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ESOP lump sum distribution - 20% withholding required?


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I work with 401k plans, but I have a client who also has an ESOP. He has a participant who has requested a lump sum distribuion and has inquired about how to remit the 20% required federal income taxes. I thought I read somewhere that the 20% withholding was not required for ESOP distributions. Or was that just for dividends?

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The witholding rules are the same with an ESOP and 401(k)s except:

1) As you say the dividends aren't distribution so the rules don't apply

2) If they take a distrbution of SHARES you only have to withhold up to the amount of cash also being distributed.

example:

A is taking a distribution of 100 shares of stock worth $9,000 and is getting $1,000 in cash for a total of $10,000. Normally you would withhold $2,000. In this case you would withhold the $1,000. Or put another way you don't have to sell shares to cover withholding.

But if the shares are staying in the plan and they are taking only cash from the ESOP withhold 20%.

So how the distribution is being done is very important.

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