Employee Benefits-IRS Provides Relied For Certain ESOP Amendments

As discussed in yesterday’s blog, in Notice 2013-17, the Internal Revenue Service (the “IRS”) provides relief from the anti-cutback requirements of section 411(d)(6) of the Internal Revenue Code (the “Code”) for plan amendments that eliminate a distribution option, described in section 401(a)(28)(B)(ii)(I) of the Code, from an employee stock ownership plan or “ESOP” which becomes subject to the investment diversification requirements of section 401(a)(35) of the Code.

There is one more issue to be covered. An ESOP which satisfies the diversification requirements of section 401(a)(28)(B) of the Code, by distributing a portion of the participant’s account in accordance with section 401(a)(28)(B)(ii)(I), is not prevented from making the distribution by the rules under section 401(a) or section 401(k)(2)(B) and Treas. Reg. Sec. 1.401(k)-1(d) that restrict the distribution of plan benefits.

However, an ESOP that becomes subject to section 401(a)(35), and that therefore ceases to be subject to section 401(a)(28)(B), must comply with the restrictions on distributions that apply before termination of employment (in the case of a pension plan), before the occurrence of certain other events (in the case of a profit-sharing or stock bonus plan), or before one of the events specified in section 401(k)(2)(B)(i) (in the case of amounts attributable to elective contributions and certain other amounts under a qualified cash or deferred arrangement). For such an ESOP, a plan provision allowing any of the foregoing distributions before the applicable event becomes a “disqualifying provision”.

To provide relief, Notice 2013-17 says that, under section 401(b) of the Code and the Notice, any such disqualifying provision will not cause a plan to be disqualified, provided that a remedial amendment- which eliminates the provision- is adopted and put into effect under the plan generally by the last day of the first plan year beginning after 2012 (or if later by the deadline for adopting an “interim amendment” to the plan to satisfy section 401(a)(35)).