The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) allows employers to deduct the value of dividends paid on company stock held in their ESOP plans.
Although employers must give participants the option to receive those dividends in cash to qualify for the deduction, it is available regardless of how many plan participants, if any, choose that option.
Prior to EGTRRA, dividends paid on stock in an ESOP were deductible only if they actually were paid out in cash.
“We have a bunch of those [changes] going on right now,” says Hewitt Associates retirement consultant Allen Steinberg. “The interest is substantial, particularly among large employers with an ongoing history of paying dividends, most of whom have built up a fair amount of stock in those plans.”
However, sponsors considering setting up such an ESOP must consider the cost of restructuring their 401(k) plans, which Steinberg estimates would be in the “tens of thousands of dollars” once the cost of educating participants about the change and processing their choices is taken into account.
Read the full story at Embracing the ESOP .