DB Lump Sum and 401K Rollover Separate OK for NUA?
IRS Publication 575 (2007) defines “A lump-sum distribution for this purpose [b](NUA)[/b] is the distribution or payment of a plan participant’s entire balance (within a single tax year) from all of the employer’s qualified plans of one kind (pension, profit sharing or stock bonus plans)…..”
I have a DB which can be taken as a Lump Sum in 2008 and I have a 401K which includes highly appreciated company stock. I plan on rolling the DB Lump Sum into a Rollover IRA but am considering leaving the 401K (with company stock) in the employer’s plan for a few more years(very low investment cost, fees).
I want to confirm that as long as I take the company stock in kind and roll over the entire remaining balance of the 401K in a single tax year in the future I will not loose the NUA treatment since I took the DB lump sum in 2008.
The words “qualified plans of one kind” make me unsure of this….
Thanks for your feedback.
Permalink Submitted by Alan Spross on Tue, 2008-01-29 21:13
I think the publication verbiage is somewhat dated what with all the hybrid and other plans that have emerged in recent years. The 3 kinds of plans within the original intent were pension, profit sharing, and stock bonus plans. Your pension rollover now and the 401k (profit sharing plan) rolled in a later year will not compromise your ability to use NUA with employer shares in the 401k as long as the final LSD is qualified. Following is pasted from the IRS Regs defining what is included in each “kind”:
(b) General rules.
(1)(i) A pension plan within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. Retirement benefits generally are measured by, and based on, such factors as years of service and compensation received by the employees. The determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent upon profits. Benefits are not definitely determinable if funds arising from forfeitures on termination of service, or other reason, may be used to provide increased benefits for the remaining participants (see §1.401–7, relating to the treatment of forfeitures under a qualified pension plan). A plan designed to provide benefits for employees or their beneficiaries to be paid upon retirement or over a period of years after retirement will, for the purposes of section 401(a), be considered a pension plan if the employer contributions under the plan can be determined actuarially on the basis of definitely determinable benefits, or, as in the case of money purchase pension plans, such contributions are fixed without being geared to profits. A pension plan may provide for the payment of a pension due to disability and may also provide for the payment of incidental death benefits through insurance or otherwise. However, a plan is not a pension plan if it provides for the payment of benefits not customarily included in a pension plan such as layoff benefits or benefits for sickness, accident, hospitalization, or medical expenses (except medical benefits described in section 401(h) as defined in paragraph (a) of §1.401–14).
(ii) A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant. A plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For the rules with respect to discrimination, see §§1.401–3 and 1.401–4. A profit-sharing plan within the meaning of section 401 is primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident or health insurance.
(iii) A stock bonus plan is a plan established and maintained by an employer to provide benefits similar to those of a profit-sharing plan, except that the contributions by the employer are not necessarily dependent upon profits and the benefits are distributable in stock of the employer company. For the purpose of allocating and distributing the stock of the employer which is to be shared among his employees or their beneficiaries, such a plan is subject to the same requirements as a profit-sharing plan.