rbmrtn
Thinks s/he gets paid by the post
I have never heard of this at all! How can 401K dividends "pass through" for income with no penalty unless you are doing a 72T?
It's an investment option of your 401k. I think came about as a result of the Enron fiasco to allow you to diversify your company stock holdings. Note this is just for your company stock. There is no 10% penalty but no special treatment like qualified dividends. It's a nice option have.
How 401(k) Dividends Are Paid | Finance - Zacks
Company Stock Dividends
The option to purchase company stock in your 401(k) plan can also classified as a qualified employee stock ownership plan, or ESOP. Under the ESOP rules you must be given the option to either reinvest the dividends paid on company stock into more shares of the stock or have dividends paid out directly to you. The choice of where the 401(k) company stock dividends go is an election on your 401(k) investment choices form.