Tax question on LESOP's

[Hokie]

I own stock in a LESOP plan of a former employer. I receive the dividends quarterly and pay tax on these as ordinary income. Last year the company declared a large special dividend in addition to the regular dividend. I received a pretty substantial check and they withheld no tax from it. Now it is really biting me on income taxes. Could I have done an IRA rollover with this dividend? The 1099-DIV form indicated that the dividend was a non-qualified dividend. This means I pay tax at the same rate as ordinary income and do not get the special lower rate for qualified dividends.

[A HERETIC I AM]

1. If it was Non-Qualified, you couldn't have rolled it into an IRA

Without seeing the details of the plan it is difficult to know the details (obviously) but Employee Stock Ownership Plans are qualified plans. The L (for the benefit of those unfamiliar with LESOP's) stands for "Leveraged". This means the company borrowed the money to fund the plan and is paying back the loan with Employee contributions.

I am curious if you had the option of reinvesting your quarterly dividend checks and thus keeping all the money under the qualified umbrella.

My experience with ESOP plans is that many companies won't allow what is known as a "Transfer in kind" into an IRA. What that basically means is you can not open an IRA and transfer the shares into that IRA through a rollover. What many ESOPs require is you either have to liquidate the shares and they send you a check or they physically send you the stock certificates. You will only get certificates if the company is publicly traded. (If they are private or "closely held" you will only get a check. After all, who is going to trade untrade-able shares with you?) If the latter happens and you open an IRA with them, the firm where your IRA is will then take the share certificates and convert them to "Street Name" at which point they become much more liquid ie: easily trade-able.

Your ESOP is a tax qualified plan (if it isn't, it is a rare bird indeed) and is able to be rolled into an IRA. You just have one more hoop to jump through, the acquiring of the check or the certificates. If you do want to effect a rollover (and if you are no longer there, this is probably the best idea) open the IRA first. You would want to make sure any check issued to you by the ESOP states "FBO Hokie, IRA" FBO = "For the Benefit Of". Any transfer or exchange paperwork from your ex employer will have a place to enter such info as well as the IRA account number.

The bottom line is, if it was non-qualified money there is no magic bullet to make it qualified. You are going to have to pay the taxes. Stuff extra non-qual money into a Roth. Then your investments will grow tax deferred and come out tax free.

PM me if you like. I can be more specific in a PM than i can on a thread.