Stock Distribution from Terminating DB Plan?

[Guest amboyd]

Can a terminating db plan that holds employer stock and cash assets offer participants the option to receive a lump sum distribution upon termination in the form of stock? I haven't been able to find specific guidance on this issue, but in the normal course, wouldn't the plan liquidate the stock and make distributions in cash?

Thanks.

[AndyH]

You can offer distributions to be "in-kind" in a DB termination just like any other plan that does not have self directed investments.

The participants would all need to be offered the same opportunity and would obviously need to elect a lump sum and elect to have part of their distribution in the form of stock (or any other security).

[Kirk Maldonado]

Don't forget that distributions from the plan in the form of employer stock can qualify for favorable tax treatment in certain circumstances.

[Guest Harry O]

How would a distribution of employer stock from a DB plan qualify for NUA? I never really thought about it before but it seems it might be an uphill battle.

[mbozek]

Under IRC 402(e)(4) a Lump sum distribution from any qualified plan is eligible for NUA.

[Kirk Maldonado]

Harry O:

I must confess that I've never had to face that particular situation. (That is why I used the particular wording that I chose.)

I just wanted people to focus upon that potential issue; not to give a definitive answer.

[Guest Harry O]

mbozek -

For there to be NUA, there must be "basis."

I'm not sure how a participant would have basis in shares that were never allocated to his account (DB plans obviously do not allocate assets to accounts). The trust itself has basis and maybe this is enough . . .

I haven't had the time (or energy) to pick up the section 402 regulations which should answer this question.

Interesting question . . .

[Kirk Maldonado]

Harry O:

If you parse your way through the regulations, I believe it works.

[mbozek]

Harry: See Reg. 1.402(b)(2)(ii)© and (D) for the determination of basis in a DB plan.

[Guest Harry O]

Thanks. Learn something new every day.

In any event, distribution upon plan termination won't be a qualifying lump sum for NUA purposes (unless the employee happens to be over age 59.5(?)).