Dividends in ESOP within 401(k) Plan

[RCK]

Like many other larger 401(k) plans, we have recently converted the company stock fund within our plan to an ESOP to make the dividend payments deductible. And as part of that process we have to give the participants the option of receiving their dividends in cash instead of being automatically reinvested in their accounts.

We have just completed the first quarterly process under these rules and 75 of the checks were for less than $1. My question is whether we can apply a deminimus limit on those cash distributions without jeopardizing the deductibility of the dividends.

[Guest GoldenBear03]

Like many other larger 401(k) plans, we have recently converted the company stock fund within our plan to an ESOP to make the dividend payments deductible. And as part of that process we have to give the participants the option of receiving their dividends in cash instead of being automatically reinvested in their accounts.

We have just completed the first quarterly process under these rules and 75 of the checks were for less than $1. My question is whether we can apply a deminimus limit on those cash distributions without jeopardizing the deductibility of the dividends.

A 1099 is only issued when a distribution totals $10 or greater.

[WDIK]

Some observations:

1) It appears that GoldenBear03 may have misunderstood the original post, as the followup post, while true, does not appear to address RCK's question.

2) IRC Section 404(k) and 1.404(k)-1T do not seem to provide a deminimus exception to the deductibility rules (but I must admit that I don't know for certain if the issue is addressed elsewhere).

3) It is my understanding that the timing required for distribution to the participants is "not later than 90 days after the close of the plan year in which paid," so perhaps annual rather than quarterly payments could be considered.

[RCK]

WDIK--I now know what you do know.

You appear to be correct on all three points:

1. GoldenBear03 is indeed off the mark--the question is not whether we have to issue the 1099, it is whether we have to issue the check in the first place.

2. I have not found an out anywhere else either.

3. I think that you're right on the timing issue. If so, we will roll up the smaller ldistributions and make the actual distributions on an annual basis.