Investing Dividends in Non-Stock Assets

[Alf]

Ok, applicable dividends are paid to the ESOP and reivested in qualifying employer securities pursuant to 404(k)(2)(A)(iii). Is there any guidance on how long they have to remain invested in the stock if the ESOP has a 401(k) feature with mutual fund investments and employees want to diversify the dividends? In a 55/10 diversification situation, does anyone know how the diversification requirement and the reinvestment of applicable dividends in stock requirement coordinate?

[BeckyMiller]

Have you looked at the legislative history or the guidance that the Service issued when the law changed to allowed the participant to elect to take cash or have the dividends reinvested? I don't recall that this matter was addressed.

But, it would seem clear that the qualification issue for diversification should trump this language. Thus, the shares are allocated and in the following diversification election period, if the participant is eligible to diversify, these shares should be included in the pool of stock eligible for diversification.

See Notice 2002-2. This discusses the concept that the dividend deduction is not available until the participants election becomes irrevocable.... But, I can't imagine that means that they can't ever switch out of stock.

I guess I am hoping that one of the other ESOP folks would chime in here....

[stephen]

RLL or Kirk are you out there...

[Kirk Maldonado]

The statutory language says that an ESOP is DESIGNED to be invested primarily in employer stock.

It does NOT say the assets of the ESOP must actually be primarily invested in employer stock.

[Guest KB]

Our plan is (actually, was) a combination 401k/ESOP with a dividend pass-through feature. We allowed participants age 55/5 years of service to diversify all or part of their ESOP balances (contributions and all earnings/dividends), either to other investment funds within the plan or as a withdrawal from the plan. You may be dealing with a smaller plan, but our plan has some 8500 participants. Approximately 70% of our plan was invested in employer securities so we were not too concerned about a majority of the plan not being invested primarily in employer securities and not maintaining its ESOPness.