Code U indicates a dividend distribution from an employee stock ownership plan (ESOP) under section 404(k). These are not eligible rollover distributions. ESOP dividend distributions are not qualified dividends per the IRS. See page 2 for exceptions to qualified dividends. Also, on page 1 you will find the exception directing the ESOP dividends to be reported on a 1099R vice 1099DIV.
This is not a distribution from the cash value of your ESOP which has assumed the Roth 401K character and thus would be non-taxable.
Dividends paid to participants directly or through the ESOP are known as pass-through dividends, and they are exempt from the notification and consent rules governing other distributions from qualified retirement plans. Pass- through dividends cannot be rolled over into an individual retirement account or other qualified plan, there is no withholding, and recipients are taxed on these dividends at their ordinary income tax rates.
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