NUA stock in 401k

Submitted by Douglas Conoway on Sun, 2010-12-05 02:22

I am trying to determine if there are any restrictions in treating company stock as NUA for a qualified plan distribution. Does the origin of the company stock matter in taking advantage of the NUA option? For example, is the stock eligible for NUA treatment only stock contributed by the employer to the plan as compared to stock purchased by the employee? Or put another way, can an employee select 100% company stock as his investment choice in his 401k plan and then roll all of it out using NUA to take advantage of capital gains tax rates on the entire amount?



Submitted by Alan Spross on Sun, 2010-12-05 04:38

All company stock purchased by your own salary deferrals and also company match stock is eligible. However, diversification should always trump NUA considerations. Remember what happened with Enron and Lehman Bros. as well as several dot com companies from the late 90s. I don’t think you are allowed to invest only in company stock even if you wanted to. The company must also allow you do diversify out of company stock if you wish to.

When you distribute NUA stock as part of a qualified lump sum distribution, the cost basis is taxed as ordinary income for the year of the distribution. The cost basis is further subject to the 10% penalty unless you separated from service in the year you turned 55 or later.

Another potential issue is tax increases for the LT cap gain rates. Since the current max is 15%, it is widely believed that LT cap gain rates will increase more than ordinary rates in the future. Still, in the right situation NUA can be a valuable tool to use.



Submitted by Douglas Conoway on Mon, 2010-12-06 19:10

Alan, thanks so much for the quick response. By any chance do you have a tax code or revenue ruling reference I can use for this issue with the client? I haven’t been able to find one. I’m not a CPA so I can’t give specific tax advice.

BTW, I agree completely with your comment about diversification. This was in regards to a new client who recently retired from Corning and has been purchasing Corning stock for years. The price is now $18 and he wants to wait until it hits $30 before selling. Other than the years during the tech bubble the Corning price was well below $30. The strategy then might be to rollover the expensive shares to an IRA but use NUA treatment for the lower priced shares. Agree?



Submitted by Alan Spross on Mon, 2010-12-06 20:48

I agree that if the client wants to take only some of the shares as NUA shares, it is highly preferable to specify the lowest cost basis shares for this purpose. Most plans, however, do not support such cost tracking and require that all shares have the same average cost basis. But it is always a good idea to ask.

Here is a comprehensive article regarding NUA and related issues:
http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journa…



Submitted by Larry Moore on Wed, 2010-12-08 21:28

Have you had a situation where the owner of the 401(k) plan with company stock dies and the plan is rolled into an IRA of the spouse? Does the redemption of the stock need to be completed within the year of death in order to qualify for the NUA benefits or can it be done within 12 months after the death of the decedent?



Submitted by mk foss on Wed, 2010-12-08 21:52

To take advantage of NUA – the shares must be transferred directly to the retiree or beneficiary. Once they’ve been rolled to an IRA, there is no longer an NUA benefit.



Submitted by Alan Spross on Thu, 2010-12-09 00:48

Any IRA rollover will wipe out NUA benefits, but if the surviving spouse inherits a 401k plan with highly appreciated employer stock, the surviving spouse can utilize NUA benefits in the same manner as the decedent could have. A qualified LSD must be done, not necessarily with a time limit, but any intervening distributions including RMDs would result in a later LSD not being qualified for NUA treatment.



Submitted by Larry Moore on Thu, 2010-12-09 22:25

Alan,
Thank you for your response. The circumstances of the case are that the decedent had a 401(k) with approximately $1,200,000 of value. The employer stock was approximately $600,000 of the total value. Because of a second marriage the decedent chose to leave 25% of the 401(k) to the son, (aged 30) and 75% to the husband (aged 61). They have established accounts with a brokerage firm. In the June 2009 issue of Ed Slott’s IRA Advisor dealing with NUA it appears that the employer stock needs to be distributed in kind to a non-IRA account. I assume this is done by the beneficiary in setting up the appropriate registrations at the brokerage firm. Another issue is a question that if one of the inherited beneficiaries of the 401(k) plan decides to take the stock for NUA purposes by distributing it to a non-IRA account, does the other beneficiary of the inherited 401(k) plan with the company stock have to do likewise? I have suggested that they do nothing until the “dust” settles on the estate issues.



Submitted by Bruce Steiner on Fri, 2010-12-10 03:01

Whether to use NUA or do the rollover is more complicated than it may appear at first glance. You may wish to discuss this with the attorney handling the estate, or other tax/estates counsel.



Submitted by Alan Spross on Fri, 2010-12-10 16:52

Yes, things will be more complicated for beneficiaries attempting to use NUA, determine how any after tax contributions will be applied, and even consider Roth conversions in the mix since they are also an option here whereas a non spouse beneficiary cannot convert an inherited TIRA at this point.

Among other issues:
1) Participant’s death is a triggering event for NUA, but it is critical that no intervening distributions be taken now by the beneficiaries that would disqualify their use of NUA.
2) A complicated analysis like this and execution before year end may well be impossible.
3) If one beneficiary wants the employer stock and the other does not and/or NUA will not benefit them, it will take close coordination between the parties in order to get the assets split 75/25 and also include the appropriate employer stock shares with the correct beneficiary.
4) 50% of these values in one holding is very risky, so there is also an unofficial clock running in order to diversify these assets before the shares take a major hit. If the stock is to be sold right away, a higher % cost basis is more practical than otherwise. There is also the question of how long the 15% LT cap gains rates will be around.



Submitted by Scott Dozier on Thu, 2011-03-03 15:16

“1) Participant’s death is a triggering event for NUA, but it is critical that no intervening distributions be taken now by the beneficiaries that would disqualify their use of NUA. ”

Would an RMD in the next tax year after the death of the original participant be considered an disqualifying distribution? My case has a date of death as 10/25/10 and the non-spouse bene took an RMD in Feb 2011. Is the NUA still available for the surviving beneficiary?



Submitted by Alan Spross on Thu, 2011-03-03 16:00

Yes.
A distribution is not considered to be an intervening distribution if taken in the same year as the LSD. Therefore, the surviving spouse needs to complete the LSD by the end of this year or NUA potential will be forfeited.

Pursuant to the above, the surviving spouse is able to take other distributions this year if cash is needed. The key is that all balances in plans of a similar type be totally distributed by year end. If this is not completed the NUA would be forfeited EVEN if the RMD taken last month was the decedent’s final RMD for 2010.



Submitted by Stuart Cameron on Fri, 2013-02-22 16:56

My client has a 401k with $500,000 in it.  He is planning to rollover to an IRA.  In the 401k is $35,000 of company stock.  His taxable income is $70,000.  Should the stock go into an individual account and pay taxes on the appreciation?



Submitted by Alan - IRA critic on Fri, 2013-02-22 17:42

Wiith NUA his current tax on distributing the shares to a taxable brokerage account is based on the cost basis in the plan when the shares were purchased. To determine if this is worthwhile, he needs to get a quote from the plan on the cost basis of these shares per share and then figure what % that is of their value. Usually, if the cost basis is less than 30% NUA should be considered. 30% of 35,000 is 10,500, which would be the taxable amount if cost basis was 30%. The appreciation is not taxed until the shares are sold, and then at the lower LT cap gain rate.



Submitted by Stuart Cameron on Fri, 2013-02-22 18:10

Thanks Alan.



Submitted by Pam Heimdal on Mon, 2014-05-19 15:03

Does the transfer of company stock and the rollover of the 401K plan have to occur in the first year it’s available or can it happy in a subsequent year?  I know both need to occur within one calendar year, just curious if it needs to be done in the first year that it’s available to make the NUA treatment work.



Submitted by Alan - IRA critic on Mon, 2014-05-19 15:41

The lump sum distribution does not have to be in any particular year, but any distributions in the interim years will erase the prior triggering event and that would eliminate the NUA. Therefore, if taxpayer retired in 2011, an LSD in 2014 would qualify as long as no distributions took place between separation and 2014. If an intervening distribution occurred, taxpayer would have to wait until the next triggering event (eg reaching 59.5) to make a qualifying LSD.



Submitted by Pam Heimdal on Mon, 2014-05-19 16:25

Thanks.  That’s what I thought, was just looking for reassurance. 



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