An employer pays a dividend in stock to a leveraged KSOP. The dividend attributable to allocated shares is allocated to the participant's account balances. What about the dividend attributable to the encumbered shares? I understand that if the dividend were paid in cash, it could be used to service the loan or pay expenses. Should this stock dividend be treated as a net gain to the trust and allocated to all participants based on total account balances?

A stock dividend cuts the same pie into more pieces; there is no economic substance. The stock dividends on suspense account shares stay in the suspense account and are allocated along with the shares that were there before the dividend, otherwise you would be diluting the ultimate allocation. If you had a real and competent pledge and security agreement, the agreement would provide for the lien to cover shares received from stock splits and dividends.