NUA and ESOPs
ESOP participant is under age 55 and separating from service. If the participant elects NUA treatment, will the IRS allow NUA treatment if a lump sum distribution is elected, but distributions are paid over a five year period? According to the company’s election forms, the company has the option to repurchase company stock in annual installments over a period of five years. Note – the company stock price will be “locked in” when the participant exercises his right to sell the stock to the company or ESOP under the lump sum election.
Permalink Submitted by Alan Spross on Mon, 2008-07-21 03:30
Sorry for delay, but apparently no one is familiar with all the ramifications of these re purchase agreements and how they affect NUA, myself included.
To qualify for NUA, all remaining shares must be distributed as part of a qualified LSD of all plans of similar type of that employer. If the company shares are paid out over 5 years, only the final year distribution would be considered a LSD of all remaining shares.
This may present a problem. As for the buyback, what are the mechanics of the repurchase, and is it made out of the taxable account after distribution to the employee?
I think in this case, the plan administrator should provide information specific to this particular arrangement, as I do not know if there is any standard type arrangement.
Permalink Submitted by BruceM on Tue, 2008-07-22 15:52
NUA (or 10 yr forward averaging for those born prior to 1936) from a private company’s ESOP that uses the maximum repurchase period on separation from service, is something I’ve never understood very well. Where are the shares transferred on the lump sum distribution? Will a brokerage accept shares of a private company, even if repurchase occurs on the same day as the transfer? And to be able to do a NUA transaction, would you have to wait 5 years?
The following URL discusses this (and other) issues relating to the unique issues surrounding ESOP distributions.
http://www.principal.com/allweb/docs/ris/marketing_materials/pq/pq_6634.pdf
BruceM
Permalink Submitted by Jim Vance on Wed, 2013-05-29 14:55
How are ESOP distributions handled. I work for a ESOP owned company and will be retiring within the next 2 years. The payout is in 16 quarterly payments and i have not heard of that type of distribution in any of my readings. Any advise or insight?
Permalink Submitted by Alan - IRA critic on Wed, 2013-05-29 19:58
it may be due to liquidity issues, but you would only have a qualified lump sum distribution for the shares distributed in the last calendar year. You could not use NUA on the distributions in earlier years because of the lack of an LSD. You might end up with 1/16, 2/16, 3/16 or at best 4/16 (25%) of the shares eligible for NUA.