NUA followed by Rollover

Submitted by Mhotchkiss on Wed, 2015-04-01 17:59

Client has ESOP Company stock. Privately held company. Client takes a lump sum distribution, utilizing NUA treatment – company immediately liquidates stock and gives client cash. Client receives a 1099R for the total value $16,000 of the account, box 2a shows 7,712, box 6 shows NUA 8,987. Client also receives a 1099B for $16,000. Client then, within 60 days, rolls over the $16,000 to a new IRA. (Don’t ask me why) What was done wrong here? I think he could take NUA treatment, but likely the privately held company doesn’t want it’s stock floating around with unaffiliated people, so they would want to liquidate it. But, if that’s the case, and he received cash for the stock AFTER the distribution, he wouldn’t be able to rollover that portion to an IRA, correct? Am I missing something? Do ESOPs or privately held companies have special rules for NUA? How would this need to be fixed? -m



Submitted by Alan - IRA critic on Wed, 2015-04-01 20:37

  • m- as you suspected, client has a choice between NUA and an IRA rollover. When the shares are distributed the client has a choice utilize the NUA, rollover the shares, or sell the shares and rollover the proceeds from the sale. In this case, there was no option to hold the shares and the plan required sale of the shares, but the client still has the option to decline NUA and complete a rollover within 60 days. Having chosen the latter, the 1099B is effectively nullified, as is NUA. Client cannot change his mind again because the IRA rollover is permitted and is not an excess contribution to the IRA. IRS custodian will report a rollover contribution on Form 5498.
  • Per Pub 590 A, p 26, “The same property (or sales proceeds) must be rolled over – If you receive property in an eligible rollover distribution from a qualified retirement plan, you cannot keep the property and contribute cash to a traditional IRA in place of the property. You must either roll over the property or sell it and roll over the proceeds” and further “treatment of gain or loss” – if you sell the distributed property and roll all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds are treated as part of the distribution and are not included in your gross income”.  This would have to be explained to the IRS in an explanatory statement relative to Sch D and Form 8949.
  • Note that this applies whether the shares are private or publicly traded.

Submitted by [email protected] on Wed, 2015-04-01 21:43

Ok, so I am clear, you are saying that given what occured, the client completed an IRA Rollover and nullifed the NUA on the balance.  No tax liability, no cap gain treatment, no basis in the IRA.  Is it possible, that alternatively, he could say he meant to do the NUA, and mistakenly rolled over the NUA proceeds into the IRA, keeping the cap gain tax liability but by rolling it in to the IRA, created an excess contribution?  If so, is that possible to fix by removing the equivalent of the NUA amount from the IRA?

Submitted by Alan - IRA critic on Wed, 2015-04-01 22:45

I don’t think so because what was done was not an excess contribution. The amount rolled over was fully eligible for rollover if done within 60 days. There have been several past PLRs holding that once employer shares are placed in an IRA, NUA is forfeited. While the shares were sold and therefore employer shares never reached the IRA, I don’t see any  reason to expect that the IRS would come to a different decision and with the cost of a PLR, I would not think it wise to pursue that. Note that client also could have rolled part of the proceeds (or shares had he been allowed to retain them) to an IRA and treated the rest of the distribution according to the 1099R, pro rating the amounts on the 1099R for NUA purposes.

Submitted by [email protected] on Thu, 2015-04-02 13:33

Makes sense.  Thanks.

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