Who is required to be eligible to diversify holdings in an ESOP account?

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Anyone with 10 years or more of participation in the plan (defined as the ESOP or a predecessor plan whose assets were transferred to the ESOP) and who is 55 years or older must be eligible to diversify shares. For instance, say an employee reaches age 55 when she has eight years in the plan. She is eligible when she is 57 and now has 10 years of plan participation. Five years after the first diversification election, participants can diversify up to 50% of their shares. There is no election after that for further diversification. In our example, the employee would be eligible to diversify 50% at age 62.Once employees meet the diversification criteria, they can diversify up to 25% of the shares in their account balance each year for five years. This is cumulative, so if the employee diversifies 25% in year one, they can only diversify 25% of any additional shares in each subsequent year. If they do not diversify all or part of what they are eligible to diversify, they can make up the difference in the following elections. The 50% diversification includes prior diversification. Companies can diversify by paying the employee out (although this will trigger a 10% penalty tax plus income tax), providing the employee at least three prudent investment choices in the ESOP, or (and this is the most common approach) moving the money into a 401(k) plan.Companies can be more generous than the required diversification by allowing either earlier or larger diversification or both and/or changing the criteria to years of employment, not years in the plan. This can be done on a regular basis or as a one-off or periodic offer.For details on diversification, see The ESOP Repurchase Obligation Handbook.