ESOPs are not required to invest exclusively in company stock; many ESOPs have substantial investments in cash or other securities. However, ESOPs normally have more than half their assets invested in company stock.
In addition, ESOP participants who are approaching retirement age must be given an opportunity to diversify their ESOP accounts. 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 service of participation in the ESOP with an annual option to diversify 25 percent of his or her ESOP account into investments other than company stock for five years. In the sixth year, the participant must be given a one-time option to diversify up to 50 percent of his or her account.
At least three investment options must be offered within the ESOP to meet the diversification requirements. Alternatively, the ESOP may transfer assets to another qualified plan, or make a distribution directly to the participant to satisfy the diversification requirements.
SES ESOP Strategies’ ESOP services can help ensure that your ESOP addresses reporting and compliance requirements.