ESOP Rollover to 401(k) Plan?

[Guest Sara H]

An employer sponsors both a 401(k) plan and an ESOP. A retiree would like to roll the value of his ESOP into his 401(k) account. The 401(k) plan allows for rollovers from 401(a) plans by employees who have met eligibility. Is there anything that prevents this employee from rolling the value of their ESOP account into the 401(k) plan (he won't be actually rolling the stock into the plan, but the cash value of the stock).

[stephen]

As long as both plans allow for this it is not an issue.

[Guest Sara H]

I'm being told that if this employee wants to roll from the ESOP to the 401(k) plan that the 401(k) plan has to acept "in kind" rollovers....why would the rollover for a retiree have to come over as stock rather than cash?

[stephen]

If the employee is rolling over cash from the ESOP I am not sure why there would be an issue with the 401(k) plan accepting the cash. After all it seems this is simply a cash rollover to the plan.

However, if the employee is trying to roll the ESOP stock into the 401(K) plan I can see where the in-kind becomes an issue. As the 401(k) plan is not required to accept stock form the ESOP plan as a rollover contribution.

Does the ESOP allow for the retiree to take a cash distribution? If yes, can he/she then roll this distribtuion over to the 401(k) plan?

[Guest mjb]

Q Why does the ee want to roll over cash to the 401k plan instead of taking a distribution of the stock and being taxed at the LT cap gain rate on the nua? Only good reason to make rollover election is if fmv of stock is less than basis in which case the ee will be taxed only at ordinary income tax rates of the basis.

[stephen]

Perhaps the retiree wants to diversify their retiremwnt assets and is comfortable with the offerings and fees in the 401(k) plan and therefore is looking at that as an option.

By rolling over into the 401(k) plan there is not a taxable event and theerfore no taxes to pay currently.

The NUA may make sense but this was not asked by the original poster.

[Guest mjb]

By rolling over the stock the employee loses the benefit of the lower cap gain rate, 5% v. 15, 15 v. 25-35% on the NUA. (the ee would have to pay the 10% penalty tax on the basis if distribution occurs before age 55). The employee can diversify by selling the stock upon distribution at LT rates and investing in cheap index funds. Converting the stock to a capital asset investment instead of retaining it as an ordinary income asset in a retirement account will result a lower tax rate for both cap gains and dividends as well as stepped up basis. Paying taxes is a no brainer because the ee can use some of the proceeds from the stock (NUA is not subject to 20% withholding). Maybe the OP wasnt aware of the benefits of electing NUA on the stock.

[RLL]

Maybe there is no NUA....or maybe the amount of NUA is not significant in relation to the amount that would be taxable if there were not a total rollover.

[Guest Harry O]

The employee obviously wants to get out of his employer stock. He can do this on a pre-tax basis via a rollover. It would depend on the employee's facts and circumstances but I can certainly see a number of situations where the value of continued tax-free deferral outweighs the value of the capital gains break on a PORTION of his distribution.

I think a lot of folks run to use NUA without really thinking it through. There are certainly cases where the NUA tax break is very powerful but there are just as many cases where continued deferral through a rollover makes more sense.

[Guest mjb]

Given the substantial difference in taxation of 10% or more on the NUA (both at distribution and after the stock becomes a capital asset with stepped up basis) the only reasons elect not to rollover the stock is if there is no NUA or because the 10% penalty tax on the basis if the participant is under 55 would be greater than the tax savings of electing NUA. Most participants rollover the stock because they dont want to pay income tax on the basis not because they will pay less tax by rolling over the stock.