NUA and Dividend Payout from 401K
I have a client who is currently receiving the dividend on his company stock in his 401K as a quarterly cash payment. Per the plan, this income is taxable as ordinary income, but is not subject to any penalty tax regardless of age. He is planning to retire in Sept. 2015 at age 58, and will continue receiving his dividend payments from the plan for the remainder of the year. Because he will be in a lower tax bracket next year, we are planning to defer his rollover until 2016, at which time he will utilize NUA on some of his company stock to bridge the gap pre 59-1/2. My question is this: will the dividends paid out after he retires in 2015 negate his ability to do NUA in 2016 because it will not qualify as a lump sum distribution ?
Per the plan administrator, they claim that the dividend payments will not negate his ability to do NUA next year, as the dividend payments are not considered “withdrawals”. This seems contradictory to me, as I would assume they’ll be reported on a 1099R as income, which in turn would be considered a distibution from the plan? Under my logic, this means that he would need to wait for a new triggering event, though they claim not.
We had previously done this for several other clients who had received dividend payments with no negative impact on their NUA distribution, though I don’t recall their specific circumstances (i.e. had reached another triggering event, etc.). Perhaps there is something I am missing because the administrator seemed very confident in his response, I just don’t want to overlook anything for our client.
Thanks in advance for your input.
Permalink Submitted by Alan - IRA critic on Wed, 2015-04-29 04:29
Are these dividends ESOP dividends? Reported on a 1099R or 1099 DIV? If reported on a 1099R, what is the Box 7 distribution code? Note that if the 1099R issued for the LSD has NUA in Box 7, the IRS is not likely to question it. IRS guidance on various dividend payments with respect to intervening distributions is not in the tax code, perhaps in a letter ruling I am not aware of.
Permalink Submitted by Robin Ross on Wed, 2015-04-29 18:08
Thanks for your reply, and I will have to find out how they are coded. I believe that they are in fact ESOP dividends, so perhaps they are coded as a 1099 DIV instead? If this is the case, then it would not be considered a distribution from the plan, correct?
Permalink Submitted by Janie Chang on Mon, 2017-07-03 23:18
I have a similar situation. The Dividend is a ESOP distribution. I received a 1099R with a distribution code of “U – Dividendend distribution from ESOP under section 404K” at year end in 2011.I’m curious to find out the definitive answer whether the dividend is considered a distribution from the plan or whether it will negate the ability to do NUA.Any assistance will be appreciated
Permalink Submitted by Alan - IRA critic on Tue, 2017-07-04 01:11
See the first paragraph on p 4 of the following 1999 PLR. [http://www.irs.gov] If these are 404k ESOP dividends, they should not be construed as intervening distributions relative to determining if the participant has done a qualified LSD. 404k dividends are coded “U” in Box 7 of the 1099R reporting such dividends.
Permalink Submitted by Janie Chang on Sat, 2017-07-15 21:13
Thank you very much. The PLR is very helpful and explicit to clear my concern.
Permalink Submitted by Dennis A. Parker on Thu, 2017-09-28 21:03
Hello,I had previously inquired on this forum (7-10-17, “NUA and residual account balance”) about a client of mine who used the NUA strategy in 2016, when she separated from service with P & G. I was concerned because in 2017, she received a notice from the P & G retirement plan that she has a residual account balance as the result of trailing dividends. My concern was that these dividends blew the lump sum distribution in 2016 and negated the NUA. At the time, we determined that there was no IRS guidance on this issue and made a plan to take the residual balance as a distribution in a later year (not consecutive with the NUA).I believe the PLR mentioned above [http://www.irs.gov] addresses this issue on page 4, in the third paragraph (which refers to the issue described on page 2, last paragraph, #2) – that the LSD is not affected by the dividend distributions being received after the participant’s separation from service and attainment of age 59 1/2. Am I correct in applying this PLR to my client’s P & G situation?
Permalink Submitted by Patricia Gallagher on Thu, 2018-04-12 02:39
Hello, I’ve been receiving pass thru dividends (deposited qtrly)which are reported annually on 1099R with a “U” in box 7 for a while now.( left the company over 10 yrs ago). I will be age 59 1/2 mid part of this year and would like to use NUA strategy in near future. Will receiving these dividends impact my ability to use NUA. The stock is in 401K -both common stock and ESOP? The stock has appreciated considerably vs cost basis. Are the pass thru dividends received considered a distribution making it ineligible to utilize NUA strategy? Hope not!Thanks Thanks
Permalink Submitted by Alan - IRA critic on Thu, 2018-04-12 03:35
No, 404k dividends coded “U” on the 1099R are not considered intervening distributions that would disqualify use of NUA. See the link above for PLR 1999 47041. As such, if you have not taken any other distributions since separation from service you don’t even have to wait until 59.5 to do the LSD. That said, if you separated prior to the year you reached 55, waiting until 59.5 would eliminate the 10% penalty on the cost basis of your NUA shares. Notwithstanding this PLR, I would confirm with the plan administrator that they will issue a 1099R showing NUA in Box 6 of the 1099R reporting the transfer of shares to your taxable brokerage account. Note that you must distribute the entire balance of all plans of similar type for a qualified LSD. That would include a 401k plan as well as the ESOP shares. Be sure to get a quote of your cost basis since NUA works best if the cost basis is not over 25% of the value of employer shares.