NUA from an inherited 401(k)

Submitted by Shou-Mei Chang on Mon, 2014-08-25 17:53

I inherited my husband’s 401(k) when he passed away earlier this year while still employed. The 401(k) account is now in my name and under my social security number. When I elected to take advantage of the Net Unrealized Appreciation special tax rule, I was told by the company that the proceeds from the transaction (after the shares were lump-sum distributed in-kind and sold immediately since the privately-traded firm does not allow stock ownership outside of the firm) can only be made payable to my husband’s estate and not to me the beneficiary although I am the owner of the 401(k) account. If I am not mistaken, NUA is considered Income in Respect of the Decedent, therefore I as a beneficiary should still be able to get the NUA treatment for this year’s tax reporting when it’s filed married jointly. Let me know if my assumption is incorrect.

My question is:
Can I still get the NUA special tax treatment when the firm’s internal broker reports the sale of the in-kind distributed shares in 1099-B under my late husband’s social security number while the administrator of the 401(k) account reports the NUA treatment in 1099-R under my social security number? If so, how do I reconcile these numbers on the 1040?

Thanks.



Submitted by Alan - IRA critic on Mon, 2014-08-25 19:03

  • Were you named directly on the plan as beneficiary? What is their reason for indicating payment (and tax reporting) should be made to the estate? Would you have to file an estate 1041 in the absence of these shares? Sounds like they are too lazy to change the registration on the shares or are trying to avoid showing ownership by a non participant of the restricted shares.  You are correct about the IRD, and you need to be sure that you complete a qualified lump sum distribution of the entire 401k plan (and any other similar plans, but not DB plans) before the end of this year, or NUA will be forfeited since the Box 6 NUA will not be part of the 1099R. There will be a separate 1099R for the direct IRA rollover of the rest of the plan.
  • If you cannot get them to change the 1099B TIN, I would still report the sale using LT cap gain rates on Form 8949 and Sch D. Just retain documentation of your discussions and push to get the reason for the estate reporting in writing for future IRS documentation should the IRS question the NUA treatment on the sale.

Submitted by Shou-Mei Chang on Mon, 2014-08-25 21:01

Thank you very much for your help and prompt reply to my question.I believe I am the direct beneficiary of the plan. You see, shortly after my husband passed away, I was informed by the company that, as his spouse, I am the beneficiary of his 401(k) plan, that his account will be moved into an account under my name, and that I can determine if I’d like to close the account or leave the funds in the plan the way it was.I would have to file an estate 1041 in the absence of these shares because I also inherited shares of the firm’s stock that my late husband had purchased outside of the retirement account. The proceeds from these shares, which had to be sold once the participant is separated from the company, was also made payable to his estate and had to be deposited first into a bank account (money market) opened under his EIN before it can be transferred to me, his beneficiary. I understand that I would get a Step-Up in cost basis on this. Can you tell me how I should report this? In 1040 or 1041?The firm told me the reason it cannot make the check payable to me was because their legal department insisted the firm cannot legally make in-kind distribution to anyone but the original plan participant.A lump-sum distribution in my case will also include rolling over the mutual fund that is part of the 401(k) plan into my IRA.

Submitted by Alan - IRA critic on Mon, 2014-08-25 23:12

  • The sale of the shares that were NOT part of the 401k plan would result in a 1041 filing. There could be a gain or loss between the DOD and basis adjustment and the sale date that would be passed out of the estate to you as apparent beneficiary of his estate. You could not claim any loss until the estate was closed and the cap loss distributed to you on a K 1, from which you would enter the gain or loss on your personal return whether single or joint. Or course, there may well be neither a gain or loss on these shares.
  • With respect to the NUA shares, I cannot tell you whether the legal Dept is correct or not about reporting NUA shares sold in the estate when the plan 1099R indicates the distribution of the shares were made directly to you personally. I question their treatment of the NUA shares in the same manner as the other shares. Again, get this in writing if you can, as it will help with any IRS inquiry. If both groups of sale are on the same 1099B form, filing your 1040 will take an explanatory statement regarding the differing treatment if the cost basis information is not correct. IRS instructions are provided on reporting cost basis adjustments on Form 8949 if the reported cost basis is not correct. NUA shares get no basis adjustment, but the other shares do so you will have to determine the number of shares of each if they are combined. Note that even the NUA shares may have a gain or loss between the distribution date and the sale date, and any gains are taxed at the ST Rate. Any loss just reduces the amount of NUA. Perhaps you should get a tax preparer familiar with NUA reporting to handle all the one time reporting requirements for this year at least. Feel free to post back here once you get the 1099R and 1099B forms for 2014.

Submitted by Shou-Mei Chang on Tue, 2014-08-26 00:50

I have a question concerning how the firm should report the sales of stock shares. All the firm has is my late husband’s SS number. Should both sales be reported under his ss number? Or should I provide the firm with my husband’s EIN? If so, should I ask the firm to report both sales under my husband’s EIN or only the NUA sale under his ss number while the other his EIN?

Submitted by Shou-Mei Chang on Wed, 2014-08-27 21:00

  • For those inherited shares that were held outside of the retirement account and thus I will get a step-up in cost-basis, since the stocks in the firm are traded only quarterly (i. e., once every 3 months), am I correct to assume that, when sold immediately after my husband passed away, the cost basis of these shares would be whatever the share price is on the trading date because there is no way to trade on the day the sale order is submitted?
  • when I do a NUA, when is the estimated tax due? Will I have the option of paying it in installments or must I pay it all in one lump-sum immediately within the calendar quarter when I received the check from exercising the NUA?

Submitted by Alan - IRA critic on Wed, 2014-08-27 21:11

  • Yes, there would be no gain or loss on the non retirement shares unless there was something unusual affecting the interim share value.
  • There is nothing unique about NUA with respect to under payment penalties. If you meet one of the safe harbors (100% or 110% of your prior year tax liability paid in quarterly estimates or withholding at any time during the year, there will be no underpayment penalty. If you sell in the same year as the distribution, the above applies to both the LT Cap Gain on the NUA and the ordinary taxes on the cost basis of the shares. If you have not been paying quarterly estimates, you can make up for that by withholding from any source of income you have.

Submitted by Shou-Mei Chang on Tue, 2014-08-26 00:18

Do you know how I can find a tax preparer who is familiar with NUA reporting, short of calling every CPA office locally?

Submitted by Alan - IRA critic on Tue, 2014-08-26 03:05

  1. While both sales should be reported under your SSN, if they cannot be reported that way, reporting under the estate EIN is more correct than under his SSN. However, the reporting of dividends, interest etc is often reported under a decedent’s SSN in cases where payments continue but the account has not be re titled in time. This can be dealt with on tax returns using the nominee process under which the recipient taxpayer lists the item on the return and indicates that reporting is being transferred to the correct entity. Using this procedure, regardless of the TIN shown on the 1099B, the reporting can be assigned to your own SSN. Maybe that avoids a 1040 in your case depending on other factors. But this will be a final joint return, and the IRS is used to nominee situations on final joint returns.
  2. With respect to NUA experienced tax preparers, probably larger firms are more likely to have someone experienced in that area. If you know any retirees of large corporations, they are the ones that are more likely to have NUA to report. Local associations of tax prepares may also know of firms that are experienced in that area. But no way to avoid making some calls and perhaps it will lead to a good preparer. Many preparers are NOT up to speed on this subject, so this may take some time.

Submitted by lawrence just on Tue, 2014-08-26 15:24

only wanted to confirm what I got out of the seminar. you are allowed to convert 10 % over 10 years, regardless of income, and just pay the income tax on the amount of the partial transfer.

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