Net Unrealized Appreciation and Triggering Event
I’d like to make sure I’m not missing anything. Once a triggering event happens and you want to take advantage of NUA in an employer plan, you need to make sure a “Lump Sum Distribution” of all property and funds in the plan happens in the same calendar year in order for the NUA to get the favorable tax treatment. However, as long as no intervening event happens, such as a distribution for any reason, the LSD and NUA roll out can take place many years after the triggering event–it doesn’t have to happen in the same year as the triggering event.
I assume a partial rollover from the plan to an IRA would constitute an intervening distribution.
So besides anything that might be an intervening distribution, such as an RMD, a rollover, or any other partial distribution, is there anything else that might blow the opportunity of the triggering event that happened. A loan? Contributions or rollover into the plan?
Thanks in advance,
Lee
Permalink Submitted by Alan Spross on Mon, 2011-08-29 19:59
You have a good handle on this. An intervening distribution would occur only in a year following the year of the triggering event. For example, you might have a deemed distribution of a loan earlier that same year, but it would not be a problem. A contribution to the plan also could not be an intervening distribution. The typical pitfalls would be RMDs, partial distributions or partial IRA rollovers that were not part of the LSD, and the LSD did not get done before the end of that year.
For example, if separation from service is the trigger, but if a partial distribution in a later year is taken, it wipes out the separation trigger and then the employee must wait for 59.5 for the next trigger. If someone starts RMDs, that is OK as long as they realize that they must take out the complete remaining balance before the end of that year to still have a qualifying LSD.
Permalink Submitted by Alan Spross on Tue, 2012-06-05 20:13
The IRS has never limited the time period for which a triggering event applies if there are no intervening distributions. It does seem rather strange that an LSD would be construed to occur “because the participant separates from service” if the LSD occurs 12 years later, but the time has never been a problem.
That said, the IRS will be guided by the 1099R, so the client should get confirmation that NUA will be stated in Box 6 of the 1099R in addition to confirming his taxable cost basis per share. If for some reason the plan balks with respect to the NUA, he should find out the reason for that decision.
Permalink Submitted by Margot Dorn on Wed, 2014-02-19 19:19
Client completed a NUA distribution more than 60 days ago and received a 1099 showing that the amount is fully taxable. Upon inquiry he was told that he was not eligible for NUA treatment becasue there had been a deemed distribution of a loan balance after separation. He separated 10/31/2006 and turned 59.5 on 12/23/2006. The distribution was made in 2007 per the 2007 1099. Are there any exceptions that would apply to him to allow NUA treatment?
Permalink Submitted by Alan - IRA critic on Thu, 2014-02-20 03:21
If his 1099R does not include any NUA in Box 6, then there isn’t any NUA. A deemed distribution usually occurs prior to separation and it’s possible that the lump sum distribution was mishandled, but I doubt there is any chance to bring up those questions now. Didn’t client question this at the time and/or was he not provided with an explanation of the distribution at the time? If he didn’t qualify for NUA, he still could have rolled over the distribution within 60 days to eliminate the tax bill.