Rollover of Employer Securities

[Guest Gibson]

A plan participant is terminating employment to go with another company. His account in his profit sharing plan consists partially of employer securities. He wants to roll over the employer securities into his new company's plan. When he finally takes a distribution (and subsequently sells the stock), do the net unrealized appreciation rules in 402 apply in the same manner as if he'd received a distribution fro his first employer and then sold the stock?

[Disco Stu]

Unfortunately the opportunity to take advantage of the NUA rules is lost if the securities are rolled to another qualified plan or IRA. I believe that the cite would be under 402(e)(4), which states that the NUA rules apply to...

"...any lump sum distribution which includes securities of the employer corporation..."

Once the distribution comes out of another plan, the securities are no longer from the employer corporation.

It very well may be in the person's interest to take a taxable distribution of the stock now. He will get taxed on his basis now and pay tax on the capital gains when he sells the stock. If the shares are rolled to another plan, he will pay tax on the fair market value of the stock when the shares are eventually distributed.

This participant should talk to a tax advisor about his/her situation. Depending on the particulars, rolling these shares could be a big mistake, resulting in a much higher tax bill later in life.

[Guest Harry O]

I agree that the employee should consult a tax advisor but some folks get all caught up in capturing NUA even when it doesn't make sense. If the stock pays a healthy dividend, sheltering the stock through a rollover makes sense. In addition, taking the stock may not make sense if you pay a 10% early distribution penalty on the basis (especially if the basis is a high percentage of the stock's value).