ESOP Annual Addition

[ERISA25]

I first should disclose that I know very little about ESOPs, so some follow-up qs may help. In connection with a refinancing, a company made a special allocation that was funded from unallocated dividends, cash, and forfeitures. The allocation was made to induce the trustee to do the refinancing. I am curious as to whether the amount of the special contribution that is funded from unallocated dividends and forfeitures is considered annual additions? Any thoughts or citations that can point me in the right direction?

[JRN]

Forfeitures certainly count as "annual additions". Dividends are "earnings" and, as such, do not count as "annual additions". But, I question whether you can have unallocated dividends? Presumably, you are referring to dividends that were paid to the ESOP on unallocated shares held by the ESOP in the suspense account. But, I think these dividends are "earnings" that have to be allocated in the year paid.

[Marcus R Piquet]

Caveat - it is possible for some of the reallocated forfeitures to be excluded from Annual Additions. See IRC §415©(6), the "one-third rule," pasted below:

(6) Special rule for employee stock ownership plans.

If no more than one-third of the employer contributions to an employee stock ownership plan (as described in section 4975(e)(7) ) for a year which are deductible under paragraph (9) of section 404(a) are allocated to highly compensated employees (within the meaning of section 414(q) ), the limitations imposed by this section shall not apply to—

(A) forfeitures of employer securities (within the meaning of section 409 ) under such an employee stock ownership plan if such securities were acquired with the proceeds of a loan (as described in section 404(a)(9)(A) ), or

(B) employer contributions to such an employee stock ownership plan which are deductible under section 404(a)(9)(B) and charged against the participant's account.

The amount of any qualified gratuitous transfer (as defined in section 664(g)(1) ) allocated to a participant for any limitation year shall not exceed the limitations imposed by this section , but such amount shall not be taken into account in determining whether any other amount exceeds the limitations imposed by this section.