ESOP Diversification & NUA
I have a client that is 51 years old with $2 million in company stock in his ESOP plan. His intent is to do an NUA transaction with about $200,000 and roll the remaining balance to an IRA so he can diversify his holdings. He is set to retire march 31st of 2022.
My concern for him is that he is remaining concentrated in the individual stock for almost an additional year. His plan allows him to diversify 25% of his balance and move this over to his Profit Sharing plan. If we were to do this diversification this year (2021), would that negate his ability to do the partial NUA next year when he retires? I know there are the lump sum distribution requirements for the NUA transaction but I am not sure if this would ruin the plan.
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-24 23:53
Whatever he can do this year will not affect the ability to do a qualified LSD in 2022. Note that if client also has a 401k (considered a similar type plan to the ESOP) that will also have to be rolled over next year. Because the ESOP allows transfer of 25% per year, what about after he retires? Will he still be able to do a full LSD of those shares using separation from service as the triggering event? Some plans limit annual payouts per year which of course ruins the LSD. Also, note that because he is retiring prior to the age 55 penalty exception applying, the taxable cost basis of the ESOP shares distributed for NUA will be subject to penalty.