1099-R Code U: ESOP Dividends

Employer-stock dividends paid out of your ESOP: taxable, not rollable, but no early distribution penalty.

What the IRS instructions say

Official meaning, from the Instructions for Forms 1099-R and 5498 Dividends distributed from an employee stock ownership plan under section 404(k); not eligible for rollover.

Is it taxable, and does the 10 percent penalty apply?

Taxable as ordinary income in the year paid, reported on the 1099-R rather than a 1099-DIV. Section 404(k) ESOP dividends are specifically exempt from the 10 percent early distribution additional tax, even if you are under 59 and a half, and they cannot be rolled over. They are the pass-through of dividends on the employer stock your ESOP holds.

Worth knowing: These are dividends, not a withdrawal of your account, which is why the early distribution penalty never applies. They are taxed as ordinary income, not at the lower qualified-dividend rates.

Combinations you might see

Box 7 can carry two codes. With code U, the pairings mean:

BU: ESOP dividends paid through a designated Roth account within the plan

If this code looks wrong

The IRS matches Box 7 against your return, so start with the payer: request a corrected 1099-R, which is the IRS's standing instruction for incorrect forms. No corrected copy by the end of February? The IRS can contact the payer for you, and Form 4852 substitutes as a last resort. Remember that an indirect 60-day rollover is correctly coded 1 or 7, because the payer cannot see the redeposit; direct rollovers should show G or H, as our rollover guide explains before the paperwork ever gets cut.

← All 1099-R Box 7 codes

Sources: IRS Instructions for Forms 1099-R and 5498; IRS Tax Topics 558 (early distributions), 413 (rollovers), and 154 (incorrect forms). Verified July 2026.

General educational information, not tax advice. Your distribution's taxation depends on your facts; consult a qualified tax professional. ClearChoiceRadar is not affiliated with the IRS or any government agency.