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Net Unrealized Appreciation and Lump Sums


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In 2017 a participant terminated and received a single sum distribution of company stock derived from employer contributions.  In 2018 the employer made a profit sharing contribution, a portion of which was allocated to the participant who had terminated in 2017.  As a result, the participant received a second distribution of company stock in 2018.  

Can either or both distributions be considered a lump sum that would exclude the NUA from the participant's income? 

If not, can we correct under EPCRS, have the participant repay the first distribution, and the make a distribution in 2018 that is considered a lump sum for this purpose?  For this second question, assume the plan document did not permit the first distribution in 2017.  

 

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Complete guess, but I think you can make a reasonable argument that both distributions would exclude the NUA from the participants income.  In 2017, there was a triggering event and the entire account balance was distributed in a single tax year.  The PS contribution likely discretionary was not part of the participants vested balance until made to the plan

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Thank you Madison.  I was thinking along the same lines.  Yes the second contribution was discretionary.  The problems are (1) the distributions were not in the same year and (2) there was no separate "triggering event," unless the second contribution can be considered a triggering event.  I will have to give this more thought.  I was sure I could find something about this on the old 5-year averaging rules, but I have not been able to find anything.    

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Thank you for letting us know.  I still think you could make an argument on the discretionary profit sharing contribution piece if it was made infrequently.  If it is under $5,000, then you could argue the trigger was the mandatory cash-out? 

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I'm not sure how mandatory cash out could be a trigger.  The statute says death, after 59 1/2, separation from service, and disabled.  I am thinking maybe we could argue after 59 1/2, but I don't like that argument.  Under the plan, a distribution made after 59 1/2 is really described as an in-service distribution, and the participant here was not in-service at the time.  

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"I am thinking maybe we could argue after 59 1/2, but I don't like that argument.  Under the plan, a distribution made after 59 1/2 is really described as an in-service distribution, and the participant here was not in-service at the time."

I don't believe the 59 1/2 rule is at all related to whether or not the participant has separated from service, and I don't think the plan language is relevant. Just like the 10% early distribution penalty. The distribution just has to be after reaching age 59 1/2.

(And the distribution may also be "on account of separation from service." See, for example, the PLR linked below.)

Nat Choate's book has a good discussion of this issue (source of the PLR cite).

https://www.irs.gov/pub/irs-wd/0302048.pdf

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