NUA

Submitted by Brian Dobbis on Thu, 2019-11-21 16:24

Interesting scenario – although (probably) common – I have never encountered.

Company “A” bought company “B”
Owners of “B” get one share of “A” and cash for every share of “B”
Company “B” always (until this year) matched 401k contributions in company stock

Question:
An employee of company “B” is considering retiring in 2019 – he/she is concerned the purchase of their company (“B”) could negatively impact NUA treatment ?
In other words would it make a difference using NUA before/after the deal finalizes? Or does the basis remain the same – make the purchase (of company “B”) mute?

All help/guidance is appreciated.



Submitted by Alan - IRA critic on Thu, 2019-11-21 17:00

  • Normally, if B owners received all A shares in exchange, the plan recordkeeping would retain the same dollar cost basis employee has in B and transfer that to A. Then A could be distributed as NUA shares with the same % of cost basis that B would have had if no buyout. That assumes the new plan will succeed the old plan, and of course the participant will need a triggering event. Because there are several variations in these buyouts it is always wise to request specific answers from the plan(s) for these questions.
  • However, since the cash component here could range from a small amount to a very large portion of the buyout terms, NUA shares are being cashed out (sold), therefore only a portion of the NUA will remain unless there is some provision in the buyout in which the cash sale would be part of the LSD, meaning the employee has separated from the old company and not transferred to the new company as an employee. SInce there are so many combinations of scenarios here, the answer will depend on the status of the employee and the terms of the buyout to determine how much of the current dollar NUA cost basis will actually transfer to the acquired shares of A.
  • Most of this complexity would be eliminated if the employee retired and was able to complete the LSD before the shares were exchanged. The current cost basis % would have to be very low to consider retiring early just to avoid the exchange of shares.
  • If employee stays on and participates in the new plan, then the future matching contributions will probably all be in A with no cash. The plan might separate the cost basis in separate lots for shares owned prior to the buyout and those acquired in A after the buyout rather than the plan using an average cost basis over all the surviving shares. That could result in the old lot having a much lower cost basis than shares acquired in the future. 

 



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