Employee Stock in 401(k)
A Self-Employed client currently has a Solo Participant 401(k) plan that holds cash and about $25,000 of XYZ Company stock. She had rolled out these funds years ago when she left XYZ and went into business for herself. She remembers at the time the XYZ Stock had to come over in-kind as there were restrictions about her trading the shares. We’d like to change her custodian and go from her current Single K to a new Trustee who cannot hold the Stock. She is considering liquidating the XYZ to cash so the cash can come over to the new Solo K TTEE.
I am concerned about her ability to roll out the Company stock from her previous company, pay the Cap Gains and have the stock outside of her retirement plan. I think I remember this as an “Ed Slott” move that gets overlooked many times. The question is this – can she still do this maneuver – rolling the previous co. stock out and paying cap gains, or did that maneuver die when she did not take advantage of it when she originally rolled out of XYZ’s plan?
Permalink Submitted by mk foss on Tue, 2009-01-27 00:22
I’m afraid that this option is no longer available to her.
When a person leaves an employer where the qualified plan invests in employer securities, they can avoid ordinary income tax on the Net Unrealized Appreciation (NUA) in the employer shares. For example, if the average cost to the plan was $36 per share and the stock was trading at $76 when the person separates from service. The $36 is taxable as ordinary income when the shares are received and the $40 (NUA) is long term capital gain when the shares are sold.
Rolling the shares into an IRA or another qualified plan removes the ability to use the special NUA tax benefit.
Permalink Submitted by Alan Spross on Tue, 2009-01-27 00:25
Very good question.
If you assume that the original distribution from XYZ met the requirements of an LSD, and the single K plan agreed to track the NUA and cost basis info in the same manner that they would track after tax contributions post EGTRRA………then could the solo K issue a 1099R showing the NUA amount?
Don’t know, but there are already so many contingencies it would appear unlikely. But as far as I know the only firm rulings on NUA is that it is forfeited upon an IRA rollover. Since this is another QRP and not an IRA, who knows?
The IRS will be looking for a 1099R showing the NUA, but I do not know that the solo K has authority to track it and pass it through or not. Perhaps there has been a ruling that I am not aware of.