Dividends included in annual additions?

[RLL]

Hi mspencer! Welcome to the ESOP message board.

Under IRC Section 415©(2), "annual additions" is defined to include employer contributions, forfeitures and employee contributions.....although Section 415©(6) excludes certain contributions and forfeitures in the case of a leveraged ESOP. Dividends on employer stock owned by an ESOP constitute earnings on trust assets, and such earnings are not "annual additions" under the IRC.

However, the IRS regulations under Section 415©, at Reg. Sec. 1.415-6(B), provide that certain transactions between an employer and a plan may give rise to annual additions. This would apply to dividends only in an extraordinary circumstance when the IRS could "recharacterize" certain dividends as employer contributions. For example, if the ESOP were the only holder of a certain class of employer stock and an extraordinary amount of dividends were paid on that class, this may be an appropriate circumstance for such a recharacterization. The IRS would have to establish that the dividends were designed as a means to avoid the Section 415© limitation.

If the dividends are "reasonable" in amount and/or if the ESOP is not the only shareholder receiving such dividends, the dividends cannot be recharacterized as "annual additions" under Section 415©(2).

[Guest mspencer]

ESOP with dividends used to repay loan; two allocations: 1)dividends paid on shares already allocated to participant accounts are used to release shares equivalent in value to the dividend, and those shares are allocated prorata based on allocated share balances. These dividends I understand are not included in annual additions for 415 purposes.

2) Dividends remaining after first allocation are used to release shares which are allocated to participant accounts prorata based on participant compensation. Are the dividends used in this allocation included in annual additions for 415 purposes? I can't find anything in the code or regs that give me the guidance I need.