n-11-19.pdf

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Part III –Administrative, Procedural and Miscellaneous
Definition of Readily Tradable On An Established Securities Market
Notice 2011-19
Purpose
This notice provides guidance regarding when securities of the employer
are readily tradable on an established securities market or readily tradable on an
established market for purposes of certain provisions of the Internal Revenue
Code relating to employer securities held by certain qualified retirement plans.
Background
Section 4975(e)(7) defines an employee stock ownership plan (ESOP) as
a defined contribution plan (1) which is a stock bonus plan which is qualified
under § 401(a), or a stock bonus and a money purchase plan both of which are
qualified under § 401(a), and which are designed to invest primarily in qualifying
employer securities as defined in §4975(e)(8), and (2) which is otherwise defined
in regulations prescribed by the Secretary. Section 4975(e)(7) also states that an
employee stock ownership plan must satisfy certain requirements in §409,
including the requirements of § 409(h). In addition, §401(a)(23) generally
provides that a stock bonus plan is not a qualified plan under §401(a) unless the
plan meets certain requirements, including the requirements of §409(h).
Section 401(a)(22) generally provides that a defined contribution plan
(other than a profit sharing plan) must meet the requirements of §409(e) (which
relates to passthrough of voting rights) if it is established by an employer whose
stock is not readily tradable on an established market, and after acquiring

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securities of the employer, more than 10 percent of the total assets of the plan
are securities of the employer.
Section 409(h) provides generally that a plan satisfies the requirements
of §409(h) if the plan offers a participant who is entitled to a distribution the right
to demand payment in the form of employer securities and, if the employer
securities are not readily tradable on an established market, the participant must
also have the right to require that the employer repurchase the employer
securities under a fair valuation formula (put option).
Section 401(a)(35)(A) provides that a trust which is part of an applicable
defined contribution plan is not a qualified trust under §401(a) unless the plan
satisfies certain diversification requirements set forth in §401(a)(35)(B), (C), and
(D). Subject to certain exceptions, an applicable defined contribution plan under
§401(a)(35) is a defined contribution plan that holds any publicly traded employer
securities. A publicly traded employer security is defined in §401(a)(35)(G)(v) as
an employer security under section 407(d)(1) of ERISA which is readily tradable
on an established securities market.
Section 401(a)(28) provides that an ESOP, and a tax credit employee
stock ownership plan under §409(a), is not a qualified plan under §401(a) unless
the plan meets the requirements of §401(a)(28)(B) and (C). Section
401(a)(28)(B) imposes certain diversification requirements with respect to certain
participants. Section 401(a)(28)(B) was amended by the Pension Protection Act
of 2006, Pub. L. 109-280, 120 Stat. 780 (PPA ’06) to not apply to a plan to which
§401(a)(35) applies. For employer securities that are not readily tradable on an

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established securities market, §401(a)(28)(C) requires all valuations with respect
to activities carried on by the plan to be made by an independent appraiser that
meets requirements similar to the requirements of regulations under §170(a)(1).
Section 404(k) generally permits an income tax deduction for the amount
of any applicable dividend paid in cash by a C corporation with respect to
applicable employer securities. For this purpose, applicable employer securities
are generally defined to mean employer securities as defined in §409(l) held by
an ESOP.
Section 4975(e)(8), as amended by the Technical Corrections Act of 1979,
P.L. 96-22 (1980), provides that qualifying employer securities must meet the
definition set forth in §409(l). Section 409(l)(1) defines employer securities as
common stock issued by the employer (or by a corporation that is a member of
the same controlled group) which is readily tradable on an established securities
market and provides special rules for an employer that has no class of stock
which is readily tradable on an established securities market. In the absence of
any guidance of general applicability, some plans may have applied the definition
of “publicly traded” at §54.4975-7(b)(1)(iv) of the Excise Tax Regulations (issued
before enactment of the Technical Corrections Act of 1979) to determine whether
employer securities are readily tradable on an established securities market
within the meaning of §409(l)(1).
Section 1042 generally provides that, if the taxpayer or executor so elects,
gain on the sale of qualified employer securities which would be recognized as
long-term capital gain is recognized only to the extent the gain exceeds the cost

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of qualified replacement property acquired within the replacement period. This
treatment applies only if the sale is to an ESOP or eligible worker-owned
cooperative that holds at least 30 percent of the corporation’s stock after the
sale, and various other conditions in §1042(b) are satisfied. In addition, under
§1042(c), the only securities eligible for this treatment are employer securities
defined under §409(l) and issued by a domestic C corporation that has no stock
outstanding that is readily tradable on an established securities market.
Final regulations under §401(a)(35) were issued on May 18, 2010 (75 FR
27927). Under §1.401(a)(35)-1(f)(5), a security is readily tradable on an
established securities market if the security is traded on a national securities
exchange that is registered under section 6 of the Securities Exchange Act of
1934 (15 U.S.C. 78f). The regulations also treat a security as readily tradable on
an established securities market if the security is traded on a foreign national
securities exchange that is officially recognized, sanctioned, or supervised by a
governmental authority and where the security is deemed by the Securities and
Exchange Commission (SEC) as having a ready market under SEC Rule 15c3-1
(17 CFR 240.15c3-1). Under the current SEC rules, a security that is included on
the FTSE Group (FTSE) All-World Index is deemed to have a ready market.
Section 1.401(a)(35)-1 is effective for plan years beginning on or after January 1,
2011.
Readily tradable on an established securities market or established market
Under this notice, the terms readily tradable on an established securities
market and readily tradable on an established market, with respect to employer

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securities, each mean employer securities that are readily tradable on an
established securities market within the meaning of §1.401(a)(35)-1(f)(5) for
purposes of the following provisions: (1) §401(a)(22); (2) §401(a)(28)(C); (3)
§409(h)(1)(B); (4) §409(l); and (5) § 1042(c)(1)(A).
Effective Date
This notice is effective for plan years beginning on or after January 1,
2012. However, this notice is not effective until plan years beginning on or after
January 1, 2013 for any plan that is sponsored by an employer with respect to
which, on March 14, 2011, neither the employer nor any member of its controlled
group (within the meaning of § 409(l)) has any common stock that is readily
tradable on an established securities market within the meaning of §1.401(a)(35)-
(1)(f)(5)(A) (relating to securities that are traded on a national securities
exchange that is registered under section 6 of the Securities Exchange Act of
1934), 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
§1.401(a)(35)-(1)(f)(5)(B) (relating to securities that are traded on a foreign
national securities exchange that is officially recognized, sanctioned, or
supervised by a governmental authority and is deemed by the SEC as having a
“ready market” under SEC Rule 15c3-1, within the meaning of §1.401(a)(35)-
(1)(f)(5)(B)). Taxpayers (including any employer sponsoring a plan described in
the preceding sentence) can rely on this notice for periods after March 14, 2011.
Drafting Information:

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The principal author of this notice is Robert Gertner of the Employee Plans, Tax
Exempt and Government Entities Division. For further information regarding this
notice, please contact the Employee Plans taxpayer assistance answering
service at 1-877-829-5500 (a toll-free number) or e-mail Mr. Gertner at
RetirementPlanQuestions@irs.gov.