Net Unrealized Appreciation following Acquisition

[Jon Chambers]

Company A maintains 401(k) plan including employer securities. Many plan participants hold highly appreciated shares of Company A stock through the Plan. Company B acquires Company A, exchanges shares of Company B stock for shares of Company A stock, and amends Company A's plan to provide that the plan can hold Company B stock as the new employer security.

Question 1: Is plan participant's net unrealized appreciation (NUA) in Company B stock determined based on the historical purchase cost of Company A stock that was exchanged for the Company B stock, or based on the acquisition price by Company B?

Question 2: Assuming that NUA is based on historical purchase cost, can participants elect capital gains treatment on a future sale of Company B stock, assuming shares are distributed in-kind and are liquidated outside the plan? If yes, how long do they need to hold Company B stock to qualify for long term capital gains treatment?

[Guest Harry O]

See Section 402(j) of the Code for the rules on this situation.

1. Historical purchase price.

2. They can request a distribution and sell the stock immediately and get long-term capital gains (assuming the distribution would otherwise qualify for NUA treatment). All NUA is taxed as long-term capital gains regardless of how long the shares were actually held by the plan.

[Jon Chambers]

Thanks Harry! I knew someone would know the answer to this one.