Are ESOP Accounts Required to Be Fully Invested in Company Stock?

ESOPs are not required to invest exclusively in company stock; many ESOPs have substantial investments in cash or other securities. However, ESOPs must be “designed” to invest primarily in company stock that constitutes “qualifying employer securities,” which means voting common stock or certain types of convertible preferred stock.

In addition, ESOP participants who are approaching retirement age must be given an opportunity to diversify their ESOP accounts out of company stock. For shares acquired by an ESOP after December 31, 1986, the ESOP must provide any participant who has attained age 55 and completed 10 or more years of participation in the ESOP with an annual option during a 5-year period to diversify 25 percent of his or her ESOP shares into investments other than company stock. In the sixth year, the participant must be given a one-time option to diversify up to 50 percent of his or her shares.

At least three investment options must be offered within the ESOP to meet the diversification requirements. Alternatively, the ESOP may satisfy the diversification requirements by transferring cash to another qualified plan with three or more participant directed investment options, or by making a distribution directly to the participant.