Dividends used to pay ESOP loan

[Guest John Nelson]

Employer has paid cash dividends to ESOP, which ESOP has used to make payments on ESOP loan. In accordance with IRC 404(k)(2)(B), shares of company stock having fair market value equal to the amount of the dividend paid on allocated shares are allocated to participants.

Problem: Fair market value of shares has declined. Therefore, more shares are being allocated to participants' accounts this year than would be the case if shares were only being released and allocated based on normal amortization of the ESOP note. As a result, the ESOP debt is now more than the current fmv of the collateral shares in the suspense account, which means that the fmv of the shares allocated to the participants' accounts is now more than the "net" value of the plan assets. (Net value meaning "assets minus liabilities".)

The ESOP administrator is asking how to report this on the Form 5500? The problem is that the ESOP debt is greater than the value of the shares in the suspense account.

Any thoughts? Thank you.