NUA

Submitted by Thomas Ferry on Fri, 2016-01-29 18:15

Client has worked for ER for 30 yrs. in the past, ER offered an ESOP and 401k. The ESOP was eventually combined with the 401k. Client’s ER was just acquired. Client still employed there. Client has option to roll 401k consisting of $2m (of which $500k is ER stock w/ basis of $100k) to acquiring ER’s 401k or to an IRA.

As it relates to preserving the option to elect NUA treatment on ER stock, what are the pitfalls to look out for when contemplating an IRA rollover of some or all of the 401k?

For example, can the $1.5m of non ER stock be rolled to an IRA, and the ER stock be rolled to the new 401k?



Submitted by Alan - IRA critic on Fri, 2016-01-29 19:51

  • All mergers and acquisitions contain specific provisions regarding retirement plan issues in general and how former employer shares will be treated. Will the former employer shares be converted into shares of the acquirer?  If so, will the initial converted shares continue to receive the accounting support required to eventually issue a 1099R after client separates from service showing the correct cost basis and NUA on these shares. Will new shares of the acquirer be added to the existing shares if those shares are converted to acquirer shares. The IRS should have no problem with continued treatment of these shares as NUA shares whether converted to acquirer shares or not, but the plan needs to address all the variables and accounting issues that will be needed to get the 1099R which client will eventually report. Client will probably have a lower cost basis % if new shares are not added and dividends are not reinvested in the converted shares since the cost basis will then be frozen. Of course, expected gains would still have to occur over time and client would have to continue to work for awhile so that a few years would pass without additions to the cost basis.
  • If client also has after tax contributions to the former plan (eg he might be an HCE and pre tax contributions might have been recharacterized as post tax contributions), then the plan provision regarding how these after tax contributions are allocated to the employer shares is important. After tax employer stock purchases reduce the cost basis on the final 1099R, but do not increase the NUA %.
  • Client also needs to decide if he wants to continue to hold 25% of his retirement plan in a single issue. Diversification should always trump tax benefits. While he may be provided a future opportunity to exchange out of these shares which of course forfeits NUA on the shares sold within the plan, he may want to consider rolling some portion over to an IRA now and then selling them in the IRA so his diversification would be improved immediately. 20% cost basis is appealing, but of course that 20% is subject to change every day.
  • Perhaps client and others moving to the new firm with large amounts of employer stock can pool their efforts to get answers from the new management on their options and the effects of the employee decision. While they may say to consult with a tax advisor, there are many advisors that do not understand NUA and even for those who do, they need plan specific information on how the new plan will handle former employer shares.

 



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