NUA basis reporting to brokerage house

Submitted by abraham boznick on Fri, 2019-02-08 19:16

upon my request my employer will be distributing company shares utilizing NUA to brokerage account. I understand that basis of these shares will be reported by the employer on 1099R. Would my employer also report the basis of these shares to the brokerages house whom I am transferring these shares to? Or I have to provide the basis of these shares to the brokerage house myself? If my employer provides the basis to the brokerage house — some of these shares predated 2012 and some of these shares are after 2012. Would the brokerage house keep track which shares are covered and which shares are uncovered. Or I have to tell the brokerage house which ones are covered and which ones are uncovered?



Submitted by Alan - IRA critic on Fri, 2019-02-08 19:33

You will probably have to provide the cost basis figures to the broker yourself. The figures you provide must conform to the cost basis method the plan used and Box 2a of the 1099R (adjusted to disregard application of any after tax contribution reduction of 2a), and most plans track NUA shares using an average cost basis for all employer shares. However, if you have documentation that the shares distributed included different lots with different cost basis, you could advise the broker of this breakdown. If might be more difficult to determine how many shares were purchased pre or post 2012, as I doubt that most plans capture that breakdown.

Submitted by abraham boznick on Sat, 2019-02-09 01:09

thank you for your comment. Can you help me with the after tax portion as I do have an after tax contributions in my 401k account.  For simplicity,  say I have 30k of NUA cost basis and 20k in after tax money. Would I have 10k showing in box 2a in this case? With all of my 20k after tax money going into regular IRA account instead of  going into Roth IRA? If that the case — is it something the employer obligated to do if I request him to do so? thank you.

Submitted by Alan - IRA critic on Sat, 2019-02-09 04:48

Many plans automatically will apply your 20k of after tax contributions to reduce the taxable cost basis, meaning 10k in 2a in your example. Other plans may allow you to direct that  20k as a non taxable rollover to your Roth IRA as part of a split rollover per Notice 2014-54. You should call the plan administrator after determining your preference and ask if the LSD can be reported accordingly. Note that this will not change the NUA cost basis per share, if applied to Box 2a of the 1099R reporting the distribution, it will just reduce the tax due for the distribution of NUA shares, but your NUA per share will be the same either way. 

Submitted by abraham boznick on Sat, 2019-02-09 22:51

Alan, thank you for providing such a great service to the community. Just for me to understand your answer. Per your answer above, Is my understanding correct that some employers would use option 1 (“Many plans automatically will apply your 20k of after tax contributions to reduce the taxable cost basis, meaning 10k in 2a in your example.”) and other employers would  use option 2 (“Other plans may allow you to direct that  20k as a non taxable rollover to your Roth IRA as part of a split rollover per Notice 2014-54”).   Am I  I correct to say that normaly I cannot direct the employer whether to use option 1 or option 2 — it is simply the employer choice which option to use  and the employer sticks with their choice?

Submitted by Alan - IRA critic on Sun, 2019-02-10 00:25

Yes. Some plans follow accounting rules that specify how the after tax amount is to be applied and there is no flexibility. But other plans may allow you to choose how it is to be applied if you ask them. Which options works best for you depends on your overall situation, including what your marginal rate is in the year of the LSD. This choice is similar to that of a Roth conversion since you are determining whether it is best to pay more tax now to add 20k to your Roth IRA, or to use the after tax amount to reduce the  tax bill now.

Submitted by abraham boznick on Sun, 2019-02-10 00:43

yes, thank you very much. Just one more follow up. You indicated that potentialy I can use option 1 above for “after tax” money in my 401k. I presume option 1  would not work for my ROTH 401k money. Meaning that Roth 401k cannot be used to reduce the taxable cost basis of NUA in the same fashion I can use “after tax” money in my 401k account to reduce taxable cost basis of NUA.

Submitted by Alan - IRA critic on Sun, 2019-02-10 20:40

  • Your question is affected by plan accounting relative to which account holds the employer shares. If the Roth 401k holds such shares and they are distributed to a taxable brokerage account, the taxable cost basis would be what the plan paid, which would be after tax and therefore 0, however the gains which would eventually be tax free once the Roth becomes qualified would become NUA and taxable if such shares were included in the LSD. Accordingly, in most cases it would be preferable to NOT request share distribution for employer shares held in the Roth 401k.
  • Since employer matching shares do NOT go into the Roth 401k, there should be fewer shares there unless an in plan Roth rollover was done, rolling employer shares from the pre tax (or after tax sub account) into the Roth 401k.
  • SInce plan accounting is plan specific, best to get a cost basis and NUA quote prior to acting. You do not want any surprises when you get the 1099R, which in most cases is too late to do a 60 day rollover of the distributed shares.

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