Allocation of dividends on unallocated stock

[Guest MikeD]

I have the following situation:

ESOP started in 2004. For the 2004 stock was released from the suspense account and allocated among participants. In 2005, a dividend was declared. The document states that dividends on allocated stock are allocated based on stock account balance and that dividends on unallocated stock are allocated based on account balance in the "other investments" account. There are no participants with an "other investments" account balance, as all of the accounts consist solely of company stock.

Does anyone have an idea of how to proceed with the allocation of the dividends on the unallocated stock? Since the terms of the Plan do not address what to do if there are no account balances in "other investments," could the Plan be amended now to address the way in which those dividends will be handled?

Thanks!

[BeckyMiller]

First, I would check with legal counsel on the plan language. Was this intentional? Is there room to correct the language at this time? Does the Plan Administrator have any authority to determine the allocation method in this case.

Second, realize that the nondiscrimination regulations provide that the exclusion from allocation testing for earnings is limited to "...allocations of income, expenses, gains, and losses attributable to the balance in an employee's account are not taken into account in determining allocation rates." 1.401(a)(4)-2©(2)(iii). In response to a question at the hearings on the proposed regulations, the IRS stated that the allocation of earnings attributable to unallocated shares in an ESOP would be included in allocations subject to nondiscrimination testing. Thus, they must be tested against compensation for nondiscrimination purposes.

Because of this, many plans aggregate the dividend on collateral with the employer contribution to determine a participant's share. But, not all plan advisors agree with this interpretation of the language.

Does the plan have a determination letter?