Desires NUA but some funds are frozen

Submitted by Bruce Schmiedlin on Sun, 2023-12-10 22:04

A prospective client is trying to do an NUA from his 401(k) by moving everything except the employer stock into an IRA via a trustee to trustee transfer and then moving the company shares directly from his 401(k) into a brokerage account. He took some form of distribution earlier this year, but it’s unclear whether that was a permissible dividend payout on the employer stock (which doesn’t taint NUA) or one that forces him to finish his LSD before year end. His broker confirmed with the custodian that the participant is eligible for NUA treatment this year, and the custodian stated there had been no disqualifying distributions in prior years.

When the broker went to execute the NUA steps, things went horribly wrong. The custodian refuses to allow the participant to liquidate his 401(k) because, for reasons unknown to the broker, part of the 401(k) is frozen. The custodian also claims that the participant will be allowed NUA treatment in a future year. However, my history with this specific custodian shows them to be other than trustworthy.

How does the participant proceed with NUA treatment when part of the 401(k) is frozen and there might have been a distribution (if it wasn’t the employer stock dividend) earlier this year?



Submitted by Alan - IRA critic on Sun, 2023-12-10 22:36

  • If the earlier distribution was 404k dividends, those are not considered intervening distributions. If the distribution was not from 404k dividends, then such a distribution would require that the LSD be completed this year or the participant would have to have a new triggering event possible (separation from service or reaching age 59.5).
  • What part of the plan is frozen, employer shares or something else? Why and for how long? Have the employer shares been distributed yet? The plan admininstrator must clarify both situations – the type of prior distribution, and why the current LSD cannot be completed.
  • Note that if the employer shares have been distributed, and it becomes clear that a qualified LSD with the total distribution box checked on the 1099R is not possible, if the share distribution was done in the last 60 days, the shares can be rolled into an IRA. 
  • What is the role of the broker here?  Plan participants usually deal with the 401k administrator directly, and should clear with the administrator that a qualified LSD is possible, and determine the % of cost basis for the company shares. 


Submitted by Bruce Schmiedlin on Tue, 2023-12-12 00:01

I agree with everything you said and have sent the broker down all those paths. I pointed out the 404(k) dividend aspect, and there’s no way to tell from the statements if it was 404(k) dividend or something else.  I provided reading material to the broker and client regarding how those work.  The statement only shows money going out during that without a description or even a date.  The statements don’t show income detail either.  I put the onus on the broker to deal with the plan’s recordkeeper to sort all this out. I instructed the broker to find out what was frozen and why. The shares have not been distributed. The broker is helping the participant navigate this, as the broker will manage both the resulting IRA (non-shares) and the taxable brokerage account (company shares).  The participant is adrift and relying on the broker to make this happen.  The recordkeeper simply isn’t being forthcoming with the information.  In fact, two months ago the recordkeeper said the participant could do an NUA without mentioning that any of the account was frozen. As for triggering events, the participant already is past age 59.5 and has separated from employment. My best hope is that someone knows of a PLR when a plan freezes assets and the participant wants NUA treatment.  Or that the plan confirms these were 404(k) dividends, which remains uncertain, and the participant has the means to wait out the freeze. My personal experience with this large recordkeeper has been poor, so I trust nothing verbal.  They froze my GIC due to its underperforming assets (not permitted in the prospectus) and tried to have me roll over company shares in-kind into an IRA despite being warned that this blows up NUA.  Now I see the same games years later with this participant (no, it’s not me).



Submitted by Alan - IRA critic on Tue, 2023-12-12 03:55

404k dividends are issued by an ESOP, not a 401k. Was there an ESOP plan here? One way to check is whether last year a 1099R was issued with Code U (404k dividends).



Submitted by Bruce Schmiedlin on Sat, 2023-12-16 00:42

This was the first year he got any money from the account, so there isn’t a prior year 1099R.  Nice thought, though.  He’s not sophisticated enough to understand whether there was an ESOP that rolled into the 401(k) as a subaccount/source.  The statements just give beginning balance, total dollars in/out, total dollars investment performane and ending dollar balance.  No shares, no dates, no money sources. That’s why I’m not giving advice on whether or not this was a dividend that doesn’t trigger LSD rules. My hope is that someone knows of a PRL that addresses the inability to do a LSD due to frozen funds.



Submitted by Alan - IRA critic on Sat, 2023-12-16 01:51

Why is the 401k frozen, and is there any estimate available on when the freeze might be lifted? Client may have to wait this out. Not having any access to his funds or to change investments is likely a bigger problem than not being able to do an LSD/NUA in the near term. 



Submitted by Bruce Schmiedlin on Tue, 2023-12-19 13:01

  • I’ve posed those same questions to the broker and suggested they speak with the Plan Sponsor and consider an ERISA attorney.  It’s been weeks, and I haven’t heard why the assets are frozen.
  • This major 401(k) player has a history of freezing GIC holdings when the underlying assets underperform.
  • That same player sells annuities, and I hope they didn’t sell one inside the 401(k).

I’m looking for any options if this year’s distribution triggered the LSD requirement while some assets are frozen.



Submitted by Alan - IRA critic on Tue, 2023-12-19 16:02

If the employer shares have been distributed and the 1099R does not indicate both an LSD and an NUA amount, not only has the NUA opportunity been lost, but the entire value of the distribution will be taxable, likely more damaging than the loss of the LT cap gain rate. If the share distribution was received in the last 60 days, the taxable nature of the distribution can be prevented by rolling the shares over to an IRA or by selling those shares and rolling the cash received to an IRA. If the 60 days has passed, and if the IRA custodian will cooperate, Rev Proc 2020-46 can be used to extend the rollover period using the reason “a” or “k” to qualify. At this point the person could probably wait a month to see what the 1099R indicates, and if adverse attempt a late rollover to eliminate the taxable income from his 2023 return. Again, I am not aware of any PLR that allows the participant to treat an attempted LSD thwarted by frozen assets as a valid LSD. 



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