401k – Beneficiary IRA Rollover Trasnfer in Cash or in Kind

Submitted by Alon David on Fri, 2021-05-07 18:03

Hi Alan-iracritic

Thank you for all the help during this process for me.

To refresh, my mother passed away and left me her 401k as a beneficiary with the company she worked with years ago. The company is holding the 401k and is giving me the requirement to rollover the funds to a brokerage within 60 days. However the company is asking me if I would like to rollover in kind (in shares) or in cash. It will still be rolled over to a beneficiary ira which should be a tax sheltered event, but does picking any of these options (cash or shares) incur more taxes than the other when doing a rollover? Are they exactly the same in terms of tax liabilities?

Also the company told me I have to take an RMD before the rollover begins. Is that accurate?

Thank you



Submitted by Alan - IRA critic on Fri, 2021-05-07 23:12

There is no difference in tax liability for the rollover based on rolling assets in kind or in cash. Certain assets in the plan may be proprietary and not acceptable to an IRA custodian.  However, if the plan holds highly appreciated employer shares eligible for NUA, you have the option to distribute those shares to a taxable brokerage account, pay tax on only the cost basis, and then sell the shares later on. When you do, the NUA gains will be taxed at the lower LTCG rate instead of ordinary income. You might look into this before requesting the usual direct rollover to an inherited IRA. FWIW, you also have the option of doing the direct rollover to an inherited Roth IRA as well, but that would be a taxable rollover.
If your mother was RMD age and did not take her 2021 RMD before passing, then the plan must distribute that RMD to you and not include it in the direct rollover. It will be taxable to you. The plan is correct.

Submitted by Alon David on Sun, 2021-05-09 19:38

So it seems I made a mistake then. I will call the 401k custodian tomorrow to see if it can be reversed. I currently chose the cash option which seemingly liquidated the whole 401k, I will receive the check in the mail this week, ie its been liquidated but hasnt been rolled over yet to the BIRA yet. Is it too late to go with the NUA option if I dont own the shares currently?

Submitted by Alan - IRA critic on Sun, 2021-05-09 20:15

You didn’t say that you already requested the direct rollover. The cash option is simpler  since the plan can just mail you a direct rollover check for the entire value. How do you know NUA is worthwhile if you were not given a cost basis quote?  Typically, if the cost basis is more than 25% of current value, NUA is not beneficial. If you have already requested a cash direct rollover check payable to your inherited IRA brokerage, and the employer shares have been liquidated, it is too late to reverse that. 

Submitted by Alon David on Sun, 2021-05-09 20:24

The cost basis is definitely less than 25% of the current value. These shares were purchased 30 years ago. Thank you for the info, I just dont understand why the companys benefit center never provided this as an option.

Submitted by Alan - IRA critic on Sun, 2021-05-09 21:24

You should have been provided with a 402f Notice or equivalent information. NUA is mentioned in that Notice, link below:
Notice 2020-62 (irs.gov)

Submitted by Alon David on Mon, 2021-05-10 16:26

Hi thank you for your help. The beneficiary center said they may be able to reverse this event. I will be meeting with my CPA this week. What information would you recommend I present to my CPA to decide which route is more tax benefiical (NUA route or IRA rollover route.) As a side note: the beneficiary center mentioned that my mother didnt outright own any company shares but just the cash in the company fund but I would have to repurchase shares with a different brokerage that the company outsources to. I got the cost basis as well as the number of shares. The CB is 27.4% of the Total.  Is a CPA the right person to speak to about this? Or would a CFP be more knowledgeable.  You have defintely helped me get more insight in this process so I can be knowledgeable with my hired tax professionals. Thank you so much

Submitted by Alan - IRA critic on Mon, 2021-05-10 18:05

Sounds like she owned units in a unitized stock fund that can be converted to actual shares through this brokerage. Since 27.4% is borderline it is not possible to determine if this is beneficial or not. You would have to set up an account with a brokerage you current do not deal with. The actual total value of the shares is another factor, since just a few thousand is probably not worth all this unless you actually need the funds for current spending. For example, if you took a distribution from an inherited IRA, it would be taxable as ordinary income. But if you did an LSD and sold shares, the NUA portion (72.6%) would be taxed at the lower LTCG rate. That would also resolve any diversification from holding too much in a single holding for too long. But if you do not need the money fairly soon, you might be better off with the total tax deferral of an IRA direct rollover.
Note that to qualify for NUA, you must complete a qualified lump sum distribution (LSD) all in the same year. And with RMDs due, it would have to be this year, or the RMD would disqualify NUA in the future as it would be considered an “intervening distribution”.  On the other hand, the distribution of company stock would count toward the 2021 beneficiary RMD for you, or for her year of death RMD if she passed this year.
To be clear, you would still need to do a direct rollover to an inherited IRA for the REST OF the plan balance to complete the LSD. Only the amount you allocate to purchase company shares through the brokerage is kept in a taxable brokerage account. 
Many CPAs or tax people are not aware of the enough details of NUA to be of help. This link contains considerable detail:     401(k) Net Unrealized Appreciation (NUA) Rules And Caveats (kitces.com)

Submitted by Alon David on Mon, 2021-05-10 21:25

Thank you for your help You would have to set up an account with a brokerage you current do not deal withDoes this mean in order to qualify for NUA distribution it has to be a brokerage that I currently do not have an account with? 

Submitted by Alan - IRA critic on Mon, 2021-05-10 22:40

No, you could have the shares distributed to your own existing brokerage account or open one wherever you wish. I just took your last post to mean that your plan required you to use a specific broker, but that is not the usual case.

Submitted by Alon David on Tue, 2021-05-11 16:08

Hello, I spoke with the company retirement center. They told me that if I go with the NUA route that I would have to wait until a certain age (65 or so), to benefit from LTCG. Before that age, any sell off would be considered ordinary income. Have you heard of that, is that accurate?  Also I am trying to crunch the numbers (of course I am not making any moves until I have a licensed professional walking me through it) but I can’t wrap my head around how the 25% cut off (cost basis/total value) wouldnt be beneficial. For instance if I only paid 24% on the cost basis and then 15% on everything else, doesnt that always come out ahead of paying 24% every year in the situation of a Beneficiary IRA? (of course assuming those numbers fall into those tax brackets)  Thank you for your help, its incredible how many tax professionals have no idea about this. I am going to keep researching and searching. Thank you again.

Submitted by Alan - IRA critic on Tue, 2021-05-11 19:20

That info is totally wrong. Once you get the distribution in shares you can sell the shares anytime you wish. The NUA will be treated as a LTCG. Now if there are additional gains in the shares after the distribution, if you sell the shares in the first year, the additional gain (but not the NUA) will be taxed as ordinary income. After 1 year all gain is taxed at the lower LT rate.
The higher the cost basis, more will be taxed in the distribution year as ordinary income, and you will have continued annual taxable income on dividends each year. Since you would probably sell some shares sooner than later to meet diversification goals there is considerable loss of tax deferral benefits. There are some examples in the link provided but they are for owned IRAs, not beneficiary IRAs in which you probably only have 10 years to distribute the entire balance. That means your beneficiary IRA offers very limited tax deferral compared to owning the IRA with smaller and lower annual RMDs not starting until 72.
The 25% is just a very rough breakeven point and any individual could have a much lower or higher break even point between the NUA shares and IRA rollover (inherited IRA in your case), depending on multiple factors such as age, current and future tax brackets, etc. In short, making the selection is sort of a crap shoot. And the real elephant in the room is how the company will perform. If it encounters bad times and the share value drops, your NUA per share drops with it, and you might choose to sell your shares much sooner. While the same thing would happen in an IRA, sale of the shares in the IRA would not generate taxable income. You would just reinvest the proceeds in other securities. 

Submitted by Alon David on Mon, 2021-05-24 16:03

Hello, if my mother took a distribution before she passed, does this disqualify the rest of the 401k for NUA eligibility? Also does that disqualification carry over to us? I am doing a transfer for my brother who had the same account profile as me and now I found out from a representative that if my mother took a distribution already ( she was 74) that it would disqualify the rest of the 401k from NUA eligibility. Is this accurate? I will of course run this by my tax advisor, but just wanted to get a broader outlook. 

Submitted by Alan - IRA critic on Tue, 2021-05-25 00:43

No, it does not disqualify the rest of you because her death is a new triggering event for NUA if the beneficiaries make a qualified LSD. It would have disqualified HER for NUA if she had lived and wanted to utilize NUA in some later year, but does not disqualify beneficiaries.

Submitted by Alon David on Tue, 2021-05-25 19:12

Ok I see. So I finally found a financial group that has experience in distributing shares with NUA eligibility. From what I gathered from them, the company holding the 401k will convert to units into shares at the same cost basis with their internal custodian. Then we will receive a 1099R form which will also be mailed to the IRS. But there usually isnt a field for the cost basis on this form from what I have read. The financial group told me that the custodian will report to the IRS independantly the cost basis and I wont have to. Is this true? Just wanted to double check before moving forward.  Honestly, thank you for your help and turning me onto this. If everything checks out with my advisor then you literally saved my family thousands of dollars in tax liabilties. I really appreciate it. 

Submitted by Alon David on Tue, 2021-05-25 19:13

Ok I see. So I finally found a financial group that has experience in distributing shares with NUA eligibility. From what I gathered from them, the company holding the 401k will convert to units into shares at the same cost basis with their internal custodian. Then we will receive a 1099R form which will also be mailed to the IRS. But there usually isnt a field for the cost basis on this form from what I have read. The financial group told me that the custodian will report to the IRS independantly the cost basis and I wont have to. Is this true? Just wanted to double check before moving forward.  Honestly, thank you for your help and turning me onto this. If everything checks out with my advisor then you literally saved my family thousands of dollars in tax liabilties. I really appreciate it. 

Submitted by Alan - IRA critic on Tue, 2021-05-25 20:36

There is no such independent report. The 1099R shows the taxable cost basis in Box 2a, and you have to divide that by the # of shares distributed to get the taxable cost basis per share. However, it gets more complicated if you have after tax contributions in the plan which the plan applies to reduce the taxable cost basis in 2a. This makes the calculation of the cost basis you provide to the broker receiving the NUA shares more complex. What the broker needs is the cost basis per share from which they will determine the cap gain upon sale of the shares that they will report to you and the IRS on Form 1099 B.
No need to go into the more complex calculation unless the plan actually contains after tax contributions that are applied to reduce Box 2a. If you find that to be the case, please post. 
To be clear, you need to supply the cost basis to the broker per share, so the broker can determine the amount of LTCG to report on the 1099 B when you sell the shares. Some brokers may not be interested in this info and will report on the 1099B without showing the cost basis, indicating that the shares are “uncovered”. Then when you file Form 8948 to report the cap gain, you will have to determine what the correct cost basis is from which to determine your cap gain. You might ask your broker receiving the shares what reporting support they provide for NUA shares. 
This is confusing, so you may have more questions.
 

Submitted by Alon David on Wed, 2021-05-26 23:13

Hello, so 96% of the assets are in the company stock unitized fund. 4% are in smallcap-large cap equity funds. I am assuming that 4% is pre tax as well. I am assuming these can be rolled over separate from the company stock correct?When you say we will report the cost basis to brokerage shouldnt the 401k company report the cost basis?Picking up from my last response, is there anything that you can think of that we should look out for that would disqualify these assets from NUA? 

Submitted by Alan - IRA critic on Thu, 2021-05-27 03:07

The 401k administrator reports the cost basis to you and the IRS on Form 1099R and perhaps on a plan statement for you. You then calculate the cost basis per share and provide that info to the brokerage firm. The 4% not in company stock would typically be sold to cash in the plan and then moved to a rollover IRA as a direct rollover. The entire plan balance must be 0 at year end in order to have completed the required lump sum distribution. Before deciding to proceed with NUA you should discuss it with the plan administrator to make sure that the company stock held in the unitized fund will qualify for NUA, and NUA and the cost basis will be shown on the 1099R.

Submitted by Alon David on Thu, 2021-05-27 04:29

The 401k administrator basically told me today that they cannot decide whether these shares will be NUA eligible and that we should discuss it with a tax advisor. No tax advisor I’ve met has any experience with this. The CFP I spoke to said that they should be NUA eligible but I havent spoken to anybody who really looked at my account. Just the 401k administrator. But previously they did say they were eligible only they cannot guarantee it. 

Submitted by Alan - IRA critic on Thu, 2021-05-27 18:54

The 401k administrator is legally required to determine if you are eligible for NUA, although they will not help you determine if utilizing NUA is a wise decision. There is no way for an employee’s tax advisor to make decisions for the employer plan. I think you are dealing with an inexperienced 401k administrator and if they do not know how to address NUA, it is up to them to retain and pay for a plan consultant to train them, provide advice, or recommend a new administrative firm. 

Submitted by Alon David on Thu, 2021-05-27 21:32

My brother who trying to inact this transaction told me today the representative for the company says when they use these units to convert into shares then the cost basis is reported as the value of purchasing as of today. Ie if the cost basis was 50 Market value was 200. Now the cost basis will be 200. Which is weird, because every representative there assured me the cost basis would remain the same. Is this normal? Is it really just the discretion of the 401k administrator to decide if the cost basis is the same or will be reassesed?

Submitted by Alan - IRA critic on Fri, 2021-05-28 16:42

He needs to talk to someone else, since what he was told makes no sense. Conversion of unitized employer share accounts to actual shares does not reset the cost basis to the present. 

Submitted by Alon David on Fri, 2021-05-28 17:18

They seem pretty firm on that. We called in again today and they say their system is not set up to track or report the cost basis to the IRS, even though the cost basis is right there on the website, so a lot of stuff is not making sense on their end. The supervisor there also expressed that same sentinment. This is all super weird, don’t know if its dilberate. But One last question, I really appreciate the help. I know there is an order that needs to be satisfied to perform NUA. According to this article https://irahelp.com/slottreport/using-nua-rmd-%E2%80%93-3-steps So from my understanding, we transfer the shares to satisfy the RMD amount at first to a taxable account. Then rollover the non company stock to a Beni IRA. Then we transfer the rest of the company stock into a taxable account. Can the RMD transfer and NUA stock transfer be to the same account? Also can this all be done at once or does there have to be a time break in between? Again appreciate the help, I am almost at the finish line. I appreciate the assistance. 

Submitted by Alan - IRA critic on Fri, 2021-05-28 21:46

Before any rollovers are done, the 2021 RMD must be distributed, however if NUA is going to be used, the entire value of the NUA shares will apply to the RMD for 2021. Once the RMD amount as a minimum is distributed, the remaining balance in the plan can be directly rolled over to an inherited IRA. The entire balance of the 401k and any similar plans from this employer must be distributed before year end in order to have a qualified LSD for NUA purposes.
Per the above, the distribution of company shares, at least the amount of shares you want to use for NUA purposes can be done as a single distribution. You do not have to distribute just the RMD amount and then distribute the rest. The shares you distribute can exceed the RMD, but taxes would be due on the cost basis anyway, so the ability to apply the share distribution to the RMD does double duty by having the RMD covered by the distribution of NUA shares. But if the value of NUA shares is less than the RMD, then the rest of the RMD will have to be distributed from the rest of the plan balance. 
The NUA shares and the rest of the RMD (if any) can go to the same brokerage account. You can request both the direct rollover to an IRA and the distribution of shares at the same time, however I think that would be risky given the plan administrator confusion/incompetence. Best to complete the distribution of NUA shares/RMD to the taxable brokerage first and when that is complete do the IRA direct rollovers. 
The complexity of this transaction given the plan administrator issues is concerning, as they could well mess it up even if your instructions are clear. I would put everything in writing a keep a copy, then monitor the completion of the plan distributions. Unless there is a pretty clear advantage to NUA, you would be better off to keep it simple and just have the RMD distributed (taxable to beneficiary), then the direct rollover of the rest. 

Submitted by Alon David on Fri, 2021-05-28 22:56

Ok this makes sense. So to be sure, The RMD distribution doesnt have to be a seperate transaction from NUA transaction. The RMD can be included in the bulk transfer for the NUA sharesas that would in itself constitute the RMD as well. At this point the only money that is left are funds that can be rolled over which will be done a day later etc.
Yes it is very concerning the amount of inaccuracies we have received (from one of the biggest companies in the word mind you). However, we now spoke to a specialist (not yet a supervisor, that will have to wait until next week) who ran a mock transaction and said that they report the cost basis as the whole market value because I need to self report the cost basis with our own tax advisor. This seems odd because couldn’t hypothetically I report a false number to the IRS, which of course I wouldnt, but why would I be responsible for that? If I get audited, what form of verification would I have? And if they will verify, why don’t they just report it to the IRS? Seems odd and fishy, but I am just curious if you have ever heard of that. Again apprecaite your wealth of knowledge and I know I am getting long winded here, just wrapping these final set of questions because we have to make the distribution next week. Again appreciate the help immensely. 
 

Submitted by Alan - IRA critic on Sat, 2021-05-29 14:40

The IRS will get the 1099R as you will. If you are sure that there are no after tax contributions in the account, then you can divide the amount in Box 2a by the number of shares distributed (after they convert the unitized account to individual shares)  to get the cost basis per share, and then provide that info to the brokerage as soon as they receive the shares. Let me know if there is ANY after tax balance in the plan, since that changes things. The broker will then either recognize and use the cost basis per share you gave them so you get an accurate 1099B when you sell shares, or they will treat the shares as “uncovered” shares and leave it up to you to report the cost basis on Form 8949 and Sch D when you sell shares. Be sure to secure a copy of a 401k statement just before you request the share distribution, as it may or may not contain documentation of your dollar cost basis. Note that if the shares pay dividends and they were reinvested to purchase more units, each reinvestment over the years has added to the cost basis. Speaking of reinvesting dividends, it will eliminate some complexity if you do NOT have the receiving broker reinvest dividends paid after distribution.
Once you can talk to a specialist that understands NUA, some of the misinformation should be cleared up. It is correct that the only reporting done is the 1099R itself, but you should be able to find out the gross amount of cost basis that goes in Box 2a. What you were told about that is correct. I have not heard that NUA reported on your personal return is an audit generator, but in the event you do get an inquiry down the road, be sure to keep the best documentation you can once the distribution is made, as you might need that whenever you eventually report the sale of these shares. It is preferable that the receiving broker accepts your cost basis figures since the broker will then show the correct basis on the 1099B instead of not showing any basis and requiring you to report it on your return.
If there are further gains in the share price after distribution, the additional gains are taxed at the ordinary income rate (ST cap gain) if you sell in the first year. After that, the additional gains are LT and taxed at the same rate as the NUA per share. If the shares lose value before you sell, that just means less NUA and lower LT cap gains. Upon your death, the cost basis and additional gains get the basis adjustment, but the NUA per share does not, meaning that your beneficiaries would owe tax on the NUA per share when they sell the inherited shares. 
Unfortunately, when you sell the NUA shares, there is NO IRS provided template for reporting the sale of NUA shares on Form 8949. You report just like any other stock sale. If you sell in the first year and have to report some ST gain on the NUA shares, you will have to split the sale up on Form 8949.
Finally, as you stated, the NUA share distribution will probably be a larger figure than the RMD and will therefore automatically satisfy the RMD without any special reporting.

Submitted by Alon David on Sun, 2021-05-30 05:25

Ok thank you. I am sure there are no after tax contributions in the account. But if I am mistaken and there are some aftertax money what would that change?

Submitted by Alan - IRA critic on Sun, 2021-05-30 15:35

It would about double the complexity. The plan provisions could provide for applying after tax contributions to reduce the taxable cost basis (Box 2a), or might give you the option of rolling the after tax amount to an inherited Roth IRA instead. If applied to reduce the NUA cost basis, the tax due on the LSD would be less, but the share basis in the taxable brokerage account would include both the taxable cost basis and the non taxable amount applied to the NUA shares. You would need to be sure to provide the total cost basis to the brokerage firm so your 1099B when you sell shares will show the correct basis.

Submitted by Alon David on Tue, 2021-06-01 23:58

So my brother and I spoke to the supervisor today and here is what I gathered.
Since their system is only set up to report the market value to the IRS, they will supplement that reporting with a separate document to us that will reflect the true cost basis. We will then share this with our brokerage who will update it on the 1099R form when we sell. From what I gathered from our correspondance this seems to be an appropriate way to handle the NUA strategy of only paying OI taxes on the cost basis. 
 
They said the RMD can only be made in cash. 96% of the account is concentrated in company stock. 4% is general index tracking funds. From what I understand the RMD will be this 4% liquidated into cash. They said they are unable to rollover this portion. I don’t know the order pre se but I believe the RMD must be the first money out. So do we take the RMD in cash as regular income then transfer the company stock? They said we cannot take the RMD in the form of shares and must only be cash. I just want to make sure we don’t lose NUA eligibility if we take a cash distribution as the RMD then transfer the company stock (NUA eligible) after. 
 We are making this distribution this week, so I wanted to get my final questions in beforehand. Thank you for your help. 

Submitted by Alan - IRA critic on Wed, 2021-06-02 00:10

They continue to be unfamiliar with NUA rules. It is true that the first distribution in an RMD must be applied to the RMD, but both the cost basis and the NUA built into the shares distributed apply to the RMD per the following IRS Reg. 1.401(a)(9)-5, QA 9. Therefore, it is unnecessary to distribute other assets to you and that will just increase your taxable income. The other assets should be included in a direct rollover to your inherited IRA after the RMD has been satisfied by the distribution of NUA shares to your taxable brokerage account.
“Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?A-9.(a) General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.” 

Submitted by Alan - IRA critic on Wed, 2021-06-02 00:20

The plan must complete a 1099R to report the LSD, and they must show the taxable cost basis in Box 2a and the NUA total in Box 6.  It is fine to provide the worksheet to the brokerage so that they have some documentation of your cost basis, but it could be years before you sell those shares and realize the NUA cap gain. The brokerage will issue a 1099B, not a 1099R since the shares will no longer be in a retirement account after the LSD. As indicated earlier, you might ask the broker if they want to know your cost basis for the NUA shares or if they are just going to treat them as uncovered shares, and you then enter your own cost on Form 8949 whenever you sell the NUA shares. I hope the broker better understands NUA than the plan administrator. Next January when the plan issues the 1099R, it could be incorrect. If that happens, you will have to ask them to correct it, and when they refuse, you can issue your own substitute 1099R using Form 4852. That would be unusual and unfortunate, but at least there is a way to reject a flawed 1099R, although that could trigger questions from the IRS.
About Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s Insurance Contracts, Etc. | Internal Revenue Service (irs.gov)

Submitted by Alon David on Wed, 2021-06-02 06:29

“The plan must complete a 1099R to report the LSD, and they must show the taxable cost basis in Box 2a and the NUA total in Box 6.” 
The plan administrator said they cannot report the cost basis. They can only report the market value. Is that a dealbreaker?
“Next January when the plan issues the 1099R, it could be incorrect. If that happens, you will have to ask them to correct it, and when they refuse, you can issue your own substitute 1099R using Form 4852. That would be unusual and unfortunate, but at least there is a way to reject a flawed 1099R, although that could trigger questions from the IRS.”
Yes it seems we will have to go through this process. The plan administrator said they can only report the market value not the cost basis. 
So if I understand correctly. The plan administrator said they could only report the market value. Because of the plan administrator’s odd rule, the IRS will receive a form from them of the market value but not the cost basis. Having already updated the cost basis with our broker manually and when my brother sells the shares, we will have a 1099B and we will fill out a Form 4852 and send into the IRS the year of the sale. If the IRS asks questions we will provide them with the supplemental documentation of the cost basis from the plan administrator. Will that be enough for the IRS? Did I understand it correctly? 
Thank you again

Submitted by Alan - IRA critic on Wed, 2021-06-02 17:54

The 4852 relates to the 1099R issued by the plan that you would receive in January. The cost basis goes in Box 2a and the NUA goes in Box 6. Both are required because the NUA is the difference between the market value and the cost basis. It now strikes me that this plan may not have report cost basis because they did not track it and cannot provide it. If that is the case, you cannot use NUA. If the plan has the numbers there is no credible reason for them not to complete the 1099R as required. If they do not have the numbers, that would be a valid reason for not being able to report them. 
The broker does not issue any 1099 until the year you sell the shares. A 4852 is not used if the broker issues a 1099B indicating the shares are uncovered (that is the broker does not report cost basis) as was the case prior to 2010. You would have to provide the cost basis yourself on Form 8949. That cost basis would be what the plan paid for the shares if this info is available and you are using NUA, but if that is not possible then the cost basis would be the full market value of the shares when distributed from the plan. 
Why don’t you ask them a direct question – “are you not reporting the cost basis on the 1099R because you did not track and collect that cost when each employer share was purchased by the plan?  It makes no sense for them not to complete Box 2a if they have the figures.
To be clear if the plan does not report the cost basis and the NUA amounts on the 1099R, you would not be able to use NUA. The plan not realizing that the distribution of shares counts toward the RMD is another issue if they refuse to accept the IRS regulation I provided indicating that the distribution of shares does apply to the RMD for that year.
 

Submitted by Alon David on Tue, 2021-06-08 16:45

So I took your advice and asked directly if the cost basis is being tracked. Its a little complicated but this is how the process was explained.  
Only for beneficiaries, the cost basis of the units are tracked by the 401k administrator only until the point of transfer. This is because their system is not set up to transfer that information about the cost basis for beneficiaries, no reason why. Instead they transfer the units to a third party broker dealer to purchase the stock there. No idea if these are earmarked stocks set aside for this purpose or new stock. The administrator will then give me a 1099R form with the market value as the taxable amount, not the cost basis. They will include a separate document by email with information of the cost basis so it can be self reported (sounds like they don’t want to be held accountable for NUA elgibility). I will share this information to update the cost basis with the third-party broker dealer. When probed about the units/shares being NUA eligible they said they cannot guarantee eligibility.  However, they assured me that they don’t actually send anything to the IRS. We have to send that 1099R form to the IRS. 
 So here are my questions and concerns, and I appreciate your patience for this. 
Can we send the form 4852 to the IRS instead of the 1099R form that we receive? 
If the IRS starts to ask questions, will a non-notarized document from the company be enough to substantiate the cost basis?
If we have to send in the 1099R form with the market value as taxable, wouldn’t we have to pay high taxes on that? Wouldn’t that defeat the purpose of this strategy? It seems once that 1099R form is sent, then we would be paying more in taxes. 
 

“If the plan has the numbers there is no credible reason for them not to complete the 1099R as required. If they do not have the numbers, that would be a valid reason for not being able to report them.” 

 They claim they have the numbers they just cannot transfer that information to the brokerage because it seems to be an administration issue. Of course I won’t proceed without consulting my CPA and CFP.

Submitted by Alan - IRA critic on Tue, 2021-06-08 20:27

By law, any 1099R issued must be sent by the issuer to the IRS as well as the participant. The problem with the plan using a different firm to convert units to stock, and the outside firm not knowing whether you actually qualify for NUA or not and therefore issuing a 1099R showing the entire value as taxable means that the form will also not show the cost basis or the NUA. Therefore, you would have to convince the IRS to accept whatever documentation you can provide when you report the LSD. 
If you use a 4852 to override the 1099R, I cannot predict whether the IRS would accept that in lieu of the 1099R they have or not. This is so rare a situation, and so many different issues that could arise, if things do not go perfectly, you will be stuck with a fully taxable distribution and the 60 day deadline to roll over the shares will have passed long before you know whether NUA can actually be used.
Since the cost value of 27.4% is in the borderline area for NUA to be beneficial, and you have the 3rd party broker dealer issuing shares which must then be transferred to your usual brokerage firm and that firm will have to agree to the cost basis per share based on the plan statement, that is too much to expect to go smoothly. There is usually a small cash component included in the unitized value so the plan has liquidity, and it is not clear whether that gets converted into partial shares or not.
I would recommend passing on NUA given all these abnormalities, and just do a direct rollover of the entire balance to an inherited IRA. Any year of death RMD not completed for 2021 would have to be distributed before doing this direct rollover. 

Submitted by Alon David on Thu, 2021-06-10 21:10

Thank you I appreciate that.
By the way they changed their mind on the RMD, now we are allowed to satisfy that within the company stock transfer. No need for a separate cash distribution. 
We are advising with our CFP today, deadline is tomorrow. If we do proceed with the NUA strategy. Does the order matter? The 401k administrator mentioned if we do the transaction it must be done as one transaction (ie. the rollover of non company stock and transfer of company stock will be done at the same time) we cannot separate them. If all company stock units are transferred to common stock and all non company stock is rolled over in one transaction does that effect the NUA possibilities of the company stock? 

Submitted by Alan - IRA critic on Thu, 2021-06-10 21:41

Glad they finally figured out what counts toward the RMD.
The order does not matter as long as the entire LSD is completed before year end. However, the plan may require that both must be done on the same day. Timing should not affect taxes. Note that you do not have to transfer all the potential employer shares to a taxable account for NUA purposes. You could transfer some of the share balance for NUA to the taxable brokerage account and roll over the rest to an inherited IRA. That would reduce current taxes on the cost basis and make it easier to diversify out of the shares without having to pay the CG tax on the NUA. Tradeoff is that the inherited IRA would be larger and eventually those distributions would be taxed at the full ordinary income rate.
Withholding has not been mentioned, but when company shares are distributed, no withholding is required by the plan. Hope they understand that.

Submitted by Alon David on Thu, 2021-06-10 23:57

Thank you. Just a little clarification

Note that you not have transfer all the potential employer shares to a taxable account for NUA purposes.

I don’t understand this part.

 You could transfer some of the share balance for NUA to the taxable brokerage account and roll over the rest to an inherited IRA. That would reduce current taxes on the cost basis and make it easier to diversify out of the shares without having to pay the CG tax on the NUA. 

By rolling over, do you mean the company stock or the non-company stock?

Withholding has not been mentioned, but when company shares are distributed, no withholding is required by the plan

So I should choose not to withhold?
Thank you again. Just want to clarify these last few things before tomorrow’s call. 

Submitted by Alan - IRA critic on Fri, 2021-06-11 00:32

I made a typing error in that statement. I edited that post to clarify that you do not have to distribute the entire company share account to the taxable brokerage to use for NUA. The shares you do not wish to use for NUA can be rolled over to the inherited IRA along with the rest of the plan, and that would reduce the taxable cost basis. You could then sell the shares in the inherited IRA to diversify out of the company shares with no tax current taxes due. Just an option in case you were interested. 
With respect to withholding, it should be automatic that there is no withholding, since there is no cash available for withholding since it would all be shares. If you have to complete a distribution form for the shares, you might simply enter “no withholding since the only distribution is NUA shares”. Of course, the rest of the account would be distributed as a direct rollover to an inherited IRA, so no withholding on that either. 

Submitted by Alon David on Tue, 2021-09-14 16:46

Hi so for my sister, I transferred the company shares from my mother’s 401k retirement plan to the taxable account held at the custodian the company uses. However we also have some company stock held in this taxable account that are not NUA eligible. The whole account reads as one whole number obviously all the company stock are now grouped together in the same account. Our CFP claims we can sell everything (our intention) and self report on the % of NUA shares at tax time. I wanted to double check if there was a cleaner way to do this for the IRS come tax time. Its just the fact that now there are NUA eligible and non NUA eligible shares being held in the same taxable account. Is there a certain procedure for this? And do I have to wait a certain amount of time to sell these NUA shares? Like should I wait a year or can the NUA shares be sold right away. 

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