ESOP distribution and NUA

Submitted by Andy Redman on Mon, 2017-03-13 02:34

Hi,
Thanks in advance for any help!

I received a 1099-R this year and am having trouble figuring out the correct way to file.

Context
I took a lump sum distribution from an ESOP in 2016. I am separated from the company and was required to sell it all – and then either take the cash or rollover to an IRA. My understanding is the NUA is taxed at long term capital gains, so I took the cash. I’ve tried filling this out in TaxAct and the tax is crazy high. So now I am trying to do it manually via IRS free forms.

Details
Box 1 Gross distribution- $50305
Box 2a Taxable amount- $18377
Box 2b total distribution is checked
Box 3-5 empty
Box 6 NUA $31928
Box 7 distribution code is 1

My understanding is that the $18377 should be included as income on the 1040 in row 16. Is that right?

If so, where does the NUA of $32k go to get the long term cap gains?

My back of the envelope is that the tax should be $10-11k – but when I used TaxAct it was $26k. Which I hope and think must be wrong

Please help. I’m happy to enter manually with irs or go back to software.

Thanks in advance!



Submitted by Alan - IRA critic on Mon, 2017-03-13 04:24

Yes, line 16a would be 50,305 and 16b would be 18,377.  You should also receive a 1099 B to indicate the sale. DId you sell the shares back to the plan?  How and when were these shares sold?  Code 1 also means you owe the 10% early distribution penalty, but you might qualify for a penalty exception. That penalty would only apply to the line 16b amount, not to the NUA if you do not qualify for an exception. But I think you are missing a 1099 B.



Submitted by Andy Redman on Mon, 2017-03-13 11:54

First, I was told my the employer (or the designee managing all of this – Principal) that the 10% penalty doesn’t apply. Or at least that’s what I recall and was my impression. I no longer work there and was forced to sell, which is why I thought there was an exception.  Second, how do I get a 1099b form? This is an employee owned private company so wondering if that doesn’t apply.  Thanks!



Submitted by Alan - IRA critic on Mon, 2017-03-13 15:56

Since the 1099R reports a distribution to you of NUA shares, the sale of those shares was done outside the plan even if the plan required the sale back to the plan. That must be reported on a 1099B which you would then report on Form 8949 and Sch D resulting in LT cap gain tax on the amount of NUA. The plan may have overlooked the 1099B so you should call them and ask about this.



Submitted by Andy Redman on Wed, 2017-03-15 03:12

I reached out to my old HR dept and this is what they said: – first, I owe the penalty because I’m not 59.5. Kind of feels like they buried the lead in the old pamphlet but guess I will be paying this. Do I owe it on everything or just the NUA?- second, here is what they said re the 1099B:

Here is what I found out about form Principal Financial Group about the 1099B form.  A Form 1099B is used for sales proceeds related to a stock sale.  I believe the 1099B in relation to shares sold from an ESOP is something the IRS had been looking into, but I’m not aware of a solid response from them and have not been told this is a requirement.  It’s my understanding that the instructions to Form 1099-B suggest that a Form 1099-B is not required by ESOP sponsors that execute the put option. This is due to the fact that purchasing shares is not the ordinary course of business for those ESOP sponsors. The distribution of shares is reported on Form 1099-R, but the sales proceeds upon execution of the put is not a plan reporting requirement.  We do not complete Form 1099Bs.  The Form 1099B says:  Brokers and barter exchanges must report proceeds from (and in some cases, basis for) transactions to you and the IRS on Form 1099-B. 



Submitted by Alan - IRA critic on Wed, 2017-03-15 03:57

  • Had you reached age 55 by the end of 2016?  If so, the separation from service penalty exception should apply and the 1099R should indicate Code 2.  If not, then you owe the penalty (unless you qualify for a different penalty exceptions) on the cost basis of the shares, but NOT on the NUA amount shown in Box 6.
  • You may have to report the ESOP shares sales on Form 8949 just as if you had received a 1099B. You would owe LT cap gain rate on the amount in excess of your NUA cost basis.
  • There may also be a possibility of certain other treatment applying, but the plan should provide a written explanation how you are to report the share sales. They are leaving you hanging here, and only they know the full details of this transaction.


Submitted by Andy Redman on Wed, 2017-03-15 18:42

Thanks, Alan!  And everyone else so far. I think your answers make it clear why the tax software from TaxAct was likely over-calculating my taxes.  It sounds like my taxes + penalty will be:  On the cost basis of 18K –> 28% tax bracket + 10% penalty = $6840 On the NUA of 32K –> 15% LT Cap Gains = $4800 TOTAL = $11640  Does that seem right?  Again, TaxAct was showing ~$20K in taxes.  If that’s right, any suggestions on how to fill this out in TaxAct? Or am I just better off filling it out manually, including the 8949 form?  Related, how do I ensure that the penalty only applies to the cost basis and not the NUA?  Where do I fill that out?  And where does it state that I only owe penalty on cost basis? Thanks!



Submitted by Andy Redman on Sat, 2017-03-25 18:55

Hi everyone,I’m finishing up my taxes and wanted to double check that NUA isn’t subject to early withdrawal penalty (I’m 39 yrs old).  As a reminder, I’ve included context below.  Context –> I took a lump sum distribution from an ESOP in 2016. I am separated from the company and was required to sell it all – and then either take the cash or rollover to an IRA. My understanding is the NUA is taxed at long term capital gains, so I took the cash.The cost basis ($18K) was taxed as ordinary income plus 10% penalty, and the NUA is taxed at long-term cap gains and no penalty.Is that correct?  What is the code that states this?Thanks! 



Submitted by Alan - IRA critic on Sat, 2017-03-25 19:54

NUA is addressed in Sec 402(e)(4). Subsection B refers to Sec 72 (early withdrawal penalty) and exempts the NUA portion of the distribution from Sec 72 and therefore from the 10% penalty:

(B) Amounts attributable to employer contributions

For purposes of subsection (a) and section 72, in the case of any lump sum distribution which includes securities of the employer corporation, there shall be excluded from gross income the net unrealized appreciation attributable to that part of the distribution which consists of securities of the employer corporation.



Submitted by Alan - IRA critic on Sat, 2017-03-25 20:04

Therefore, the NUA is only subject to LT cap gain taxes. What is unique here is the lack of a 1099B reporting the sale of the NUA shares. You will have to report the sale on Form 8949 as a LT cap gain. Acquisition date will be various, and sale date will be the date you determine that the sale of the shares occurred. You might include a statement of explanation with respect to the 8949 entry referring to the 1099R that shows the amount of NUA in Box 6 as that will confirm that you did receive NUA shares. Your cost basis per share will be the amount shown in Box 2a divided by the number of shares sold since all shares were sold. Proceeds will be the amount of cash you received, and the difference is your LT cap gain.



Submitted by Andy Redman on Tue, 2017-04-04 02:35

and I’m back with another question…thanks in advance! I filed my taxes but received an error message. I need to update form 8960. I am above the net investment threshold – do I need to pay the 3.8% on the NUA (which remember I’m reporting as capital gains because I didn’t get a form 1099B)? Or is that included from my net investment income?   thanks!



Submitted by Alan - IRA critic on Tue, 2017-04-04 03:10

Yes, you do. NUA is taxed as capital gains upon sale.



Submitted by Andy Redman on Wed, 2017-04-05 03:14

Thanks, Alan.  Just reviewing the 8960 instructions and came across this. Wondering if this means I actually don’t owe the NIIT? –> From page 9 in form 8960 instructions — Net gain attributable to NUA in employer securities held by a qualified plan. Any gain attributable to NUA (within the meaning of section 402(e)(4)) that you realize on a disposition of employer securities held by a qualified plan is a distribution within the meaning of section 1411(c)(5) and is not included in net investment income. However, any gain realized on a disposition of employer securities attributable to appreciation in the value of your employer securities after the distribution from a qualified plan is not a distribution within the meaning of section 1411(c)(5) and is included in net investment income.



Submitted by Alan - IRA critic on Wed, 2017-04-05 04:37

Good that you read the 8960 instructions in detail. It is clear that cap gains on the NUA are not considered NIIT up to the amount of NUA per share distributed. Therefore, you can adjust line 5 of the 8960 downward to the extent of the NUA reportable for a particular year. About that error message, where did it come from?



Submitted by [email protected] on Wed, 2017-04-05 19:49

Makes me think of another twist to this, Alan.  Is NUA includable as Provisional Income for Social Security taxation?  AGI for Medicare B premiums?  I would think so. – m



Submitted by Alan - IRA critic on Wed, 2017-04-05 20:04

  • Yes, it would be included. Of course, it is included in the year the NUA shares are sold, not when distributed from the employer plan unless both occur in the same year.
  • The rationale for the subtraction from the cap gain with respect to the NIIT must be based on considering that cap gain as simply a deferred tax on the qualified plan distribution of shares, even though those shares may not be sold for years after the distribution and look like typical cap gains when reported on Form 8949.


Submitted by Andy Redman on Fri, 2017-04-07 19:24

Alan, in response to what I received from IRS, here it is:  Issue      : Business Rule F8960-020-01 – If Form 8960, Line 5a ‘PropertyDisposGainOrLossAmt’ has a non-zero value, then it must be equal to sum of [ Form 1040, Line 13 ‘CapitalGainLossAmt’ and Line 14 ‘OtherGainLossAmt’ ] unless all of the following conditions are true: 1) Form 1040, Line 2 checkbox “Married Filing Jointly” or Line 5 checkbox “Qualifying Widow(er)” is checked (element ‘IndividualReturnFilingStatusCd’ has a value of 2 or 5) and 2) Form 8960, checkboxes ‘Section6013gInd’ and ‘Section6013hInd’ are not checked and 3) Form 8960, Line 14 ‘FilingThresholdAmt’ equals 125000.The following information may help you determine the form at issue:Field/Xpath: /efile:Return/efile:ReturnData/efile:IRS8960



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