Early ESOP Withdraw NUA Trigger

Submitted by Daniel Owen on Tue, 2023-03-07 19:25

Client is 58 and has met requirment to take 50% of ESOP value as in service distribution rule that would allow access now. That ESOP has 18% of the total invested in composed company stock w NUA and the rest of the ESOP is in a Target Date fund. Would they be able to take the 50% early withdraw from ESOP as direct rollover without starting the NUA, assuming we can cherry pick what we roll out and not touch the company stock, take only from target date?

And to further complicate things they are also participanting in a 401k profit sharing plan with a company stock fund w NUA. We are clear that no distribution nor NUA is available on the 401k until the client seperates from service or attains age 59 1/2 but are also worried that an early withdrawl from the ESOP could alos start the NUA clock and ruin the opportunity?



Submitted by Alan - IRA critic on Tue, 2023-03-07 21:47

As long as there will be a future triggering event (age 59.5 or separation), a qualified LSD for NUA purposes can be done after such future triggering event, and in such a case a partial distribution would not be a problem. However, because an ESOP must be composed primarily with company shares it does not make sense that a target date fund composed of other investments could be allowed within the ESOP. Client will need to clarify that. 

Submitted by Daniel Owen on Thu, 2023-03-09 15:03

His SPD referenced 401(a)(35) saying must provide 3 options so the have company stock + target dates?

Submitted by Alan - IRA critic on Thu, 2023-03-09 15:35

  • The diversification requirement applies to the 401k, but there is an exemption for ESOPs. The target date fund is likely part of the 401k, not part of the ESOP.  There might be employer shares in both the 401k and the ESOP.
  • These two plans are treated as DC plans, and the LSD must include the full distribution of both plans in order to utilize NUA on company shares in either plan. 

Submitted by Daniel Owen on Thu, 2023-03-09 17:55

agreed it’s strange but the ESOP statement shows two line items on investments – company stock and target date. Then the actual 401k shows target dates. So it appears to be an ESOP that allows the diversification and thus loss of NUA on whatever gets invested in target date, my best guest.

Submitted by Alan - IRA critic on Thu, 2023-03-09 18:23

Client needs to push for an understandable explanation of how these 2 plans are structured, and if “target date” is actually a diversified fund or holds ESOP shares that are not distributable until a certain date. If the shares of both plans cannot be fully distributed within one year, then NUA cannot be utilized.

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