Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

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) . 2.5.02 Reporting NUA distributions 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) , and thus determines how much of a distribution of employer securities is NUA. Notice 89-25, 1989-1 C.B. 662, A-1. The employer then reports the NUA amount in Form 1099-R (2009), Box 6. So Joe (see “Joe Example,” ¶ 2.5.01 ) will receive a 1099-R from Baby Bell for 2009, 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. Different plans may use different methods of determining the plan’s basis. For example, one plan might use, as its basis for stock allocated to “Joe’s” account, the value of the stock at the time it was placed in Joe’s particular account; another plan might use the historical value of the stock at the time it was originally acquired by the plan, even if it was not allocated to any employee’s account until a much later time. Joe does not have to file any special tax form to report his receipt of NUA stock. He does not have to file Form 4972, which is used only by those claiming the special tax treatments for those born before 1936 ( ¶ 2.4.06 ). He simply reports the “Gross distribution” amount (from Box 1 of Form 1099-R) on line 16a of his Form 1040, and the “Taxable amount” (from Box 2a of Form 1099-R) on line 16b, as a retirement plan distribution. 2.5.03 Distributions after the employee’s death The favorable tax treatment of NUA also applies when employer stock is distributed to the employee’s beneficiary, provided the beneficiary takes an LSD of the employee’s balance. If the beneficiary takes distribution of the benefits in some form other than an LSD, then the beneficiary can exclude only the NUA attributable to stock purchased with the employee’s contributions. ¶ 2.5.01 . The IRS has ruled that the NUA, like other post-death retirement plan distributions, constitutes “income in respect of a decedent” (IRD; see ¶ 4.6) under § 691 . Rev. Rul. 69-297,