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Age 55 Diversification. 18 th Annual Ohio Employee Ownership Conference Presented by Dorn Swerdlin Swerdlin & Company Friday, April 16, 2004. What We Will Discuss . Basic Rules Examples Timeline Election Forms Acting on Election Diversification Calculations Sticky Issues. Basic Rules.

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Age 55 diversification l.jpg

Age 55 Diversification

18th Annual Ohio EmployeeOwnership Conference

Presented by Dorn SwerdlinSwerdlin & CompanyFriday, April 16, 2004

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What We Will Discuss

  • Basic Rules

    • Examples

      • Timeline

      • Election Forms

      • Acting on Election

    • Diversification Calculations

  • Sticky Issues

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Age 55 Diversification

  • Code Section 401(a)(28)(B)

    • Allows participant to diversify out of company stock.

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Age 55

10 years ofparticipationin plan

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Stock Eligibility

  • Shares of company stock acquired by trust after December 31, 1986

  • May be allowed with respect to all shares

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Election Period

  • 6 year period

    • Begins when participant meets eligibility requirements

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Able to diversify 25% of qualifying shares

First 5Years

Final option to diversify up to50% of qualifying shares

6th Year

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Computing Shares


Any shares that have been previouslydiversified

Total of allocationshares that haveever been eligiblefordiversification


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  • Not required if shares in participant’s company stock account have a market value of $500 or less


Market Value $500

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Timing of Elections

  • Must be granted to participant within 90 days of close of plan year during which he meets requirements

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  • Within 90 days after the last day of the 90-day election period

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  • Company may implement diversification elections by:

    • Making a distribution of the diversified shares or

    • Providing at least 3 investment options within the ESOP (or another plan)

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Effective Date of ESOP:January 1, 1980

Diversification Occurs:Age 55 and 10 years of participation

KL Corporation also sponsors a 401(k) Plan

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Leon Kelso

Date of Birth:January 1, 1935

Date of Participation: January 1, 1995

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06/30/2005(180 days)

03/31/2005(90 days)








10 years plan participation(eligible for diversification)

Appraisal and Allocation Complete

Preliminary Explanation

Preliminary Election Form

Returns Preliminary Form

Final Election Form

Execute Transfer

LK Attains Age 55

Joins Plan

Diversification Timeline

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Election Forms

Preliminary 2004 Diversification Election Notice

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Election Forms

Final 2004 Diversification Election Notice

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Election Forms

Final 2009 Diversification Election Notice

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Acting On The Election

  • Transfer to KL Corporation 401(k)

  • Take Cash

    • Taxed as ordinary income and subject to any applicable penalties

  • Roll over to IRA

  • Take Stock

    • Put Option is available (closely held)

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Diversification Calculation

If the plan allows the participant to diversify more than the number of shares required under the Code, there are no provisions under the Code or regulations allowing those shares to be deducted from the amount available for diversification during the qualified election period. However, they must be included in determining the total number of post 1986 shares allocated to the participant's account.

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Determining Years of Participation

General yearof servicedefinition

1,000 hours ofservice withina 12-month period

Vesting: 1,000 hours of service in a plan year

Eligibility:1,000 hours during initial year of employment and anniversaries thereof – or – if fewer than 1,000 hours during initial year of employment, measurement period reverts to plan year



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Determining Years of Participation

  • Code is unclear

  • Conservative approach: As long as a terminated participant has a vested benefit remaining in the plan, he/she is considered to be a “Participant” under the Internal Revenue Code; therefore, for each plan year that they have a vested balance, they have a year of participation for diversification purposes

What About Terminated With a Vested Account Balance?

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Determining Years of Participation

What Happens When Plans Merge?

  • There is no clear guidance; however, the conservative approach is to count years of participation from entry in the older plan.

Employer sets up new ESOP

Mergesexisting 401(k) intoESOP

Right Away:Participants may have 10 years ofparticipation if you include their years in the 401(k) plan

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Determining Years of Participation

  • Recommendation

    • In both instances, draft documents to specifically define years of participation for diversification purposes.

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What About Reshuffling?

  • Each participant has same proportion of shares and cash

  • How do you keep track of shares?

    • Administratively maintain separate “buckets” for post 1986 shares

    • For qualifying participants, diversify within the plan and transfer diversified shares to cash investment

  • Any other suggestions?

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Deadline Dilemmas

  • How do you meet the 90 Day and 180 Day deadlines?

    • Offer a preliminary diversification election form based on prior year information

    • Upon completion of appraisal and allocation, provide a final election form based on final information

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Deadline Dilemmas

  • What if you miss the deadline?

    • Creates an operational error for the plan.

    • Correct the problem so that the plan is in the same position it would have been had the error never occurred; offer the participant the diversification right at the price that would have been paid when the election should have been made