IRS Changes Reporting Requirements for Dividends on ESOP Distributions

June 10, 2008 ( - Beginning with distributions in 2009, the reporting of dividends on employer securities that are distributed from an employee stock ownership plan (ESOP) under section 404(k) of the Code must be on a Form 1099-R that does not report any other distributions.

According to Internal Revenue Service (IRS) Announcement 2008-56, if there are other distributions from the plan in such years that are not § 404(k) dividends, they must be reported on a separate Form 1099-R. The IRS anticipates that the instructions will require a special code in box 7 of the form to indicate the special tax treatment and rollover restrictions applicable to § 404(k) dividends.

The announcement said payments of § 404(k) dividends made directly from the corporation to the plan participants or their beneficiaries are reported on Form 1099-DIV in accordance with the instructions to that form.

The IRS explained that ESOP distributions that are § 404(k) dividends are not subject to the 10% additional tax under § 72, are not eligible rollover, are not subject to withholding under § 3405, and are not taken into account in determining if required minimum distributions have been made. For purposes of § 72, such distributions are treated as plan distributions paid from a contract that is separate from any other contract under the plan.

Announcement 85-168 provides that “to allow taxpayers using short Form 1040A to report this § 404(k) dividend income,” a plan must use Form 1099-DIV. The current announcement revokes announcement 85-168.

Announcement 2008-56 is here .