Rollover of non-employer-stock investments to money purchase plan esta

[Dave Baker]

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved).

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Rollover of non-employer-stock investments to money purchase plan established solely to accept rollovers does not preclude exclusion of NUA on employer stock distributed from KSOP (added July 18, 2000).

In PLR 200027058, Plan X includes a 401(k) arrangement and an ESOP (referred to as a "KSOP" in this discussion). Employer contributions are invested in employer stock. Employes have several investment choices for their 401(k) contributions. Plan Y, a money purchase plan, was established solely for the purpose of accepting rollovers. The employer contribution formula is 0%. The only eligible employees for Plan Y are: 1) employees who have attained age 59-1/2 and have received a lump sum distribution from Plan X, and 2) former employees who receive a lump sum distribution from Plan X. The purpose of Plan Y is to provide a means for these employees and former employees to accomplish two goals: 1) retain the portion of their lump sum distribution that consists of employer securities, in order to take advantage of the gross income exclusion for net unrealized appreciation (NUA), and 2) continue the remaining investment of their account in the same investment options they had under Plan X.

IRC §402(e)(4) provides that, in the case of a lump sum distribution which includes employer securities, NUA on those securities is excluded from the distributee's gross income unless otherwise elected. In several previous private letter rulings, the IRS has ruled that, although a partial rollover precludes income averaging treatment on a lump sum distribution, it does not affect the right to the NUA exclusion for the emploiyer securities that are not rolled over. Thus, when an employee or former employee who is eligible for Plan Y rolls over the non-employer-securities to Plan Y, the remaining distribution from Plan X is eligible for the NUA exclusion. In other words, the combination of the distribution of the employer securities from Plan X and the direct rollover of the remaining investments to Plan Y, constitute a lump sum distribution for §402(e)(4) purposes, allowing the NUA exclusion on the distributed employer securities. By establishing Plan Y, the employer has provided a means for these participants to preserve the current non-stock investments in their accounts, through the rollover to Plan Y, while electing a distribution of the employer securities and taking advantage of the NUA exclusion.

An interesting sidenote with this case is the establishment of Plan Y with no employer contribution formula. Is it significant that Plan Y is a money purchase plan and not a profit sharing plan? It seems so. Questions have been raised at various employee benefit conferences whetehr a profit sharing plan can be established solely for the purpose of accepting rollovers. Treas. Reg. §1.401-1(B)(2) requires an employer to make "substantial" and "recurring" contributions to a profit sharing plan. No parallel requirement exists for money purchase plans. Thus, by establishing Plan Y as a money purchase plan, the fact that the plan is funded solely with rollovers from Plan X does not present a problem.