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ESOP and NUA
Old 03-19-2018, 12:13 PM   #1
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ESOP and NUA

I was wondering if anyone has experience with an ESOP and NUA tax treatments? I am retiring in early August after 36+ years. We are an employee owned company and I have a large amount of stock. We are an S-corp and nearly 100% of the shares are held by the employees in an ESOT. We have done well over the years so my share prices have appreciated a great deal over that time. I will receive my payout over a 10 year period, this year being the first distribution later in the year after I'm gone. I want to claim an NUA on the shares that I sell each year and pay the LTCG tax rate. I think the way I plan to take the money it would save a lot in taxes. The ESOP is telling me that to claim the NUA as a capital gains I have to get a lump sum distribution and that's not going to happen. Anyone familiar with this situation? I know its fairly unusual. We also have some disagreement on how the share basis is calculated.
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Old 03-19-2018, 01:01 PM   #2
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I had a good experience with NUA on the ESOP shares I owned when I retired 9 years ago. The par, or cost basis of the shares represented about 3% of the value of the shares, so when I cashed everything out I paid 15% LTCG rate on nearly the entire value of the shares. I took the entire amount in a lump sum and had to liquidate the rest of the 401k I had, doing a trustee-to-trustee rollover into an IRA of the pre-tax portion while cashing out the small amount of after-tax dollars I had in the plan. Those two transfers were both taken tax-free.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

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Old 03-19-2018, 01:23 PM   #3
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Thanks for the reply. Do you recall if you were required to take a lump sum distribution? I'm sure that won't be an option for me. The plan is set up to pay out over time, based on your balance, up to 10 years. I'm trying to figure out if I can claim the NUA on the annual payouts, or share sales. The next hurdle would be calculating the basis and what the annual contributions were. The company contributes all the money for the share purchases so nothing came "out of pocket" for share purchases. I'd really like to figure this out, the potential tax savings look pretty sizable at first glance especially since I will be taking large annual distributions out for living expenses until I reach 59-1/2. I can apply the age of 55 rule on a portion of the annual distributions to avoid the 10% penalty so if I can pay LTCG rate rather than the higher marginal rate it could potentially save me a bundle so it seems worth working the angle to do that.
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Old 03-19-2018, 01:36 PM   #4
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My 401k rules were that if I used NUA, I would have to remove/transfer everything immediately upon separation. That was not going to happen as I was 56 at the time, and still wanted asset protection that the 401k provided, as well as the non penalty withdrawals before 59.5 years. It all ended good as I sold thousands of shares, and reinvested the proceeds in other things, and have enjoyed the latest bull market run since 2014. Mega corp shares, well, no so good.
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Old 03-19-2018, 03:55 PM   #5
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Quote:
Originally Posted by 68bucks View Post
Thanks for the reply. Do you recall if you were required to take a lump sum distribution? I'm sure that won't be an option for me. The plan is set up to pay out over time, based on your balance, up to 10 years. I'm trying to figure out if I can claim the NUA on the annual payouts, or share sales. The next hurdle would be calculating the basis and what the annual contributions were. The company contributes all the money for the share purchases so nothing came "out of pocket" for share purchases. I'd really like to figure this out, the potential tax savings look pretty sizable at first glance especially since I will be taking large annual distributions out for living expenses until I reach 59-1/2. I can apply the age of 55 rule on a portion of the annual distributions to avoid the 10% penalty so if I can pay LTCG rate rather than the higher marginal rate it could potentially save me a bundle so it seems worth working the angle to do that.
I did not have to take a lump-sum distribution, I could spread it out over 10 years IIRC. But I had to empty the entire 401k/ESOP account per plan rules (maybe also the law, I am not sure).

I was only 45 at the time, so I wanted to take the whole ESOP's proceeds at one time because I planned to invest it into a bond fund and live off its monthly dividends, which I have been doing for the last 9 years. I paid the 10% penalty only on the par value of each share, something which I did not know at the time. This turned out to be a most pleasant surprise at tax time because I ended up paying $27k less in taxes than I thought I was going to pay.

I didn't have to figure out the cost basis, as the par value was known to everyone the whole time. The 1099-R forms I got the following February correctly described the tax consequences of each of the 4 parts of the liquidation - the ESOP par value, the NUA, pre-tax rollover, and the after-tax withdrawal.
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Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

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Old 03-19-2018, 06:01 PM   #6
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From what I understand you have to take it all out at the same time...

IOW, if you have taken any out to date, you cannot do it now...

You also cannot do it over 10 years....

Now, ESOPs may be different....


https://www.kitces.com/blog/net-unre...nd-esop-plans/
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Old 03-19-2018, 06:05 PM   #7
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https://www.kitces.com/blog/net-unre...nd-esop-plans/

Above is Kitces article on NUA (it cites the IRS code section). You need to lump sum after a qualifying event (separation of service, in your case).
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Old 03-19-2018, 06:37 PM   #8
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Well, crap-o-la....

I did not see that you had to meet a requirement in order for this to work...

No partial distributions are permitted Ė the lump sum distribution must take place within one year of a) separation from your employer, b) reaching the minimum age for distribution, c) becoming disabled, or d) being deceased
I do not think I can take it now


Does anybody know what minimum age for distribution means? I do not want to use c or d and a has already passed....
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Old 03-20-2018, 12:31 PM   #9
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Hmmm, the lump sum thing is probably a deal breaker for me. With the balance I have there is no chance I will receive a lump sum distribution. Thanks for the replies.
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