Tax treatment of NUA of the employer's stock in a lump sum distributi

[Guest kazand]

Need help with the following detaails:

As far as the NUA in the employer's stock lump-sum

distributions:

1. are the employee's contributions covered as

well as those of the employer?

2. for example, if the lump-sum is $500,000 and

trusee's cost is $100,000, & $400,000 of Net Unrealized Appreciation (NUA) :

a) what are tax reporting procedures of the

future share sales (which will qulify for

a 20% cap. gain rates) :

i) is the first $100,000 of sales tax

free? (since it was included in your

ordinary income upon the distribution)

ii) what's the basis of the next, let's say

$200,000 - is it zero?

iii) what back-up is reqired to be filed

with and/or retained for the tax

reporting purposes?

iv) can the future sales of the NUA balance

be offset with the capital loss

carryovers from the prior years (which, I understand, can be carried forward indefinetely, until fully used-up or the taxpayer's death)

b) can the first $100,000 (the trustee's cost)

be definetely tranferred to an IRA ?

Appreciate any info .

[Kirk Maldonado]

An in-depth discussion of the taxation of distribution of employer securities can be found in my article entitled: Basis Issues Complicate Qualified Plan Distributions of Employer Securities, 77 Journal of Taxation 334 (1992).

[Mary Kay Foss]

In case you can't find Kirk's article here is some information:

1. Employee after tax contributions qualify for NUA treatment but the Form 1099-R is likely to report NUA on employer contributions only.

2.a. The Trustee's cost becomes the basis of the employer shares. You will want to convert it to a per share amount.

2.a.i and ii. See above; the $100,000 is not a tax free sale, it is recovered as basis. So if the stock has not appreciated and if you sold $100,000 worth, basis would be $20,000 and $80,000 of NUA would be realized.

2.a.iii. You'd keep records to prove your basis just as you would with any shares purchased on the open market. The NUA portion yields long term capital gain; further appreciation needs a 1 year holding period for long-term. Reporting a sale if the stock has gone up is tricky but not impossible.

2.iv. Except for the quirk in the first year after receipt of the shares due to long term & short term treatment, the sale of the NUA shares is treated like any other stock sale. Capital losses carried forward or created currently can offset the gain.

2.b. If the shares are transferred to an IRA you forgo the NUA treatment forever. It's only available if the employer shares which are part of the lump sum distribution are not rolled over. My clients generally keep some or all of the shares and rollover the balance of the lump sum.

[Mary Kay Foss]

To clarify my previous response:

The basis of stock acquired by after-tax contributions isn't reported on Form 1099-R because it's not part of the lump-sum. All of the information should be available from the employer.

I assumed that the $500K value of the 401k plan was all stock. Then if the plan cost was $100k; the basis would be 20%. Working with round numbers may lead to invalid assumptions, I'm afraid.