
section.
(ii) Securities laws. A plan is permitted to impose a restriction
or condition on the divestiture of employer securities that is either
required in order to ensure compliance with applicable securities laws
or is reasonably designed to ensure compliance with applicable
securities laws. For example, it is permissible for a plan to limit
divestiture rights for participants who are subject to section 16(b) of
the Securities Exchange Act of 1934 (15 U.S.C. 78f) to a reasonable
period (such as 3 to 12 days) following publication of the employer's
quarterly earnings statements because it is reasonably designed to
ensure compliance with Rule 10b-5 of the Securities and Exchange
Commission.
(iii) Deferred application of the diversification requirements--(A)
Becoming an applicable defined contribution plan. An applicable defined
contribution plan is permitted to restrict the application of the
diversification requirements of section 401(a)(35) and this section for
up to 90 days after the plan becomes an applicable defined contribution
plan (for example, a plan becoming an applicable defined contribution
plan because the employer securities held under the plan become
publicly traded).
(B) Loss of exception for indirect investments. In the case where
an investment fund described in paragraph (f)(3)(ii)(A) of this section
no longer meets the requirement in paragraph (f)(3)(ii)(B) of this
section that the investment must be independent of the employer
(including the situation where the fund no longer meets the percentage
limitation rule in paragraph (f)(3)(ii)(C) of this section), the plan
does not fail to satisfy the diversification requirements of section
401(a)(35) and this section merely because it does not offer those
rights with respect to that investment fund for up to 90 days after the
investment fund ceases to meet those requirements.
(3) Permitted indirect restrictions or conditions--(i) In general.
An applicable defined contribution plan does not violate the
requirements of this paragraph (e) merely because it imposes an
indirect restriction or condition set forth in this paragraph (e)(3).
(ii) Limitation on investment in employer securities. A plan is
permitted to limit the extent to which an individual's account balance
can be invested in employer securities, provided the limitation applies
without regard to a prior exercise of rights to divest employer
securities. For example, a plan does not impose a restriction that
violates this paragraph (e) merely because the plan prohibits a
participant from investing additional amounts in employer securities if
more than 10 percent of that participant's account balance is invested
in employer securities.
(iii) Trading frequency. A plan is permitted to impose reasonable
restrictions on the timing and number of investment elections that an
individual can make to invest in employer securities, provided that the
restrictions are designed to limit short-term trading in the employer
securities. For example, a plan could provide that a participant may
not elect to invest in employer securities if the employee has elected
to divest employer securities within a short period of time, such as
seven days, prior to the election to invest in employer securities.
(iv) Fees. The plan has not provided an indirect benefit that is
conditioned on investment in employer securities merely because the
plan imposes fees on other investment options that are not imposed on
the investment in employer securities. In addition, the plan has not
provided a restriction on the right to divest an investment in employer
securities merely because the plan imposes a reasonable fee for the
divestment of employer securities.
(v) Stable value or similar fund. A plan is permitted to allow
transfers to be made into or out of a stable value or similar fund more
frequently than a fund invested in employer securities for purposes of
paragraph (e)(1)(ii) of this section. Thus, a plan that includes a
broad range of investment alternatives as described in paragraph (d) of
this section, including a stable value or similar fund, does not impose
an impermissible restriction under paragraph (e)(1)(ii) of this section
merely because it permits transfers into or out of that fund more
frequently than other funds under the plan, provided that the plan
would otherwise satisfy this paragraph (e) (taking into account any
restrictions or conditions imposed with respect to the other investment
options under the plan). For purposes of this section, a stable value
fund or similar fund means an investment product or fund designed to
preserve or guarantee principal and provide a reasonable rate of
return, while providing liquidity for benefit distributions or
transfers to other investment alternatives (such as a product or fund
described in Department of Labor Regulation Sec. 2550.404c-
5(e)(4)(iv)(A) or (v)(A)).
(vi) Transfers out of a qualified default investment alternative
(QDIA). A plan is permitted to provide for transfers out of a QDIA
within the meaning of Department of Labor Regulation section 2550.404c-
5(e) more frequently than a fund invested in employer securities.
(vii) Frozen funds--(A) General rule. A plan is permitted to
prohibit any further investment in employer securities. Thus, a plan is
not treated as imposing an indirect restriction merely because it
provides that an employee that divests an investment in employer
securities is not permitted to reinvest in employer securities, but
only if the plan does not permit additional contributions or other
investments to be invested in employer securities. For this purpose, a
plan does not provide for further investment in employer securities
merely because dividends paid on employer securities under the plan are
reinvested in employer securities.
(B) Transitional relief for certain leveraged employee stock
ownership plans (ESOPs). An employer stock fund does not fail to be a
frozen fund under this paragraph (e)(3)(vii) merely because of the
allocation of employer securities that are released as matching
contributions from the plan's suspense account that holds employer
securities acquired with an exempt loan under section 4975(d)(3). This
paragraph (e)(3)(vii)(B) only applies to employer securities that were
acquired in a plan year beginning before January 1, 2007, with the
proceeds of an exempt loan within the meaning of section 4975(d)(3)
which is not refinanced after the end of the last plan year beginning
before January 1, 2007.
(4) Delegation of authority to Commissioner. The Commissioner may
provide for additional permitted restrictions or conditions or
permitted indirect restrictions or conditions in revenue rulings,
notices, or other
[[Page 27933]]
guidance published in the Internal Revenue Bulletin.
(f) Definitions--(1) Application of definitions. This paragraph (f)
contains definitions that are applicable for purposes of this section.
(2) Applicable defined contribution plan--(i) General rule. Except
as provided in this paragraph (f)(2), an applicable defined
contribution plan means any defined contribution plan which holds
employer securities that are publicly traded. See paragraph (f)(2)(iv)
of this section for a special rule that treats certain plans that hold
employer securities that are not publicly traded as applicable defined
contribution plans and paragraph (f)(3)(ii) of this section for a
special rule that treats certain plans as not holding publicly traded
employer securities for purposes of this section.
(ii) Exception for certain ESOPs. An employee stock ownership plan
(ESOP), as defined in section 4975(e)(7), is not an applicable defined
contribution plan if the plan is a separate plan for purposes of
section 414(l) with respect to any other defined benefit plan or
defined contribution plan maintained by the same employer or employers
and holds no contributions (or earnings thereunder) that are (or were
ever) subject to section 401(k) or 401(m). Thus, an ESOP is an
applicable defined contribution plan if the ESOP is a portion of a
larger plan (whether or not that larger plan includes contributions
that are subject to section 401(k) or 401(m)). For purposes of this
paragraph (f)(2)(ii), a plan is not considered to hold amounts ever
subject to section 401(k) or 401(m) merely because the plan holds
amounts attributable to rollover amounts in a separate account that
were previously subject to section 401(k) or 401(m).
(iii) Exception for one-participant plans. A one-participant plan,
as defined in section 401(a)(35)(E)(iv), is not an applicable defined
contribution plan.
(iv) Certain defined contribution plans treated as holding publicly
traded employer securities--(A) General rule. A defined contribution
plan holding employer securities that are not publicly traded is
treated as an applicable defined contribution plan if any employer
maintaining the plan or any member of a controlled group of
corporations that includes such employer has issued a class of stock
which is publicly traded. For purposes of this paragraph (f)(2)(iv), a
controlled group of corporations has the meaning given such term by
section 1563(a), except that ``50 percent'' is substituted for ``80
percent'' each place it appears.
(B) Exception for certain plans. Paragraph (f)(2)(iv)(A) of this
section does not apply to a plan if--
(1) No employer maintaining the plan (or a parent corporation with
respect to such employer) has issued stock that is publicly traded; and
(2) No employer maintaining the plan (or parent corporation with
respect to such employer) has issued any special class of stock which
grants to the holder or issuer particular rights, or bears particular
risks for the holder or issuer, with respect to any employer
maintaining the plan (or any member of a controlled group of
corporations that includes such employer) which has issued any stock
that is publicly traded.
(3) Employer security--(i) General rule. Employer security has the
meaning given such term by section 407(d)(1) of the Employee Retirement
Income Security Act of 1974, as amended (ERISA).
(ii) Certain defined contribution plans or investment funds not
treated as holding employer securities--(A) Exception for certain
indirect investments. Subject to paragraphs (f)(3)(ii)(B) and (C) of
this section, a plan (and an investment option described in paragraph
(d) of this section) is not treated as holding employer securities for
purposes of this section to the extent the employer securities are held
indirectly as part of a broader fund that is--
(1) A regulated investment company described in section 851(a);
(2) A common or collective trust fund or pooled investment fund
maintained by a bank or trust company supervised by a State or a
Federal agency;
(3) A pooled investment fund of an insurance company that is
qualified to do business in a State;
(4) An investment fund managed by an investment manager within the
meaning of section 3(38) of ERISA for a multiemployer plan; or
(5) Any other investment fund designated by the Commissioner in
revenue rulings, notices, or other guidance published in the Internal
Revenue Bulletin.
(B) Investment must be independent. The exception set forth in
paragraph (f)(3)(ii)(A) of this section applies only if the investment
in the employer securities is held in a fund under which--
(1) There are stated investment objectives of the fund; and
(2) The investment is independent of the employer (or employers)
and any affiliate thereof.
(C) Percentage limitation rule. For purposes of paragraph
(f)(3)(ii)(B)(2) of this section, an investment in employer securities
in a fund is not considered to be independent of the employer (or
employers) and any affiliate thereof if the aggregate value of the
employer securities held in the fund is in excess of 10 percent of the
total value of all of the fund's investments for the plan year. The
determination of whether the value of employer securities exceeds 10
percent of the total value of the fund's investments for the plan year
is made as of the end of the preceding plan year. The determination can
be based on the information in the latest disclosure of the fund's
portfolio holdings that was filed with the Securities and Exchange
Commission (SEC) in that preceding plan year.
(4) Parent corporation. Parent corporation has the meaning given
such term by section 424(e).
(5) Publicly traded--(i) In general. A security is publicly traded
if it is readily tradable on an established securities market.
(ii) Readily tradable on an established securities market. For
purposes of this paragraph (f)(5), except as provided by the
Commissioner in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin, a security is readily tradable on an
established securities market if--
(A) The security is traded on a national securities exchange that
is registered under section 6 of the Securities Exchange Act of 1934
(15 U.S.C. 78f); or
(B) The security is traded on a foreign national securities
exchange that is officially recognized, sanctioned, or supervised by a
governmental authority and the security is deemed by the SEC as having
a ``ready market'' under SEC Rule 15c3-1 (17 CFR 240.15c3-1).
(g) Applicability date and transition rules--(1) Statutory
effective date--(i) General rule. Except as otherwise provided in this
paragraph (g) and section 901(c)(3)(A) and (B) of the Pension
Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA
'06), section 401(a)(35) is effective for plan years beginning after
December 31, 2006.
(ii) Collectively bargained plans--(A) Delayed statutory effective
date. In the case of a plan maintained pursuant to one or more
collective bargaining agreements between employee representatives and
one or more employers ratified on or before August 17, 2006, section
401(a)(35) is effective for plan years beginning after the earlier of--
(1) The later of--
(i) December 31, 2007; or
(ii) The date on which the last such collective bargaining
agreement
[[Page 27934]]
terminates (determined without regard to any extension thereof); or
(2) December 31, 2008.
(B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. If a collective bargaining agreement
applies to some, but not all, of the plan participants, the definition
of whether the plan is considered a collectively bargained plan for
purposes of this paragraph (g)(1)(ii) is made in the same manner as the
definition of whether a plan is collectively bargained under section
436(f)(3).
(2) Regulatory effective/applicability date. This section is
effective and applicable for plan years beginning on or after January
1, 2011.
(3) Statutory transition rules--(i) General rule. Pursuant to
section 401(a)(35)(H), in the case of the portion of an account to
which paragraph (c) of this section applies and that consists of
employer securities acquired in a plan year beginning before January 1,
2007, the requirements of paragraph (c) of this section only apply to
the applicable percentage of such securities.
(ii) Applicable percentage--(A) Phase-in percentage. For purposes
of this paragraph (g)(3), the applicable percentage is determined as
follows--
------------------------------------------------------------------------
Plan year to which paragraph (c) of this section The applicable
applies: percentage is:
------------------------------------------------------------------------
1st................................................... 33
2nd................................................... 66
3rd and following..................................... 100
------------------------------------------------------------------------
(B) Special rule. For a plan for which the special effective date
under section 901(c)(3) of PPA '06 applies, the applicable percentage
under this paragraph (g)(3)(ii) is determined without regard to the
delayed effective date in section 901(c)(3)(A) and (B) of PPA '06.
(iii) Nonapplication for participants age 55 with three years of
service. Paragraph (g)(3)(i) of this section does not apply to an
individual who is a participant who attained age 55 and had completed
at least three years of service (as defined in paragraph (c)(3) of this
section) before the first day of the first plan year beginning after
December 31, 2005.
(iv) Separate application by class of securities. This paragraph
(g)(3) applies separately with respect to each class of securities.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: May 5, 2010.
Michael F. Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-11924 Filed 5-18-10; 8:45 am]
BILLING CODE 4830-01-P
