For plan years beginning after December 31, 2006, a diversification requirement applies to certain defined contribution plans that hold publicly-traded employer securities ( Q
3732).
1 A qualified defined contribution plan, other than a profit sharing plan, that is established by an employer whose stock is not readily tradable on an established market and that holds more than 10 percent of its assets in employer securities must provide that plan participants are entitled to exercise voting rights with respect to employer stock held by the plan with respect to approval of corporate mergers, consolidations, recapitalizations, reclassifications, liquidation, dissolution, sales of substantially all of the business’s assets, and similar transactions as provided in future regulations. Each participant must be given one vote with respect to an issue, and the trustee must vote the shares held by the plan in a proportion that takes into account the one participant/one vote requirement.
2
Planning Point: There has been significant litigation in recent years, with a resurgence in 2016-2017 against employers who allow or continue to allow investment in company stock, especially companies experiencing financial difficulties. Sears became the subject of such a class action lawsuit on August 1, 2017.
3 Companies that have defeated such litigation include Eaton Corp., IBM, JP Morgan Chase, Lehman Brothers, RadioShack Corp., and Whole Foods Corp., to name some of the more prominent companies sued by employees. Even good performance of company stock has not prevented employee lawsuits against companies like Chesapeake Energy Corp., General Cable and Seventy Seven Energy Inc., based upon complaints involving company stock accounts in their plans. For this reason, an employer should have significant business reasons for including company stock in the plan’s portfolio in the present litigious environment. In addition, the Plan Committee should monitor company financial affairs closely for changes in investment policy when company stock is included.
1. IRC § 401(a)(35).
2. IRC §§ 401(a)(22), 409(e).
3.
See, e.g.,
Catafalmo v. Sears Holdings Corp., No. 1:17-CV-05230 (N.D. Ill. complaint filed Jul.14, 2017).