Non-404(k) dividends = nondeductible contributions?

[Guest Pennysaver]

If a company pays a non-404(k) dividend to an ESOP (so it is NOT deductible under IRC 404(k)), is it automatically a nondeductible contribution for 404(a) purposes?

Or is the non-404(k) dividend still a deductible contribution to the extent it does not exceed the limits under IRC 404(a)(3)?

[RLL]

It is not automatically a contribution ... deductible or non-deductible. A dividend is only treated as a contribution if it is recharacterized as such by the IRS under IRC section 415.

[Guest Pennysaver]

It is not automatically a contribution ... deductible or non-deductible. A dividend is only treated as a contribution if it is recharacterized as such by the IRS under IRC section 415.

Okay.... How exactly does the IRS effect such a recharacterization? What would prompt the IRS to do so?

[ESOP Guy]

Read about the wonderfully named "Steel Balls" court case on the topic.

http://www.nceo.org/main/column.php/id/321

[Guest Pennysaver]

Read about the wonderfully named "Steel Balls" court case on the topic.

http://www.nceo.org/main/column.php/id/321

Very helpful! Thanks, RLL and ESOP Guy!

[ESOP Guy]

For what it is worth this last April the NCEO conference an IRS rep talked about how the IRS would like to issue more guidence and crack down on the amount of dividends going into ESOPs.

This in my mind has could be a game changer in EOSPs. More and more companies want to go to 100% S Corp ESOP owned in one transaction. A number of projections I have both done and seen show the only way to pay the loan off is by putting in the max contribution and rather large dividend. They could make going from no ESOP to 100% owned ESOP harder in the future.