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ESOP NUA Tax rules

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To take advantage of the Net Unrealized Appreciation (NUA) tax rules for shares distributed from an ESOP, the IRS requires a Lump Sum distribution from all of the employer's qualified plans of the same type (that is, all pension plans, all profit-sharing plans, or all stock bonus plans).

If the employer has a 401k plan and a separate ESOP,  do employees have to take a Lump Sum distribution of both the 401k and the ESOP to take advantage of the NUA?

I've read different opinions on this.


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More specifically, a 401(k) plan is a profit sharing (there is actually no such thing as a 410(k) plan; they are all profit sharing plans with a 401(k) feature added!).  An ESOP is a stock bonus plan by definition.

From IRS: https://www.irs.gov/retirement-plans/employee-stock-ownership-plans-esops

"An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/ money purchase plan. "

Thus, the answer is clear; they are treated separately.  I'd be interested in who is giving you the wrong opinion that you note in you posted question.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089

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Thank you for the comments and IRS website link. 

A former employee's Fidelity rep was stating that all funds needed to be withdrawn from all qualified plans. The former employee provided a link to the Fidelity site with the following language:

  • You must distribute all assets from all qualified plans you hold with the employer, even if only one holds company stock.
  • https://www.fidelity.com/viewpoints/personal-finance/company-stock

To make sure we were providing good information to our employees, the question was referred to our outside ERISA attorney who stated that ESOPs are Profit Sharing plans and that a Lump Sum from all plans would be required. It didn't pass the smell test so I thought I check with the experts here. 

Thanks everyone.


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