IRS finds overall compliance high in EPCU diversification of investments project


An IRS Employee Plans Compliance Unit (EPCU) project reports that the overall compliance with the diversification of investments requirements was very high. The goal of the diversification of investments project was to identify defined contribution plans that invested in publicly traded employer securities and determine whether the plans were in compliance with the diversification requirements under Code Sec. 401(a)(35) both in operation and in form. The diversification of investments project began in September 2013 and ended in December 2014.

To satisfy the diversification requirements under Code Sec. 401(a)(35) and regulations, a plan must permit participants, beneficiaries, and alternate payees to divest employer securities held in their defined contribution accounts and reinvest the funds in alternative investments. If employer securities are acquired with employee contributions, or attributed to rollover contributions, the plan must permit the divestment and reinvestment of funds immediately. If employer securities are acquired with employer contributions, the plan may impose a service requirement of up to three years for the right to divest and reinvest the funds in alternative investments.


The EPCU reported that the majority of the plans in the sample complied in operation with Code Sec. 401(a)(35). In just about all cases, plan participants had self-directed investment accounts and, as a general rule, could trade in and out of employer securities on any business day. In all of the cases, investing elective deferrals in employer securities was optional. Participants could choose from an array of investment options offered by the plan.

All plans complied with Code Sec. 401(a)(35) and regulations in terms of conditions and restrictions. The most common restriction was blackout dates for trading employer securities among “insiders” who had knowledge of the company’s performance prior to the issuance of quarterly reports. Another common restriction found in approximately 20% of the cases was to limit investments in employer securities to a certain percentage of a participant’s account balance (generally 20% or 25%). This is one of the permissible restrictions under the regulations.

However, the EPCU did find that in approximately 15% of the cases the plan document did not contain the diversification language required under Code Sec. 401(a)(35). In these cases, the plan administrators either did not know of the language requirement, were unaware that their plans did not contain the required language, or were incorrectly told by their attorneys that their plans did not need the Code Sec. 401(a)(35) language because the participants were not required to invest in employer securities and did so only by choice.

Other new projects

The EPCU has three new projects. One project involves the proper reporting on Form 5500 of assets that were transferred from the plan. Another project concerns Forms 5500-EZ (or Forms 5500-SF where the one participant plan box was checked) with “the first return filed for the plan” box checked, but with assets over $250,000 at the beginning of the plan year. In the third project, the EPCU wants to look into why a plan did not provide a plan benefit when it was due as indicated on Form 5500 series returns and check to see if the EPCU’s Form 5500 series return records are accurate.

Source: IRS website, March 23, 2015.

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