NUA and company stock by lot

Submitted by abraham boznick on Wed, 2019-10-02 04:29

I am over 59.5. I have retired and plan to use NUA technique to take out company shares out of my employer 401k plan. My employer uses an average cost basis and is unwilling to provide me or computershare (this is a compnay that the employer uses as a middleman when distributing 401k) the cost basis of shares by lot. However, I have all prior year statements from my employer and can see what the cost basis and number of shares were at the end of each prior year. Thus my plan is to take all low cost basis shares as of the end of year 2010 and use them for NUA. And transfer the remaining high cost basis shares after 2010 into IRA. I am willing to take a risk in case of IRS audit to explain on how I segregated my company stock into low and high cost basis lots, using the prior year statements as documentation.

Would I be better off in asking my employer to distribute all company stock directly to me and then within 60 days deposit low cost shares into brokerage account and high cost shares into IRA? Or should I ask my employer to distribute all company stock to computershare and then ask computershare to deposit the amount equivalent to “low cost shares lot” to brokerage account and “high cost shares lot” to an IRA account. Or in other words — which of those two methods would be easier to deal with when preparing a tax return?



Submitted by Alan - IRA critic on Thu, 2019-10-03 04:13

  • Regardless of how you do it, you would be undertaking a very aggressive approach in segregating the cost basis of various lots without documentation provided by the plan to back you up. The general consensus is that you must adhere to the plan’s accounting methods, and most plans use average cost basis for all shares distributed and therefore the participant must follow suit. There is no way to project what your degree of audit risk is here, but once you pass the 60 day rollover period, all company shares you hold will have a taxable cost basis.
  • The first method will produce a 1099R showing the average cost basis of only the shares distributed to you. However, you intend to report less than the 1099R and would need to include an explanatory statement as to why you reported less. The IRS will likely ask you for your documentation. However, the additional tax due here is only the difference between what you report as taxable and the average cost basis for the number of shares distributed.
  • With the alternate strategy of distributing all the shares, your downside is higher as more shares have been distributed from the plan. Again, you would be reporting less income than Box 2a shows, but here you would have to document the cost basis of the shares you rolled over using your own lots backed up by your plan statements. 
  • While both aggressive approaches depend on IRS acceptance of your documentation (or IRS not even understanding your statement), the second plan is more risky simply because more shares have been distributed so there would be larger difference between what you report and the 1099R.
  • You should determine if you would still do the LSD if your taxable cost basis was as shown on the 1099R. Normally, NUA is only beneficial if that basis is < 25% of the FMV, gray area perhaps between 25 and 30%.

Submitted by abraham boznick on Mon, 2019-10-07 05:03

Alan, thank you very much for your insightful comments. If it is not a big deal would you please let me know how 1099R  (for each box) as well  other associated forms submitted to IRS under each of the above two scenarios would look like. Let’s say my company stock consists of 5,000 shares purchased BEFORE end of 2010 valued now at $300,000 with cost basis of $65,000 as well as 6,000 shares purchased AFTER 2010 valued now at $360,000 with the cost basis of $250,000. As I indicated earlier my company is only willing to provide overall cost basis of $315,000 for ALL shares (though I have a statement from 2010 indicating the value and cost basis of 5,000 shares purchased before 2010)

Submitted by Alan - IRA critic on Mon, 2019-10-07 15:23

  • Pre 2011 shares only IF the plan issued such a 1099R:  Box 1  300,000; 2a 65,000; 2b Total Dist. checked; 6  235,000; 7 Code 7. This assume you have NO after tax contributions in the plan allocated to the employer shares. If you do, then Box 2a would be reduced accordingly. Of course, the plan will not issue this broken out 1099R, this would be for your use to enter into a tax program if you elected the aggressive approach.
  • The 1099R actually issued by the plan would include all shares unless you chose to distribute to taxable account fewer than your total. In that case, the following figures would be pro rated.  Box 1 660,000; 2a 315,000; 2b Total Dist box checked; 6 345,000; 7 Code 7. These figures would would have too high a cost basis to justify NUA – 48% of FMV.
  • If you distributed all the shares, then rolled over shares you are presenting as high cost basis post 2010 shares, you would report a rollover on line 4 of Form 1040, which would reduce the remaining NUA shares to match the first scenario 1099R. If the IRS disagreed, you would be stuck with pro rated amounts of the second 1099R amounting to 100% less the % of value rolled over.

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