What employer stock can be held by a qualified retirement plan

ERISA generally does not limit the type of employer stock that may be held by a qualified retirement plan. The Internal Revenue Code specifies the type of employer stock that may be held by an ESOP.

Under ERISA, a qualified retirement plan may hold only a "qualifying employer security." Any stock issued by the employer or an affiliate of the employer is a qualifying employer security. In the case of a defined benefit plan (and money purchase pension plans other than certain pre-ERISA plans), in order for stock to be a qualifying employer security, the plan cannot hold more than 25 percent of the aggregate amount of the issued and outstanding stock of the same class, and at least 50 percent of the aggregate amount of that stock must be held by persons independent of the issuer.

Under ERISA, qualifying employer securities also include certain publicly traded partnership interests and certain marketable obligations (i.e., a bond, debenture, note, certificate or other evidence of indebtedness). For purposes of ESOP investments, employer stock (referred to as "employer securities" or a "qualifying employer security") is defined in the Internal Revenue Code to mean only:

     a.     publicly traded common stock of the employer or a member of the same controlled group;

     b.     if there is no such publicly traded common stock, common stock of the employer (or member of the same controlled group) that has both voting power and dividend rights at least as great as any other class of common stock; or

     c.     non-callable preferred stock that is convertible into common stock described in (a) or (b) and that meets certain requirements. In some cases, an employer may design a class of preferred stock that meets these requirements and that is held only by the ESOP.