NUA Cost Basis

Submitted by Ron Evans on Mon, 2022-08-08 04:56

I apologize if this has been covered before, but I couldn’t find it. I am 72 years old, and I retired 10 years ago. I have assets in an employer savings plan, and none of those assets have yet been transferred out. Some of the assets are in company stock, and some are in various other investment options offered within the plan. I am getting ready to take RMDs, and am considering having some of my company stock distributed by way of NUA. At the time of my retirement, my plan had accumulated about 10,000 shares of company stock, consisting of my stock purchases, company matching stock, and stock purchased by pass-thru dividends. After my retirement, I transferred all 10,000 shares of company stock to other assets within the plan (rebalanced the plan assets). Later, I rebalanced the plan again, and transferred some assets back into company stock, at the “then” stock price. That transfer was done on one date, 8 years ago. I later did another transfer into company stock, on one date 5 years ago, at the then stock price. Both of those transfers have since received quarterly pass-thru dividends, which purchased additional company stock within the plan. So, I now have 3 categories of company stock; one set purchased 8 year ago, one set purchased 5 years ago, and dividends for both of those sets. I have verified that stock added to my plan after retirement does qualify for NUA distribution, but I have received two different answers about the cost basis. One answer is that the all the stock is lumped together at the time of distribution, and the stock cost basis is averaged; the other answer is that, if the stock purchase date of a set of stock can be clearly identified, the price at the purchase date for that set of stock can be used as the basis. I want to only do an NUA distribution on the quantity of stock purchased 8 years ago, and am hoping to use that stock’s purchase price as the basis ( as per 26 CFR 1.402(a)-1(b)(2)(ii)(A)), because that cost basis is considerably lower than the averaged cost basis. I would appreciate any insight.
Thanks, Ron Evans



Submitted by Alan - IRA critic on Mon, 2022-08-08 11:55

  • Be sure that you have never taken a distribution from the plan after you retired and prior to 2022, since that would be an intervening distribution and disqualify you from using NUA.
  • The answer depends on your plan’s accounting rules. Most plans use average cost of all NUA shares held in the plan, and will determine how your 1099 R is completed. But it is worth asking your plan in case it maintains cost basis by certain acquired lots. You could then select only the lowest cost basis lots for NUA distribution. Of course, the plan may determine the lots used in plan accounting differently from your preferred group of the 8 year purchase. Ask for a cost basis quote on the shares you want to distribute for NUA before making the decision. 
  • A frequent question is whether a participant can use their own records to override the plan’s accounting provisions and the 1099R figures. Most likely this would be a red flag and would immediately be exposed by the 1099R matching programs. You would then have to appeal your override, and I would not expect the IRS to rule favorably on this. By the time this is determined it will be too late to roll over the shares to your IRA, which is an option you have for 60 days after the share distribution if you change your mind about NUA.

Submitted by Ron Evans on Mon, 2022-08-08 15:21

Thanks, Alan, for your great answer. I will ask, and see what happens. My own record is a quarterly statement. The average cost basis is about 1.5 times the preferred group basis.

Submitted by Ron Evans on Fri, 2022-08-12 19:42

I contacted my plan administrator, and found that their cost basis accounting for NUA withdrawals is very unfavorable for their customers. Each quarter, they calculate the current cumulative cost basis by simply adding each original puchase cost to each quarter’s dividend dollar amount, without regard to when those costs occurred.  When a customer wants to do an NUA withdrawal of a certain number of shares, they just calculate a “present average cost per share” by dividing the present stock total balance by the present cumulative cost basis, and multiply that by the number of shares to be withdrawn. Compared to using the FIFO or ‘specific share identification’ methods described in IRS Publication 550, their approach results in a significant loss from the additional taxes, in my case over $110K for a partial withdrawal. Their definition of “average” doesn’t even agree with Pub 550s “average basis” definition, which considers when each cost element occured. I suspect They take that approach because of a lack of direct traceability of the the original costs, because they took over plan adminstration only in the last 10 years or so. But, no matter what the reason, it stinks.

Submitted by Alan - IRA critic on Sat, 2022-08-13 00:12

It’s not that bad. The majority of plans use an average cost basis for all shares distributed. The various cost basis methods in Pub 550 do not apply to employer plan accounting. As for any reinvested dividends, if you took your LSD distribution, they would most likely add any very recent dividends to your cost basis at that time.  Therefore, your cost basis is only increased by being unable to select low cost basis shares for your NUA distribution while selling the other shares or rolling them over, and use of average cost basis is what the majority of plans use. 

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