Updated September 28, 2026. Quick answer: code U reports dividends paid on employer stock inside an employee stock ownership plan and passed through to you under section 404(k). Form 5329 lists these dividends by name as one of the specific classes exempt from the 10% additional tax.
What the IRS tells the payer
From the current instructions, code U is “Dividends distributed from an ESOP under section 404(k)”. The full instruction text reads: “Use code U for a distribution of dividends from an employee stock ownership plan (ESOP) under section 404(k). These are not eligible rollover distributions. Note: Do not report dividends paid by the corporation directly to plan participants or their beneficiaries. Continue to report those dividends on Form 1099-DIV.” It may be used with: B.
Not every ESOP dividend uses this code
The instructions draw a clean line: code U covers dividends the ESOP itself passes through and reports on Form 1099-R. If a corporation instead pays dividends directly to participants or beneficiaries, those are reported on Form 1099-DIV, not here, and the instructions say so explicitly.
The 10% additional tax
The Instructions for Form 5329 list, as exception 15 to the additional tax on early distributions, “Distributions that are dividends paid with respect to stock described in section 404(k).” A genuine code U distribution falls squarely inside that named exception.
Which line it drives
Because these are not eligible rollover distributions, per the instruction quoted above, and originate from a qualified employer plan, they are reported as ordinary income on the pensions and annuities line of Form 1040.
Common mistakes
- Reporting a code U amount on Schedule B or as qualified dividend income. It is ordinary income from a retirement plan, not investment income.
- Confusing a code U pass-through with a direct corporate dividend payment, which uses Form 1099-DIV instead.
Box 7 is the payer’s claim, not the law
The code in Box 7a records what the custodian knew when it cut the cheque. It is not a ruling on what you owe, and the IRS instructions say so in as many words. On code 1 the instruction to payers is to use it “even if the distribution is made for medical expenses, health insurance premiums, qualified higher education expenses, a first-time home purchase…” and a list of other genuine statutory exceptions.
Related codes worth reading alongside this one: code B, and code W.
Every code in one place: the Box 7 table. If yours looks wrong: how to fix it.
Figures verified against the IRS Instructions for Forms 1099-R and 5498 (2026) and the IRS Instructions for Form 5329 (2025) on September 30, 2026.
Sources
- IRS, Instructions for Forms 1099-R and 5498 (2026), Table 1, Guide to Distribution Codes: https://www.irs.gov/instructions/i1099r
- IRS, Instructions for Form 5329 (2025): https://www.irs.gov/instructions/i5329
Code meanings are read from the IRS Instructions for Forms 1099-R and 5498 (current edition, tax year 2026), Table 1, Guide to Distribution Codes, at irs.gov on September 28, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the IRS is the right place to confirm anything consequential.