NUA Qualification/2 Triggering Events

Submitted by Robin Ross on Tue, 2016-02-09 23:13

Hello. I have a client with the following scenario:

1) Separated service from employer in 9/2015. Has not taken any disqualifying distributions from his 401K since he retired (he has taken cash dividend payments, but since the employer reports them on a 1099 DIV he’s been told they are not considered “taxable withdrawals”).

2) He turns 59-1/2 in 7/2016, but wants to take a partial distribution now, continue collecting the dividend on the stock, and then do an NUA/Lump Sum distribution later in 2016.

Since he’ll be taking NUA after he turns 59-1/2, I just want to be certain that the previous partial withdrawal that he takes earlier in the year will not have any impact on his qualification for a new triggering event. Given that all transactions are technically occurring in the same taxable year, I want to be sure that we don’t do anything to negate his future NUA option.

Thanks in advance!

Robin



Submitted by Alan - IRA critic on Wed, 2016-02-10 00:17

  • A new triggering event erases the effect of any prior intervening distributions. That said, it is always a good idea verify this with the plan since the plan issues the 1099R, and a 1099R without the NUA shown in Box 6 will create some real problems.
  • Note that the partial distribution will be reported on the same 1099R as the distribution of employer shares. When later determining the cost basis and NUA per share, the partial distribution will have to be backed out of the 1099R figures so the math is limited to the employer shares. Of course, most plans provide a separate letter summarizing the number of shares distributed, cost basis, and NUA per share at the time of distribution and this should be retained for several years to document the cost basis when the NUA shares are sold. Without such a letter, the participant would have to work up the cost basis from other sources of plan information regarding the NUA shares. Therefore, the partial distribution could muddy the waters somewhat and result in more record keeping. Finally, once the documentation is complete, perhaps it can be used to get the brokerage holding the employer shares to enter in the cost basis info for their 1099B reporting when the shares are sold.
  • If participant has any after tax contribution in the plan, complexity is also increased. How much in after tax contributions that are assigned to the company shares will also affect the 1099R – it will reduce the taxable cost basis shown in Box 2a.

Submitted by Robin Ross on Wed, 2016-02-10 20:21

Thank you for confirming, and for the suggestions regarding NUA reporting.  Thankfully, this administrator does provide the transaction letters you mentioned, and illustrates an accurate accounting of share cost basis.As always, your insight is much appreciated!

Submitted by [email protected] on Thu, 2016-02-11 22:55

I just wanted to confirm that if someone utilizes the NUA stategy they have to empty the account in the same calendar year. They cannot take out only the NUA shares and leave the rest of the funds in the 401(k).

Submitted by Alan - IRA critic on Fri, 2016-02-12 01:29

That is correct. A qualified LSD is needed for NUA to be utilized, and that means that the entire balance of both the account holding the company shares and similar retirement accounts of the employer must be  distributed in the same year as the company shares.

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