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401K 'day trading'?


Guest simbarat
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Simbarat-One last thing, just for the sake of clarification...

The previous statements made about net unrealized appreciation, capital gains and company stock only apply when the dealing with the stock of YOUR EMPLOYER held inside the plan. Generally the entire amount of a distribution will be considered ordinary income regardless of the trading practices used by the account. The distribution of the shares of your employer are the exception to this rule. This was the basis of the previous posts.

Sorry if this is redundant. I wasn't sure if this was clear from the other posts.

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Guest dmj1998

simbarat - glad i could help.

mjb - based upon your comments, i would be really curious to see the kinds of plans you are working with. younger EE's definitely have little discretionary income, but how do you amass 90% of your assets in ER stock? At the very least, the participant elects the investment direction for their own payroll contribs. i could see 90% of their wealth tied up in a 401k plan, but if they elect 90% in ER stock for their own money, that's the type of situation that got enron EE's where they are today. my 10% comment was a generalization and jon is right to correct me in that it is different for every person. as for the citigroup and ibm example, what if i was an employee of bethelem steel, xerox or polaroid? those are some big old US companies where employees have dollar cost averaged themselves into a part-time job during retirement. the point i am trying to make (and maybe jon as well), is that what if you were a 65 year bank teller for Citibank in 1990 and you wanted to retire? with you company stock hitting $2 in 1991, you could have bought a couple of cigarettes and not much else. ER stock brings with it a level of risk that means the wrong place at the wrong time could be very painful for a lot of people.

btw - in 1991, C was actually Chrysler - you could have made alot if you bought during the late 1970's when lee was holding his hat out to congress - but what would it have gotten you right now?

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Jon- The Enron plan that has been discussed in the news has been widely reported to be a 401(k) plan (not an ESOP) which had a blackout period in Oct. Second qualified plans including ESOPS are not exempt from having to comply with federal age or sex discrimination laws since ERISA does not preempt the application of other federal laws. There is a long line of employers who have been found to violate ADEA /sex discrimination laws in their benefit plans even though they complied with the tax laws.

It does not really matter what the basis for liability is because Enron is bankrupt and the employees are nothing more than general creditors who have a better chance of recovery against Enron's advisors then Enron.

As for your statement about the cost basis in actively trading employer stock I cannot find any statement issued by the IRS to support it unlike other nuanaces regarding employer stock distributed from a plan.

mjb

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MJB--as you probably know, there is no such thing as a "401(k) plan", there is simply a 401(k) feature of a profit sharing or stock bonus plan. Although I don't have any definitive information regarding the Enron plan, my presumption is that the 401(k) feature was added to a stock bonus plan, since that is the structure typically used when company stock is a primary investment option (e.g., the vehicle for match). In this case, the 401(k) element becomes an element of a stock bonus program, hence the ESOP rules kick in. My point was that the rule requiring ESOP diversification at age 50 is the rule that is exempt from the ADEA. I'm not saying that the whole plan is exempt from ADEA.

My point about NUA is really more common sense. How can you have significant NUA if you buy into the stock just prior to it being distributed from the plan? I'm not aware of any IRS cites supporting my position, or any cites disagreeing with it either.

Jon C. Chambers

Schultz Collins Lawson Chambers, Inc.

Investment Consultants

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Jon- there are two types of plans that invest in employer stock: (1) Stock bonus plans (which can be an ESOP) which are designed to invest primarily in employer stock, e.g., they do not offer diversified investment options and conform to other specific rules for ESOPs, and (2) profit sharing plans including plans with a 401(k) feature with diversfied investment options under ERISA 404© which also make employer stock available as an option. A 401(k) plan permitting investments in employer stock has no statutory exemption from the ADEA anymore than it is exempt from the securities laws. Under the IRC, an ESOP can restrict the employees' right to diversify investments until the employee attains age 55 and has 10 years of participation but that provision is not available to a 401(k) plan that makes employer stock available as an option. I have reviewed many 401(k) plans offering employer stock that are not qualified as ESOPS.

As for the basis issue in employer stock if there is one thing I have learned in reseaching the IRC is that common sense is NOT available for interpretating the IRC. Only the statutory language can be used. The code completely conflicts with common sense.

mjb

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MJB--thanks for the clarifications. I completely agree with you on the IRC not following common sense.

Regarding 401(k)/stock bonus/ESOP and Enron, my presumption (based on reports that Enron permitted diversification just for older, long service employees) was that the plan was qualified as an ESOP, and consequently, could follow the ESOP rules for age 55 diversification.

Jon C. Chambers

Schultz Collins Lawson Chambers, Inc.

Investment Consultants

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