ESOPs are required to provide participants age 55 and older with 10 years of participation (as defined by the plan or other administrative document) the option to diversify a portion of their company stock.  They are eligible to diversify 25% of their shares during the first five years of eligibility and 50% in the sixth and final year.

A notice informing the participants eligible for diversification of their rights must be provided to participants no later than 90 days after the end of the plan year:

• If the allocation is final, you can send a final diversification disclosure to the participant (that will include the final amounts eligible to be diversified), and you will have satisfied the requirements. 
  
• If the allocation is not completed, then you must send a preliminary disclosure (which does not need to include the amount eligible to diversify) no later than 90 days after the end of the plan year and a final diversification disclosure no later than 180 days after the end of the plan year.  In some cases, the final allocation balances are still not known 180 days after the end of the plan year.  While there is no formal guidance, I am not aware of any plans that have experienced any problems when they have sent the final diversification disclosures as soon as administratively feasible after receiving the final amounts eligible to diversify. 

Both disclosures should solicit an election on whether or not the participant is interested in taking a diversification distribution.  You should collect a response from all participants to ensure that you have additional documentation to further demonstrate compliance.  The preliminary election should be considered nonbinding, and the final election accompanied with a completed distribution form would instruct the plan to process a diversification payment.

For more information about diversification, please check out the distributions installment (page 4) of the ESOP Planning section.