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In my current 401k, there are periodic conversions (looks like the beginning of each year) of the classification of company stock to ESOP shares. There is no change in quantity of traded shares and does not coincide with any dividend dates.
Why is the company doing this?
How might this reclassification affect me?
Well, it seems I was inattentive previous years when the information was redistributed.
The company performs this annual sweep as a benefit to the employees. All shares classified as ESOP can have dividends paid in cash to the participant instead of being reinvested into ESOP shares. If the participant elects cash distributions of the dividends, they are subject to ordinary income tax (filed under 1099-R) but are not subject to the 10% early withdrawal penalty.
Since the election can be made even after termination of employment, the participant may see a tax benefit in taking cash during years of low income to reduce future taxable income.
