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CCH® PENSION — 03/18/11

IRS releases guidance defining readily tradable employer securities held by retirement plans

The IRS has issued a notice providing guidance regarding when employer securities are "readily tradable on an established securities market" or "readily tradable on an established market" for certain provisions of the tax Code relating to retirement plans. The guidance is generally effective for plan years beginning on or after January 1, 2012. However, taxpayers and plan sponsors may rely on the guidance for periods after March 14, 2011.

Notice adopts definition contained in final regs

Under IRS Reg. §1.401(a)(35)-1(f)(5), which was issued in May 2010, a security is "readily tradable on an established securities market" if the security is traded on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934. The regulations also treat a security as readily tradable on an established securities market if the security is traded on a foreign national securities exchange that is officially recognized, sanctioned, or supervised by a governmental authority and where the security is deemed by the Securities and Exchange Commission (SEC) as having a ready market under SEC Rule 15c3-1 (17 CFR 240.15c3-1). Under the current SEC rules, a security that is included on the FTSE Group (FTSE) All-World Index is deemed to have a ready market.

Under the IRS notice, the terms "readily tradable on an established securities market" and "readily tradable on an established market," with respect to employer securities, means employer securities that are readily tradable on an established securities market within the meaning of Reg. §1.401(a)(35)-1(f)(5), for purposes of the following Code sections:

• Code Sec. 401(a)(22), which provides that a defined contribution plan (other than a profit-sharing plan) must meet the pass-through voting requirements of Code Sec. 409(e) if it is established by an employer whose stock is not readily tradable on an established market, and after acquiring securities of the employer, more than 10% of the total assets of the plan are employer securities;
• Code Sec. 401(a)(28)(C), which provides for the use of an independent appraiser by an ESOP;
• Code Sec. 409(h)(1)(B), which provides for the right to demand that benefits be distributed in the form of employer securities;
• Code Sec. 409(l), defining "employer securities" for ESOP purposes; and
• Code Sec. 1042(c)(1)(A), dealing with the definition of "qualified securities" involving the sale of stock to an ESOP or eligible worker-owned cooperative.

Effective dates

The notice is effective for plan years beginning on or after January 1, 2012. However, the notice is not effective until plan years beginning on or after January 1, 2013, for any employer-sponsored plan with respect to which, as of March 14, 2011, neither the employer nor any member of its controlled group has any common stock that is readily tradable on an established securities market within the meaning of IRS Reg. §1.401(a)(35)-1(f)(5)(A) (relating to securities that are traded on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934), but the employer or a member of its controlled group has common stock that is readily tradable on an established securities market within the meaning of IRS Reg. §1.401(a)(35)-1(f)(5)(B) (relating to securities that are traded on a foreign national securities exchange that is officially recognized, sanctioned, or supervised by a governmental authority and is deemed by the SEC as having a "ready market" under SEC Rule 15c3-1).

Source: IRS Notice 2011-19, I.R.B. 2011-11, March 14, 2011.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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