(a) In general. Section 407(a)(2) of the Employee Retirement Income
Security Act of 1974 (the Act) provides that a plan may not acquire any
qualifying employer security or qualifying employer real property, if
immediately after such acquisition the aggregate fair market value of
qualifying employer securities and qualifying employer real property
held by the plan exceeds 10 percent of the fair market value of the
assets of the plan.
(b) Acquisition. For pusposes of section 407(a) of the Act, an
acquisition by a plan of qualifying employer securities or qualifying
employer real property shall include, but not be limited to, an
acquisition by purchase, by the exchange of plan assets, by the exercise
of warrants or rights, by the conversion of a security (except any
acquisition pursuant to a conversion exempt under section 408(b)(7) of
the Act), by default of a loan where the qualifying employer security or
qualifying employer real property was security for the loan, or by the
contribution of such securities or real property to the plan. However,
an acquisition of a security shall not be deemed to have occured if a
plan acquires the security as a result of a stock dividend or stock
split.
(c) Fair market value--Indebtedness incurred in connection with the
acquisition of a plan asset. In determining whether a plan is in
compliance with the limitation on the acquisition of qualifying employer
securities and qualifying employer real property in section 407(a)(2),
the limitation on the holding of qualifying employer securities and
qualifying employer real property in section 407(a)(3) and Sec.
2550.407a-3 thereunder, and the requirement regarding the disposition of
employer securities and employer real property in section 407(a)(4) and
Sec. 2550.407a-4 thereunder, the fair market value of total plan assets
shall be the fair market value of such assets less the unpaid amount of:
(1) Any indebtedness incurred by the plan in acquiring such assets;
(2) Any indebtedness incurred before the acquisition of such assets
if such indebtedness would not have been incurred but for such
acquisition; and
(3) Any indebtedness incurred after the acquisition of such assets
if such indebtedness would not have been incurred but for such
acquisition and the incurrence of such indebtedness was reasonably
foreseeable at the time of such acquisition. However, the fair market
value of qualifying employer securities and qualifying employer real
property shall be the fair market value of such assets without any
reduction for the unpaid amount of any indebtedness incurred by the plan
in connection with the acquisition of such employer securities and
employer real property.
(d) Examples. (1) Plan assets have a fair market value of $100,000.
The plan has no liabilities other than liabilities for vested benefits
of participants and does not own any employer securities or employer
real property. The plan
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proposes to acquire qualifying employer securities with a fair market
value of $10,000 by paying $1,000 in cash and borrowing $9,000. The fair
market value of plan assets would be $100,000 ($100,000 of plan assets
less $1,000 cash payment plus $10,000 of employer securities less $9,000
indebtedness), the fair market value of the qualifying employer
securities would be $10,000, which is 10 percent of the fair market
value of plan assets. Accordingly, the acquisition would not contravene
section 407(a).
(2) Plan assets have a fair market value of $100,000. The plan has
liabilities of $20,000 which were incurred in connection with the
acquisition of those assets, and does not own any employer securities or
employer real property. The plan proposes to pay cash for qualifying
employer securities with a fair market value of $10,000. The fair market
value of plan assets would be $80,000 ($100,000 of plan assets less
$10,000 cash payment plus $10,000 of employer securities less $20,000
indebtedness), the fair market value of the qualifying employer
securities would be $10,000, which is 12.5 percent of the fair market
value of plan assets. Accordingly, the acquisition would contravene
section 407(a).
[42 FR 47201, Sept. 20, 1977]
