Allocating Dividends

[Lori H]

In order to make distributions to terminated participants, the company purchased stock from the plan. The stock paid dividends during the first month of the plan year. Would dividends be paid to terminated participants who received a total distribution of their 12-31-09 account balance? Doing this would mean they are still participants with very small account balances.

If dividends are allocated to participants of record at the boy minus those that received a distribution then how can the excess be handled?

[ESOP Guy]

This is one of those items where you need to read the document and the wording of the dividend board resolution carefully. The board resolution should tell you on what date you needed to own the shares in order to receive the dividend. (Yes, I understand that the ESOP owns the shares, but that date is good to use for allocating in an account.) The document will tell you the order of allocation.

As for the "orphan dividends" I have never seen a plan document address that issue. In most cases the plan's attorney will be comfortable with the Plan Administrator using their discretion as long as it is reasonable and nondiscriminatory.

Most of my plans just allocate the "orphan dividends" at the end of the plan year to everyone. It should not yield a material difference from a quarterly allocation if the plan pays quarterly.

I would check any method with the plan attorney to make sure they are comfortable defending that method. ESOPs get audited more than other plans.

[RLL]

This is one of those items where you need to read the document and the wording of the dividend board resolution carefully. The board resolution should tell you on what date you needed to own the shares in order to receive the dividend. (Yes, I understand that the ESOP owns the shares, but that date is good to use for allocating in an account.) The document will tell you the order of allocation.

As for the "orphan dividends" I have never seen a plan document address that issue. In most cases the plan's attorney will be comfortable with the Plan Administrator using their discretion as long as it is reasonable and nondiscriminatory.

Most of my plans just allocate the "orphan dividends" at the end of the plan year to everyone. It should not yield a material difference from a quarterly allocation if the plan pays quarterly.

I would check any method with the plan attorney to make sure they are comfortable defending that method. ESOPs get audited more than other plans.

Shouldn't the plan document be amended to clarify the manner in which the dividends will be allocated?

[Lori H]

I have read in the ESOP Answer Book that employees who terminate employment after the record date of the dividend will receive divdend payments, even if they already have recieved their account distributions. However, if the distribution occurs before the record date, they will not.