NUA treatment...when can or should it start?

[tghooper]

Our new client is an S corp. with put option.  We discussed the NUA treatment with the client whether or not this has been applied to past distributions and received very vague and incomplete information.  This has made us skeptical if this was correctly applied.  Seems to me that this treatment would have been applied across the board to all particpants to which it was applicable since plan inception (or post Rev proc 2003-23) to avoid nondiscrimination.  Any thoughts? 

[Luke Bailey]

tghooper, NUA is a tax rule under Code sec. 402(e)(4) that the participant should generally have the choice to apply. It is disclosed in the IRS model rollover notice, although probably is disclosed also in most ESOP SPDs. Are you saying the plan did not report the amount to the participant?

[ESOP Guy]

If you are saying you think the 1099-Rs were done wrong in the past so you should keep doing the 1099-Rs wrong I would disagree. 

if that isn't what you are saying I am not sure what the question is.   

A side point have they been updating the basis every year for the S Corp flow through earnings?   That can change the basis and NUA a lot.  

[tghooper]

Luke...correct, we don't believe they have been providing this election via the rollover notice and it's also not disclosed the SPD. 

[Degrand]

NUA is usually not applicable to ESOP since distribution are made in installments.  A lump sum distribution is required to be eligible for NUA treatment.  In addition, distributions rolled over into another qualified plan are not eligible.  

[BeckyMiller]

I don't recall any requirement to include the amount of NUA in the rollover notice.  The standard notice provided by the IRS as an example describes the tax treatment of NUA and advises the participant to contact the Plan Administrator to learn the amount.  Similarly, the SPD would typically only discuss the concept but I think you could make a case that the tax section of the SPD could be more generalized.

But, it is required disclosure on the 1099-R and the penalty for incorrect or incomplete information returns is pretty high.  I have seen problems with this issue in the past and suggest that the first step is to determine whether it is worth worrying about - how many lump sum distributions were taken that were NOT rolled over.  If many, estimate tax basis in the shares recognizing the adjustment for S earnings and S distributions.