Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

rather than directly; you may need an opinion of the plan’s or other counsel regarding whether the particular securities held in your client’s plan constitute “employer securities.” “ Net unrealized appreciation” (NUA) is the excess of the stock’s fair market value at the time of distribution over the plan’s basis (see ¶ 2.5.02 ) in the stock. Reg. § 1.402(a)-1(b)(2)(i) . If various requirements are met:  The NUA is excluded from the employee’s gross income at the time the securities are distributed to the employee. § 402(e)(4)(A) , (B) . Accordingly, the employee is liable for income tax (and 10% early-distribution penalty, if applicable; ¶ 9.1.03 (A)) only on the plan’s basis in the stock.  When the stock is later sold, the NUA is taxed as long-term capital gain, regardless of how long the recipient (or the plan) held the stock. Reg. § 1.402(a)-1(b)(1)(i) ; Notice 98-24, 1998-1 CB 929; PLR 2004-10023. The sale proceeds attributable to the NUA and any post-distribution gain are not subject to the early-distribution penalty. ¶ 9.1.03 (A). Joe Example: Joe, age 53, retires from Baby Bell Corp. in 2015 and receives an LSD of his 401(k) plan, consisting entirely of 10,000 shares of Baby Bell stock. The plan’s basis for that stock is $10 per share (total $100,000); the stock is worth $100 a share at the time of the distribution (total $1 million). The amount of the distribution includible in Joe’s income is $100,000 ($10 plan basis per share times 10,000 shares). Joe must also pay the 10 percent early-distribution penalty on the $100,000 taxable portion of the distribution, unless an exception applies (¶ 9.4) . If Joe sells the stock immediately for $1 million, he will have long-term capital gain of $900,000. If he waits two months and sells the stock for $125 a share, he has a short -term capital gain of $250,000 ($25 appreciation between date of distribution and date of sale, times 10,000 shares) in addition to his long-term capital gain of $900,000. If he holds the stock for 12 months after receiving the distribution, all gain on any subsequent sale will be long-term capital gain. The tax deferral/capital gain treatment is not available for all distributions of employer securities. It applies in only two situations:  If the securities are distributed as part of a “lump sum distribution” ( ¶ 2.4.02 – ¶ 2.4.05 ), all the NUA is nontaxable at the time of the distribution. § 402(e)(4)(B) .

 If the distribution is not an LSD, then only the NUA attributable to the employee’s contributions is excludible. § 402(e)(4)(A) .

Reporting NUA distributions; finding plan’s basis

The employer or plan determines its “cost or other basis” in the plan-held employer securities using one of the methods in Reg. § 1.402(a)-1(b)(2)(ii) , and thus determines how much of a distribution of employer securities is NUA. Notice 89-25, 1989-1 CB 662, A-1. The employer then reports the NUA amount in Form 1099-R (2016), Box 6. So Joe (see “Joe Example,” ¶ 2.5.01 ) will receive a 1099-R from Baby Bell for 2015, indicating a “Gross distribution” of $1 million (in Box 1), a “Taxable amount” of $100,000 (in Box 2a), and “Net unrealized appreciation” of $900,000 (in Box 6). In Box 2b, “Total distribution” will be checked.