Net Unrealized Appreciation in a NON LUMPSUM distribution

[Guest jrseattle]

This question relates to the tax treatment of NUA in a NON LUMPSUM distribution. I'll receive a distribution, partly in kind (employer securities with a HUGE NUA), partly cash. I'll rollover the cash into an IRA (I'm aware of the 20% withholding issue). That rollover makes the distribution a non LUMPSUM (pub 575, 1998, page 21, item 12). What is the tax deferral status of the NUA in this case. Page 22 (top) says "this tax deferral applies only to the extend the NUA in employer securities results from EMPLOYEE CONTRIBUTIONS". This last term is undefined and unclear. It does not mean "deductible voluntary employee contributions" a term used for contributions made between 1981 and 1987 (page 20). Does it refer to employee contributions versus matching employer contributions? Does it mean anything else than the deferred compensation used to fund the 401K?

[Guest Beavis]

Employee contributions in that context is referring after-tax contributions that may have been made to the plan.

[This message has been edited by Beavis (edited 01-16-99).]

[Guest Harry O]

Rolling over the cash portion of a total distribution which otherwise qualifies as a "lump sum distribution" does *NOT* disqualify the distribution as a qualifying lump sum distribution for NUA purposes. This means that all your NUA, not just that attributable to after-tax employee contributions, will be eligible for favorable NUA treatment.

The rollover *DOES* disqualify you from 5 or 10 averaging, however.

There is at least one recent IRS PLR on this issue. Your employer should be able to give you some good information on these rules (especially if employer stock is a big component of their plans).

[Guest jrseattle]

Thanks Harry,

This is good news. I assume PLR stands for Private Letter Ruling. Do you refer to private letter ruling 9721036? I found a reference to it in a Web page from aicpa.org, written by Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

Can one request the IRS for copies of these rulings?

A related question: does the 50% rule from 402(a)(5)(D)(i) apply (meaning you have to rollover at least 50% of the distribution for it to be tax deferred)?

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[Guest Harry O]

I don't have the ruling at my fingertips but that sounds about right. I'm not sure if the IRS will provide copies of the rulings, and if they do, expect a bit of a wait. Ask your accountant or tax advisor for a copy as most tax professionals subscribe to services which reprint these rulings.

Your reference to 402(a)(5)(D) indicates you need an updated version of the IRC! This section (dealing with partial rollovers under pre-1994 law) has been repealed. You can now rollover just about any distribution. The old 50% rule was repealed . . .