[Code of Federal Regulations]
[Title 29, Volume 9]
[Revised as of July 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 29CFR2550.407a-2]

[Page 498-499]
 
                             TITLE 29--LABOR
 
 CHAPTER XXV--EMPLOYEE BENEFITS SECURITY ADMINISTRATION, DEPARTMENT OF 
                                  LABOR
 
PART 2550_RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
--Table of Contents
 
Sec. 2550.407a-2  Limitation with respect to the acquisition of 
qualifying employer securities and qualifying employer real property.

    (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

[[Page 499]]

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 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]