401k plan with employer stock

[Guest bostonborn]

I have a k plan that offers employer stock as an investment option (not an esop). If the employer pays a dividend on the stock, would the dividend have to be tested like a contribution, or is it earnings?

and, if the employees automatically reinvest the dividends, is that a contribution subject to ADP testing?

Thanks

[Kirk Maldonado]

What does the plan say?

[Guest bostonborn]

Nothing specifically that I can find (its a Corbel). There is a section that talks about employer securities, but only about diversification limits. And in the investment powers section, I can find info about voting proxies. But nothing specifically that helps me here...

Now I am thinking, do we have to give participants the opportunity to invest these dividends however they want? Or can the plan sponsor direct that all dividends in this fund are to be reinvested?

[MWeddell]

The dividend is regarded as investment earnings, not a contribution.

The fact that it is not an ESOP means that the dividends on employer stock may not be passed through to participants under Code Section 404(k) and hence that these distributions generally would violate the 401(k) distribution restrictions because there hasn't been a distributable event.

[Guest bostonborn]

Thank you.

So that means, if they cannot be passed through to participants, that the employer (fiduciary) on this plan would make it part of the document that all dividends on the stock are reinvested in the stock...and the participants would not be given investment direction on the dividend?

[MWeddell]

It's definitely investment earnings. Typically dividends in employer stock are reinvested in employer stock, but I have seen plan documents that invest those dividends elsewhere (such as a money market fund).

[Guest bostonborn]

Thanks so much.