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Dividend Reinvestment Election

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Privately-owned C corp bank sponsors an ESOP and wants to give participants an election under Code Section 404(k)(2)(A)(iii) to reinvest cash dividends paid to the ESOP in shares of Bank stock.

All other issues aside, anyone have insight whether this will cause Bank stock to constitute a "designated investment alternative" under the ESOP for purposes of the 404a5 participant disclosure requirements? Based on a strict reading of the 404a5 regs it appears so - insofar as the ESOP is a "covered individual account plan" and the ability for a participant to direct dividends paid on shares in his account to be reinvested in Bank stock causes Bank stock to qualify as a participant-directed "designated investment alternative" (i.e., an investment alternative designated by the plan into which participants may direct the investment of assets held in, or contributed to, their individual accounts).

Any other thoughts out there?

Thanks in advance.

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I know some ERISA attorneys that would say "yes". They tend to be the more conservative ones I know who take the position advise people to operate their plan in the way that will always be the least likely to get you in trouble with the IRS or DOL.

There aren't many C Corp ESOPs around so there is less discussion and consensus regarding these types of issues.

What I can tell you is the very few (2 to be exact) C Corp ESOPs I worked on since these rules have been in place neither of them did those notices.

On a related note I have exactly one ESOP whose attorney took the position that because one of the options under the diversification rules was to stay in stock that was a participant directed choice/ As such we give the people a notice covering what it means to stay in the stock. The other two choices are go to the 401(k) plan or take cash. We give them a copy of the notices for the 401(k) plan along with the ESOP stock "choice" notice.

So based on my experience I would say as a general rule if you don't give notices you are doing what most people are doing. Does that mean the group is right? Obviously "no" but you would be in good company.

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