Reporting NUA to NRA

[Tegernsee]

This is a question I’ve never seen come up - apologies if it has and I didn’t see it.

We have a terminated participant in a US ESOP who is a resident of Great Britain (a nonresident alien).  He rolled over the non-stock portion of his account balance to an IRA in the US (apparently he plans to work in the US again some day), and had his employer stock distributed to a US investment account so he could benefit from the net unrealized appreciation rules.  We reported his basis as a taxable distribution on a 1099R, putting  his NUA in box 6, and put the total value of his total stock distribution (basis + NUA) on the 1042-S.  He is now telling us that we should have put all the  info on the 1042-S, and there was no reason to file a 1099-R.  I’ve read the instructions for both forms multiple times now, and can’t see where NUA treatment is discussed at all.  That seems reasonable to me, as the purpose of a 1042-S as I understand it is to identify US-source income so the appropriate treaty provisions may be applied to it.  Has anyone else ever faced this issue?

Thanks! 

[Cardscrazy]

I have not had this experience. But I generally don’t let participants tell me tax law. Especially related to ESOPS or 1099-Rs.  I would say to this participant that i filed according to the way I read the rules. I may be in error, but if you can bring in the assessment letter from the IRS that double taxes you or causes any other issue for you we would be happy to amend the 1099-R.   You will never hear from this person again.  

[Tegernsee]

That is a good answer, and I agree.  Unfortunately, the individual is happy to point out that he has a degree from a US law school and is not afraid to put it to use.  We would prefer to avoid litigation, and threats of litigation, if possible.  Also, I would like to get a definitive answer, if available, and get closure on this issue because I know it will come up again.

Thanks for the reply!

[Cardscrazy]

Ha!  Well you could consider hiring your own ERISA lawyer.  They'll be more diplomatic than me.  Generally, your participant is afraid of being what, double taxed?  The plan is required to issue a 1099-R.  My gut tells me the plan should never have filed the 1042.  Retirement plans probably do not have to issue 1042 forms.  As far as the threat, well what's the damage?  What's the legal fix?  What's the alternative?  What is your participant concerned about?  There is nothing to fear that an amended 1099-R or canceled 1042 or a letter from the plan sponsor can't fix and so there is no legal action here to worry about until something happens.  If the IRS has any issue, they'll write a letter.  Then you'll take action to help.  Promise to help if it comes to that.  Meanwhile, you can take this back and forth with this participant as a formal request for benefits and take it through the plan's claims process which will give you a 90 to 180 day cooling off period.   Just reply in a letter that you are taking his concerns to be a request for benefits under the plan.  The timing starts from when this participant first approached you with his concern.  Any corrections will be done according to the terms of the plan.  Locate the portion of the plan that relates to claims for benefits and plagiarize from that.  Send him a copy of the SPD with reference to the page where claims begins.  You do not have to feel bullied!

 

 

[Degrand]

I agree.  The entire distribution from the ESOP should have been reported on the 1099R.  I would fix the reporting filing since the distribution is from the ESOP and not the company.