Some employers provide employees with retirement savings plans in the form of stock ownership in the company. These employee stock ownership plans benefit both the employee and employer, providing a way for employees to save for retirement and a way for employers to fund the business through financing and qualify for tax incentives based on their contributions. When you cash out your ESOP, you pay taxes based on the amount of the payment unless you roll over the dividends into another account.
1. Get your 1099-DIV from the company paying the ESOP distribution. Box 1a contains the taxable dividend figure resulting from your cashed-out plan.
2. List the figure from box 1a in Part II, line 5 of Schedule B -- ordinary dividends -- if the dividends exceed $1,500. Include the name of the payer and the amount of the dividends. Add this amount to any other dividends you received and enter the total on line 6. Complete Part III of Schedule B also. Attach Schedule B to your completed income tax return.
3. Enter the figure from box 1a on line 9a of tax form 1040 or 1040A.
4. Add the figure on line 9a to other figures on lines 7 through 21 and place the total on line 22 to represent total income.
- Roll over your distributions into an IRA within 60 days to defer income taxes on the dividends.
- If you are younger than 59 1/2 and you cash out an ESOP, expect to pay an extra 10 percent excise tax unless the distributions occur after employee death or disability. If you are at least 55, you can cash out the ESOP without penalty if you lose your job.
- Urban Institute: Employee Stock Ownership Plans
- Internal Revenue Service: Form 1099-DIV
- Internal Revenue Service: Form 1040 Instructions
- Internal Revenue Service: Schedule B
- United States General Accounting Office: Answers to Key Questions About Private Pension Plans
- United States Department of Labor: What You Should Know About Your Retirement Plan
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