NUA Logistics

Submitted by John Rivolta on Mon, 2020-01-20 21:29

I recently left my position at a publicly traded company after 10+ years where I had an ESOP Retirement plan. That plan appears to have used an average cost basis versus basis on individual tax lots throughout the years.

I’ve had all company stock from that account distributed in kind to a taxable investment account and the remainder – cash – rolled over into an IRA. The distribution was initiated after Jan 1, 2020.

I understand:

1) I need to pay income tax on the cost basis component of that company stock (roughly 30-35% total value) as well as a 10% penalty (I’m under 59 1/2)

2) the NUA portion (roughly currently 65-70% of total value) is taxed at the Long Term Captital Gains rate

3) Any further appreciation since distribution is taxed as normal income

I have a couple questions regarding logistics of the tax liabilities.

When is the tax on the cost basis portion – ordinary income – and early withdrawal penalty due? Immediately, at quarter end, end of 2020 Tax Year? Via what form?

Assuming no further appreciation and after liquidating say the exact cost basis amount, how do I report that I owe no further taxes on that amount (since it was paid as normal income tax)?

Assuming future appreciation – say 5% – and liquidation beyond the cost basis amount how do I itemize the 2 components of that tax liability? Long Term Capital Gains on the amount liquidated plus normal income tax on the amount it appreciated post distribution.

I have 2 other accounts accumulated under that employer – a 401K (both Traditional and Roth components within) and a Qualified Profit Sharing Plan. Neither hold company stock directly. Do these fall under “like” plans that require distribution as well? I don’t believe the do but?

Thank you!

John



Submitted by Alan - IRA critic on Mon, 2020-01-20 23:31

  • Re 3 – if by normal income you meant ordinary income, that is only partially correct. While further gains within a year are taxed as ST cap gains at the ordinary income rate, after 1 year all gains are taxed at the LT cap gain rate. Any losses simply reduce the amount of NUA per share that can be reported.
  • Tax and penalty on the cost basis are due when the return is filed. Taxable income is reported on line 5a and 5b of Form 1040, 10% penalty on Sch 2, line 6. Actual payment of tax through withholding or estimates follows the usual timing rules for those payments, like any other income.
  • When you sell a share, you report the gross cost basis already taxed or offset by after tax contributions to the plan as your cost basis on Form 8949. The NUA from the amount received will be taxed as a LT gain.
  • For later gains after distribution, the IRS has not made a reporting recommendation. Therefore, to improvise – Additional LT gains after 1 year would not require a separate entry on Form 8949 since the entire gain is LT. If sale occurs at 1 year or less, additional gain is ST, would require a separate entry in the ST portion of Form 8949, with an explanatory statement that the basis shown is being taxed on the LT section. 
  • Yes, the ESOP and 401k account (both pre tax and Roth) are treated as plans of the same type (profit sharing) and part of the qualified LSD. A DB plan is not of the same type.

Submitted by John Rivolta on Tue, 2020-01-21 02:54

Thank you, Alan! 

  • Yes, by normal income I meant ordinary income and your point concerning ST Cap Gains turning to LT after a year is understood and appreciated.

 

  • Actual payment of Cost Basis Tax and Penalty due following rules concerning any other income – check.

 

  • Determining Cost Basis at time of share sale taking into account previous taxes paid – I’ll have to take a look at Form 8949.

 

  • Regarding “like” accounts… I got a little more information after taking a look at plan summaries and talking to Principal.

 

  • There are 3 accounts….
  1. ESOP – Defined Contribution Employee Stock Ownership Plan
  2. Profit Sharing – Defined Contribution Profit Sharing Plan
  3. 401K – Defined Contribution 401(k) Profit Sharing Plan

 

  • ESOP and PS are apparently labeled as Profit Sharing Accounts. 100% Employer Contributions. They’re qualified as 401A.

 

  • The 401K has a small employer matching component but is primarily employee contribution and is qualified as 401K.

 

  • The ESOP is the only account that directly holds any company stock.

 

  • They’re all apparently listed by principal as “Profit Sharing” plans. Are they all “like”? Is there anything else I ought to be looking at to make that determination? How long do I have to distribute the other applicable accounts? 1 year, correct? And I can roll them into an IRA? 

 

  • At this point, I’ve only had the ESOP assets distributed – company stock to a Taxable Investment Account via a Lump Sum In Kind Distribution and a small cash/money market component rolled into a Traditional IRA account. Both those receiving accounts were created and funded completely by the distributions to keep record keeping as uncomplicated as possible.

 Thank you again!  

Submitted by Alan - IRA critic on Tue, 2020-01-21 03:18

  • A qualified LSD just means that all such “like accounts” have a 0 balance at year end. The plans will therefore check the “total distribution” box on all 1099R forms. The rest of the plan assets besides employer shares are normally rolled into either a TIRA or Roth IRA as direct rollovers. If there are any non Roth after tax contributions in the 401k, they are either used to reduce the Box 2a taxable cost basis, or instead rolled into a Roth IRA tax free. You may or may not have you choice how they are applied if you have a balance there. 
  • Since the balance in all applicable plans needs to be 0 at year end to have a qualified LSD, best to start the process no later than early November. In your case, you already started it, so just need to have the other assets directly rolled out by year end. Always make it clear that you intend that the 1099R for the share distribution be shown as a total distribution with NUA in Box 6.

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