As we explained in our recent Legal Update (see New ERISA Notice Requirement May Require Action by December 2, 2006, November 2006), the Pension Protection Act of 2006 (“PPA”) creates new diversification rights for participants in retirement
plans that permit or require investments in company stock and bolsters these rights with a notice requirement. Under a strict
reading of PPA, employers could have been required to distribute notices to plan participants as early as December 2, 2006,
even though the substantive diversification requirements are not effective until January 1, 2007.
The IRS has now issued guidance in the form of Notice 2006-107 (available at http://www.irs.gov/pub/irs-drop/n-06-107.pdf) that provides transition relief both for the diversification requirements themselves and the related participant notice
requirement. The IRS has also supplied model language that can be used to comply with the notice requirement.
Transition Relief for Diversification Requirements
Under Notice 2006-107, restrictions on the diversification of company stock investments in “applicable defined contribution
plans” that are in effect on or before December 18, 2006 may be maintained for the period January 1, 2007 through March 30,
2007 without violating Section 401(a)(35) of the Internal Revenue Code of 1986, as amended (“Code”). Notice 2006-107 also
extends transition relief through December 31, 2007 for certain plan investments that are not subject to the same restrictions
on diversification that are applicable to company stock investments.[1]
Postponement of Notice Requirement
Notice 2006-107 indicates that the IRS and Department of Labor are in agreement that Section 101(m) of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”) — the PPA provision that requires notice to plan participants of their new
diversification rights — does not become applicable until January 1, 2007 at the earliest. Thus, plans covered by this requirement
need not distribute notices to participants until January 1, 2007. The IRS and Department of Labor do encourage plan sponsors
to distribute the notice at the earliest possible date, however.
Beyond clarifying the deadline for distributing participant notices, Notice 2006-107 also includes model language that can
be included in such notices. The model language can be customized as necessary to address particular plan terms.
Footnotes:
1: Under Code Section 401(a)(35)(D)(ii)(II), any limits on diversification imposed on company stock investments must be generally
applicable to the plan’s other investment alternatives (except for any restrictions tied to compliance with securities law).
