Pension Protection Act Guide - January 2009 - (Page 21)

Employer Securities SpEcIfIc poINtS vEStINg Accelerated Minimum Vesting for plan years beginning on or after January 1, 2007 (delayed effective dates may apply for collectively bargained plans and for Employee Stock ownership Plan (ESoP/ESoP and 401(k) components (KSoPs) with an outstanding exempt loan on September 26, 2005) Except for matching contributions, employer contributions must vest at least as rapidly as under a five-year cliff or a seven-year graded vesting schedule. Employer matching contributions must vest at least as rapidly as under a three-year cliff or a six-year graded vesting schedule. Applies the accelerated matching contribution vesting schedule (three-year cliff or six-year graded) to all employer contributions. If the plan allows, the faster vesting may apply only to contributions made in plan years beginning on or after January 1, 2007. ESoP/KSoP exempt loan delayed effective date is available until the plan year beginning on or after the earlier of: 1. The date the exempt loan is repaid, or 2. The date the exempt loan, as of September 26, 2005, is scheduled to be repaid. • An ESoP/KSoP’s vesting schedule(s) must change if the schedule(s) is (are) not at least a three-year cliff or an appropriate six-year graded schedule. • The cost of offering your ESoP/KSoP may increase if forfeitures were used to offset contributions or plan expenses. • Decisions must be made on how to implement the change in vesting. EffEctIvE DatE currENt Law pENSIoN protEctIoN act what It mEaNS to you EmpLoyEr SEcurItIES Diversification Rights of Investments in Employer Securities for plan years beginning on or after January 1, 2007 (delayed for collectively bargained plans) Participants who have attained age 55 and have completed at least 10 years of participation must be eligible to diversify out of employer securities held in an ESoP/KSoP. Required diversification is limited to a cumulative 25% of employer securities held by a participant in the first five years the participant is eligible to diversify and increased to 50% in the sixth year. Diversification elections are satisfied by the plan through 1) distribution 2) participant given the opportunity to direct retirement funds to at least three investment alternatives other than employer securities within the ESoP/ KSoP, or 3) transfer to another plan which does allow such investment alternatives and participant direction. Except for “stand-alone” ESoPs and ESoP/KSoPs sponsored by non-publicly traded companies, different diversification rules are applicable to employer securities held by an ESoP/KSoP. • Participants must have the immediate right to diversify employee after-tax and salary deferral contributions invested in employer securities. • Participants with three years of service must have the right to diversify employer matching and non-elective contributions invested in employer securities. • ESoP/KSoPs must offer at least three diversified investment alternatives other than employer securities. • Diversification rights may be phased in over three years for employer securities acquired with matching and non-elective contributions prior to the first plan year beginning on or after January 1, 2007. Participants who have attained age 55 and have at least three years of service before the first plan year beginning on or after January 1, 2006, are not eligible for this phase-in. • Ascertain whether the new diversification rules apply to your ESoP/KSoP. Implementation may require significant change for an ESoP/ KSoP sponsor whose plan does not already allow for participant direction of funds. • “Stand-alone” ESoPs are those that have no employee after-tax, salary deferral, or employer matching contributions, and are a separate plan. • The new diversification provisions affect ESoP/KSoPs that hold or offer publicly traded employer securities as well as those plans that hold or offer privately held employer securities where the ESoP/KSoP sponsor, or one or more of its controlled group members has a publicly traded class of stock. • Review investment alternatives available to determine whether your ESoP/KSoP meets the new diversification provisions. Some ESoP/ KSoPs may already have sufficient other investment options available, while others may need to provide additional investment options. • Plans affected by the new rules need to operate in compliance for the plan year beginning in 2007, i.e., January 1, 2007, for calendar year plans. • ESoP/KSoP sponsors must determine whether to utilize the phase-in rule. In addition to the additional administrative complexity, consider the impact on cash flow and/or market value depending upon the decision and number of shares affected. • Traditional ESoP/KSoP rules are inapplicable for plans subject to the new diversification rules. 21

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Pension Protection Act Guide - January 2009 Contents Multiple Plan Types Defined Benefit (DB) Plans Defined Contribution (DC) Plans Employer Securities Nonqualified Individual Investors

Pension Protection Act Guide - January 2009

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