Dividends on unallocated shares

[Guest JM123]

Dividends paid on unallocated shares which are not used to repay an associated exempt loan may be allocated as provided in the plan, subect to other qualification rules. Rev. Rul 80-155 would appear to indicate that such earnings would need to be allocated to participant accounts if not used to repay the loan or passed through to participants. Has anyone had this issue come up and, if so, did you arrive at the same conclusion?

A related question is whether the dividend paid on unallocated shares that's allocated to participant accounts (however the plan provides) is considered an employer contribution and annual addition for purposes of 415, or an allocation of trust investment earnings that does not result in an annual addition.

[ESOP Guy]

The 415 question is the easy question. Dividends are never Annual Additions regardless of how they are used.

I don't recall ever seeing dividends on unallocated shares being passed through. I have to admit I don't recall ever researching the question. It seems like all I recall ever seeing is pay the loan or allocated to the participants. I am doing this from memory. But as you say the document should tell you how to do it every time. I know I have never seen a dividend allocation that wasn't spelled out in great detail in the document.

[Marcus R Piquet]

I agree with ESOP Guy with respect to 415. If you want to read up on it, see §415©(2), Regs 1.415-6(b)(2), CB Notice 2002-2 Q&A 6, and PLR 200243055.

It's nearly universally accepted that dividends paid on unallocated shares must be currently allocated to participants (or passed through). I recently helped a client go through a VCP filing because they had neglected to allocate these dividends to participant accounts but simply held them in "suspense" along with the shares to which they relate.

I know of one ESOP attorney with a contrary opinion, who believes that these dividends should be able to be held in suspense, and allocated to participants when the corresponding shares are released and allocated. Let me know if you want me to put you in touch with him.

[QDROphile]

Unless there is more to tell, you could not use VCP with respect to the circumstances unless the IRS believes that holding dividends in suspense with the stock is a failure. Maybe you could tell us more.