Direct Rollover AND NUA question

Submitted by David Carrell on Wed, 2023-03-22 18:34

Apologies as I suspect the details will make this a long question…

Scenario…401K contains 2 “blocks” of employer stock. These are all pre-tax monies. These blocks have been maintained separate with separate baseis. They were given separately, through separate different processes. One block accumulated stock awarded by formula to all employees every 6 months. The other block is the accumulated employee performance bonuses. The custodian has always kept these shares in separate “Funds” (their term).

Block Stock Shares Cost Basis Current Value NUA Ratio
#1 XYZ 1600 $70,000 $150,000 47%
#2 XYZ 750 $8200 $70,313 11.7%

So I want exercise my NUA but only on block #2 since the cost/value on block #1 is too high to make sense. (IMO). This transaction is requested and process. The shares are placed into the CMA account with a different firm.

Couple of weeks later (but in the same year) I request that block #1 shares be In Kind Direct rollover into a TIRA account with the same separate firm. This was completed with no issues.

A subsequent later transaction(s) completely empties the 401K, again still in the same year.

Now the 1099R is issued showing that the In Kind rollover of block #1 is taxable and is reported in box 2a. When asked, the 401K custodians review and reply was that the NUA of block #2 precludes the subsequent in kind rollover of block #1 into a IRA and must go to a CMA/Brokerage account as a taxable distribution.

1. Does this make sense? Is there any IRS rule/regulation supporting the custodian’s claim?

2. Could this be corrected simply by my accountant completing a corrected 1099R with the proper $ in box 2a and including a letter of explanation? The shares are all in the correct accounts so the only real issue is the taxable $ on the 1099R.

3. Alternatively, can I utilize the Rev. Proc. 2016-47 and self certify this as a delayed in direct rollover?
a. If I were to use 2016-47, do I need to remove the stock shares from the IRA into a CMA. Then move them back into the IRA?
b. If I am moving the shares out and then back in, how do I get the shares out of IRA with out triggering another

4. If there is a rule which precludes the in kind direct rollover due to the NUA, can the NUA be “voided” i.e. such that the subsequent rollover is now allowed.
a. Could the 2016-47 then be used to move the “was NUA” shares oven into the IRA?

***Edit***
5. If my only recourse is to do as the 401K custodian says and treat the rollover of block 1 as taxable
a. how do I get the $ out of the IRA w/o triggering another taxable event? (if this was all precluded by IRA rules, how did the transaction get processed anyway? but this is more philosophical question.)
b. can that somehow be made into a NUA at this point? (which I really doubt). Note that if needed there has been a subsequent enabling event (I turned 59 1/2 after the 401K was ’emptied’)
*****end edit****

Thanks In Advance,
D.

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Permalink Submitted by Alan - IRA critic on Wed, 2023-03-22 22:07

If your other two 1099Rs are correct including the one with NUA in box 6, the solution to the rogue 1099R for 220,000 is simply to report it as rolled over on your 1040 as a 60 day rollover on line 5 along with the 1099R coded G for the other direct rollover. No need to remove anything from the IRA since those shares are where you want them now and they are not an excess contribution. Moreover, the IRA custodian is going to issue a 5498 showing the rollover contribution total for both rollovers. This willl be consistent with the 1099R and your returns. The fact that the 220k was actually done as a direct rollover but you are reporting on your 1040 as a 60 day rollover makes no difference. I assume there was no tax withholding since just shares were distributed.

Permalink Submitted by David Carrell on Wed, 2023-03-22 22:53

There are no other 1099R’s. Everything is reported on a single 1099R.
Additionally, no the NUA is not reported correctly. This was also pointed out to the custodian who simply replied, the 1099R is correct. Maybe not correctly, but I was able to get the basis of those NUA shares set in the new firm CMA account.
I would like to correct the NUA also but I have no clue how to do so when the reporting company refuses to admit there is an error. Since the NUA went into a CMA as required but the 1099R has a code G. That alone says the 1099R isn’t correct. Basically the whole 1099R is messed up the the firm is refusing to admit there are any errors. So I am at a loss how to correct or get them to correct everything.
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So ignoring the NUA issues (still working to figure out how to address those), can we simply follow your prior information above and just treat the $220K as a 60 day rollover?
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Will continue working on a way to correct the whole NUA issue including possibly using process 2016-47 and treat as a delayed 60 day rollover. I know that will undo the advantage of the NUA for those shares forever but frankly it might be cleaner to do this and simply be done with all of this and the mess. (BTW, I know a firm not to recommend for any even slightly complex transaction. LOL)

Permalink Submitted by David Carrell on Thu, 2023-03-23 00:20

Reviewed/discussed this with my accountant. She wants to discuss with another partner to confirm. But running the information through their program on a trial basis, this appears to work for the incorrect taxable amount in 2a. Thanks for this suggestion. Wish every solution was this clean and simple (but I REALLY WISH the 401K custodian would get their act together.)
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Doesn’t do anything for the NUA issues so will continue working that one. We are considering your prior suggestion to use process 2016-47. Have a meeting with recieving custordian company next week. Will be asking if they would accept the “late” rollover of the NUA to effectively erase it using 201-47
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Thanks again, so very much on the issue you have helped resolve. Really wasn’t looking forward to the additional ~$80K of taxes due.

Permalink Submitted by Alan - IRA critic on Thu, 2023-03-23 01:31

The people who you are talking to seem totally clueless. It appears to be more than miscommunication with the recordkeeper possibly related to incorrect distribution coding. You indicated what accounts these amounts went to and the 1099R is incorrect in multiple areas, but what shows in each box of this 1099R? There is always the option of issuing your own 1099R (actually two of them required) using Form 4852. See link below:
Form 4852 (Rev. September 2020) (irs.gov)
Self certified late rollover is not applicable here since all amounts distributed are in the right accounts, but the 1099R makes no sense in multiple areas.
You will need to file an extension for your 2022 return. That will provide 6 more months, but you will have to pay your estimated tax liability.

Permalink Submitted by David Carrell on Thu, 2023-03-23 02:19

Completely agree that there is likely a simple communication isse. But unfortunately the company (for what I assume are generally good reason just not good in this case) doesn’t allow direct communication to the ‘decision makers’. I have a couple of ideas about where the miscommunication or misunderstanding is happening, but since I can’t reach out to them I can’t share that info.
Literally when I asked the person I can talk/communicate to if he would contact them to get an explination, I was told that isn’t the process and he can’t do that.
Literally at this point all I have is his oral statement that ‘we took your information and they reviewed it. We determined the 1099R is correct as issued and no corrections necessary and will not be made.’
No further discussion or information on the basis of their decision or even statements why the errors I pointed out are not errors in their opinion. So fixing it that way isn’t going to happen. At this point my only possible way to get a corrected 1099R would be to contact their legal dept (best done by an attorney which currently I am not willing to pay for)
The idea of making our own correct 1099R’s is also part of the ongoing discussions.
The self certified late rollover as a way to null the NUA was actually a potential solution you mentioned previously. Those monies would (obviously) be moved from the CMA account into a TIRA as a late 60 day rolloever. The NUA benefits would be lost but at least the monies would all be in a qualified account since the one 1099R already shows everything going to a qualified account (though it did not which was one of the errors I shared with the 401K trustee).
Basically I give up any NUA benefits and make my actual distributions match the screwed up 1099R making it “right”. At this point, that might be the cleanest way as long as my IRA will accept the late ‘rollover’ with self certification. Not ideal solution but it might be the best solution.
Not worried about filing an extension as the wife runs a small business and we basically always wind up doing that but thanks for that reminder since we both know this isn’t getting completely fixed in 4 weeks, regardless of how it gets fixed.

Permalink Submitted by Alan - IRA critic on Thu, 2023-03-23 16:26

Yes, those are the two choices. As for correcting the flawed 1099R using the Form 4852 procedure, you might consider advising the plan that you feel your appeals have not received fair consideration, but the 4852 process invovles the IRS asking the plan for an explanation or correction, so if they continue to stonewall your requests, they will then have to respond to the IRS. If that fails to get a response then you could move on to either the 4852, or forfeit any NUA benefit in favor of the self certified rollover.
Before all this I think you had discussions with the plan relevant to NUA. So these people are aware how NUA works?
I assume there was no withholding taken or shown on the 1099R?
If you file the self cert form with your IRA custodian, you would indicate the first reason – financial institution error.
In the event that you have sold any of the shares distributed to the taxable account, please advise.

Permalink Submitted by David Carrell on Sat, 2023-03-25 18:23

They portend to understand NUA but obviously that knowledge is not consistent within the organization. Interestingly, it was “they” who originally presented to option for a NUA in Dec ’21. I chose to defer closing the 401K from ’21 to ’22 because I did not expect 3 weeks at the end of the year was enough time complete the necessary LSD the NUA required. The associate I was speaking with at that time agreed and I do believe she understood NUA process.
Obviously, the people (or now person) I am dealing with is clueless. But unfortunately, those who are making the error are walled off such that I cannot discuss with them. At this point, the senior plan lead has passed all discussions to legal. We all know how a corp legel dept works on resolutions. So at this point my only 1099R recourse would be via the IRS.
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However, we are currently leaning toward the self certification of a delayed 60 day rollover path.
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You are correct there was no witholding on any of these transactions on the 1099R (just another inconsistency in the trustee position vs. their actions.)
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We have a meeting with our financial advisor to discuss multiple issues but the self certification process is one of these. If we believe that the company will accept the past 60 day rollover. That is our likely path forward.
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Technically there were two different employer stocks that were NUA’d (due to a spin off 10+ years ago.) For one of these no shares were sold. For that block I assume I would simply move the shares in kind from the CMA to the TIRA.
For the second stock, approximately 1/3rd of the shares were sold. The stock appreciated about 35% over 3 months after they were distributed. The price has subsequently dropped back but are still about 10% above the price at distribution from the 401K.
Both stocks have declared and paid dividends while the shares were in the CMA.
For this second, can I simply buy the number of shares I sold back and move those to CMA? I suspect this is too easy a fix.

Permalink Submitted by Alan - IRA critic on Sat, 2023-03-25 22:46

For a rollover of shares (either within 60 days or later through use of the late rollover self certification process), you can either roll over the shares distributed, or if you sold some shares, roll over cash equal to the amount you received from the sale of those shares. Ignore any gain or loss since, and ignore the dividends paid on those shares when doing the rollover. You will get a 1099B for the shares you sold, but you will have to adjust the cost basis for those reported sales on Form 8949 to an amount equal to the amount you received from the sales in order to erase any gain or loss. These rules are explained in the “Rollover” section of Pub 575.
Therefore, you are correct. Since you must roll over cash equal to the amount you received from the shares you sold, re purchase of those shares would just use up the cash you received. And if you do not have enough cash in the CMA equal to the proceeds of the shares you sold, you would have to sell other holdings to raise that cash.

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