NUA

Submitted by Anthony Nicolich on Thu, 2017-04-20 15:51

Client has retired from company that does annual distributions from ESOP. ESOP company stock is priced annual when dividend is declared. Plan administrator tells my client he can not take advantage of NUA because distribution can not be split between roll over and taxable distribution.

My understanding is that as long as full distribution is made from ESOP at once it can be split. I am not sure how you would document distribution of the stock and simutanous sale back to ESOP of shares attributed to NUA.

Any advice from experience will be appreciated.



Submitted by Alan - IRA critic on Thu, 2017-04-20 18:56

What is there to rollover, a 401k plan?  There must be a full LSD of all similar plans to enable NUA to be applied. Some ESOPs may limit distributions to annual, in which case there is no LSD until the final distribution. This is true whether the ESOP shares must be sold back to the plan or not. What did client want to roll over?

Submitted by Anthony Nicolich on Mon, 2017-04-24 18:31

ESOP plan makes annual distributions after seperation.  My client intends to do a “final distribution” direct rollover to IRA if he is unable to benefit from utilizing NUA on a portion of his ESOP balance.  Would like to split a portion sufficient to cover income needs prior to 70 1/2 rmd and roll balance into IRA.  His company contact is unfarmilar with NUA and wants us to provide information about mechanics of a split distribution.  I’m trying to find some expert or authoritative resource to assist my client.

Submitted by Alan - IRA critic on Mon, 2017-04-24 19:28

This link explains the many distributions options that could apply to the ESOP. Once a plan requires annual distributions, the NUA option is essentially eliminated by these intervening distributions after the year of separation. And if so, direct rollovers to an IRA are the best option since the lower LT cap gain will not be available when the shares are sold. If distributions are annual over 5 years, it sounds like a direct rollover to an IRA of each annual distribution is the only option that makes sense. This probably explains why the plan is not familiar with NUA.   https://www.nceo.org/articles/esop-participant-distribution-rules

Submitted by Anthony Nicolich on Mon, 2017-04-24 23:09

He will take 100% distribution.  The plan only opens the window once per year after the shares are priced for that year.  My question is wether the distribution can be split between rollover and taxable distribution.  I’m not sure that I have made that clear.  Thx

Submitted by Alan - IRA critic on Tue, 2017-04-25 00:18

  • There is no IRS related rule that would limit the rollover options. For example, various amounts could be rolled to a TIRA, Roth IRA, other type of employer plan, or just distributed to the participant. However, the plan may well limit the number of destinations, perhaps even to just one destination and this is permissible. If that is the case, the client could request 100% distribution and do his own rollovers, but would have need to come up with the cash from his other funds to replace the mandatory 20% withholding.
  • To make sure I understand the plan option, he can take a lump sum distribution in any particular year he wishes, including right away?  And if that is possible, I see no reason that NUA would not apply. Of course, he would need to get a quote on what the cost basis is per share so the amount of NUA could be determined.
  • If the plan will only offer a total distribution to him and not split destination accounts, he could do his own rollover of the shares he does not want to use for NUA and then sell them to diversify. However, if the plan will not show NUA on the 1099R, that also would trigger 20% withholding whereas distribution of NUA shares avoids withholding and cashing out any shares.
  • Some plans require the shares to be immediately sold back to the plan or employer. That limits the option of selling in a later convenient year. Would client receive shares or cash due to a required sale upon distribution?
  • In summary, the IRS offers all kinds of flexibility. But if the plan restrictions shut down many of these options, the client will have to work with the options that remain. Does client have an estimate of his cost basis per share? That does not change when the value changes. The cost basis may be too high for NUA to even be beneficial. 

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