Allocation of cash dividends in an ESOP

[Guest pgkramm]

The ESOP provides only for an annual valuation but cash dividends on the employer stock are paid during the year. Must those cash dividends be allocated when paid to the Trust (and thereby creating more frequent valuations than provided by the document)?

[Guest eafredel]

The fact that cash dividends are paid during the year (e.g., quarterly) does not mean that the employer stock held by the plan must be revalued simultaneously. The stock needs to be valued at least once per year, unless the plan provides otherwise (your post says it requires only annual valuations) or the law otherwise requires an updated valuation (e.g, the purchase of stock from a party in interest). Even though you are valuing employer stock on an annual basis or providing statements to participants on an annual basis, you may want to allocate (e.g., credit accounts in a bookkeeping sense) the dividends as they are made. You should check your plan document to see when allocations must be made. This may depend on whether the dividends are being used to repay an ESOP loan.

[BeckyMiller]

Document, document, document. The first place to go with these questions is the plan document. Most private company ESOPs provide for the allocation of all trust activity as of a single, year-end date. (This is not always true, so you need to look at the document.) This is because of the valuation requirement. Few private companies are willing to deal with the complexities of valuing the shares more frequently than annually.

Trust activity occurs through the year - contributions are made, distributions paid, debt service made, dividends received, other investment activity received, etc. Typically, all of this is summarized at year-end and allocated according to plan terms.

In this world where the most common plan seems to be a daily valued 401(k) plan, I realize this seems archaic. But, it is typical of ESOPs and, when properly done, satisfies the IRC and ERISA standards.