Funds (shares) in an ESOP account are not dividends, although the shares can pay dividends that are not subject to penalty. It would be unusual and incorrect for the plan to make a distribution of ESOP dividends and report it with any code other than code U which TurboTax knows to treat as not subject to penalty. If the dividends on ESOP shares are reinvested in the plan (likely into a 401(k) plan of the employer), they cannot be treated as a code U dividend distribution when distributed later. A distribution of ESOP shares themselves is not a dividend distribution.
