Internal Revenue Code Section 401(a)(35) imposes diversification requirements for qualified defined contribution plans which hold publicly traded employer stock. Under these requirements, a participant with at least 3 years of service (or a beneficiary of a deceased participant) must be allowed to direct the plan to divest the employer stock which is held in his or her plan account, and which was acquired with elective deferrals or employee contributions, and to reinvest an equivalent amount in other investment options. For this purpose, the plan must offer at least 3 investment options, other than employer stock, each of which is diversified and has materially different risk and return characteristics. A participant (or beneficiary) must be permitted to divest the employer stock at reasonable, periodic times occurring at least quarterly, and the plan may not impose restrictions or conditions on the divestment of employer stock that is not imposed on other plan assets.
The IRS has now issued final regulations on these Section 401(a)(35) diversification requirements. Feel free to contact me with any questions you have.