Dividends on Allocated Stock Used for Repayment of Loan

[Guest MEvans_API]

Ok, so I'm crying uncle in trying to find the correct way to do this. Any ESOP Experts out there???? Please chime in.

Cash Dividends were used to pay down a leveraged loan. The split between the two are approx 6% allocated and 94% unallocated. Using round numbers, the Employer made a $100,000 dividend payment. So naturally $6,000 would be for the allocated shares and $94,000 for the unallocated shares. Shewwww I can do math!

So doing the FMV calculation, we find that the shares value based on the day before the loan payment is greater than the FMV on the date the dividends were declared. So no adjustments necessary. Shewwww again!

So we move on to the share release. The loan payments paid with cash and unallocated dividends are released on proata compensation (according to the document). Easy Peasy....Shewww!

The allocated dividend shares are to be released on prorata shares. OHHH crap. So my question is this.....

Is the actual transaction a contribution or is it a dividend or just a transfer in? No where (that I can find) tells you exactly how the transaction should be structured from a recordkeeping endeavor. HELP!!!!

[ESOP Guy]

The transaction related to the allocated shares is a dividend payment to the plan. The dividends then pay the loan and release shares.

Since it is a dividend those amounts and shares don't count as annual additions like any other dividend for example.

On the FMV test I am unsure about your description. The value of the shares released by JUST the dividend from the allocated share must be worth more then the cash value of the dividend.

In your example the shares from JUST the dividend from the allocated shares released have to be worth >$6,000

Also just to be clear it helps to think of your example as having 3 parts:

1) Contribution that is used to pay the loan and release shares.

2) Dividends on unallocated shares that are used to release shares (The dollars in both #1 and #2 are allocated on compensation which will result in the shares allocated on comp)

3) Dividends on allocated share that are used to release shares (The dollars are allocated pro rata on share balances)

The amounts in #2 and #3 are dividends and are treated as such for testing. So both #2 and #3 are not annual additions for example. The amounts don't count for deduction limit.

Hope that helps.

Edit to fix typos and make it a little more clear

[ESOP Guy]

To be more clear as I did in the edits above also: (My first version was vague I guess that is the price you pay by writing late at night)

The FMV test is this:

The shares release because of the loan payment from JUST the allocated share's dividend must be worth more then that dividend.

So if the allocated dividend's are $6,000 then compared to the shares release by that $6,000 payment must be worth at least $6,000.