When Are Employer Securities Readily Tradable On An Established Securities Market?

Notice 2011-19, 2011-11 IRB

In a Notice, IRS has provided guidance on when securities of an employer are readily tradable on an established securities market or readily tradable on an established market for purposes of certain Code provisions related to employer securities held by certain qualified retirement plans.

Background. Under Code Sec. 401(a)(35)(A), a trust which is part of an applicable defined contribution plan isn't a Code Sec. 401(a) qualified trust unless the plan satisfies certain diversification requirements set out in Code Sec. 401(a)(35)(B), (C), and (D). With certain exceptions, an applicable defined contribution plan under Code Sec. 401(a)(35) is a defined contribution plan that holds any publicly traded employer securities. A publicly traded employer security is defined as an employer security under Sec. 407(d)(1) of ERISA which is readily tradable on an established securities market.

In May of 2010, IRS issued final regs under Code Sec. 401(a)(35). Under Reg. §1.401(a)(35)-1(f)(5), a security is readily tradable on an established securities market if:

1. The security is traded on a national securities exchange that is registered under §6 of the Securities and Exchange Act of’34 (15 U.S.C. 78f); or

2. The security is both: (a) traded on a foreign national securities exchange that is officially recognized, sanctioned, or supervised by a governmental authority; and (b) deemed by the Securities and Exchange Commission (SEC) as having a “ready market” under SEC Rule 15c3-1 (17 CFR 240.15c3-1).

Whether a security is readily tradable on an established securities market may impact various other Code sections: Code Sec. 401(a)(22) (qualifications of a defined contribution plan); Code Sec. 401(a)(28)(C) (valuation for an employee stock ownership plan (ESOP) and a tax credit ESOP); Code Sec. 409(h)(1)(B) (right to require that an employer repurchase employer securities); Code Sec. 409(l) (definition of employer securities); and Code Sec. 1042(c)(1)(A) (nonrecognition sale of qualified securities to an ESOP or eligible worker-owned cooperative (EWOC)).

New guidance. Notice 2011-19 provides that 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 under Reg. §1.401(a)(35)-1(f)(5) for purposes of Code Sec. 401(a)(22); Code Sec. 401(a)(28)(C); Code Sec. 409(h)(1)(B); Code Sec. 409(l); and Code Sec. 1042(c)(1)(A).

Effective date. Notice 2011-19 is generally effective for plan years beginning on or after Jan. 1, 2012.

However, it's not effective until plan years beginning on or after Jan. 1, 2013 for any plan that is sponsored by an employer with respect to which, on Mar. 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 Reg. §1.401(a)(35)-1(f)(5)(ii)(A) (see (1), above), 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 Reg. §1.401(a)(35)-1(f)(5)(ii)(B) (see (2), above).

Taxpayers (including any employer sponsoring a plan described in the preceding sentence) can rely on this notice for periods after Mar. 14, 2011.

References: For publicly traded employer security, see FTC 2d/FIN ¶H-8071; United States Tax Reporter ¶4014.12.