change to 1099R with NUA basis adjustment by lot

Submitted by Nicole limson on Mon, 2020-01-20 05:29

I am doing NUA distribution from my 401k. My plan uses average share price to calculate average cost basis for NUA purposes The plan administrator told me that I have to modify 1099R after the fact if I want to do it by lot (as the plan would only provide reporting on 1099R using average share price). I have been told that I can do this as I have documentation which shows the share price by lot over the years. Thus, I will only use lots with low cost basis for NUA purposes to minimize taxation. And roll over the remaining high cost basis shares to IRA. My question how should I modify the 1099R when I would prepare my taxe return to accomplish this. I am also wondering how should I notify the custodian of my brokerage account that the cost basis of my NUA shares in the brokerage account has decreased as compared to the information provided to the brokerage account by my plan.



Submitted by Alan - IRA critic on Mon, 2020-01-20 15:39

  • If you are sure that the plan will not issue the 1099R reflecting only the cost basis of shares that were actually distributed, you are on very thin ice. With the IRS and to some extent your brokerage, what happens amounts to the luck of the draw. There have already been cases of conflicting IRS guidance on various NUA techniques per the following link regarding the “Frank Duke” method.
  • https://irahelp.com/forum-post/17504-nua-lsd-401k
  • Therefore, if the plan uses average cost basis, the taxpayer should follow suit. If you still choose to take an aggressive position and do not want to spend big bucks to apply for a letter ruling, you should download Form 4852 (Substitute 1099R) and follow the instructions. You will have to add line k to line 8 since the form does not include a line for the NUA amount.  
  • Since the IRS will not address your tax return until well after the 60 day rollover period is over, and since they are likely to require you to follow the plan 1099R, at that point you are stuck with the distribution as is and the higher cost basis. If you pursued Rev Procedure 2016-47 to extend the 60 day rollover deadline, you would have to allege a plan error for the reason, but there is no actual plan error when they simply use the average basis accounting for cost basis that is the norm in the industry. Therefore, you should determine if you are willing to take the chance that you will probably end up with the higher average cost basis for the shares actually distributed.
  • SInce the cost basis directly affects the amount of NUA per share, there is no sense in notifying your broker of any specific share cost basis until the IRS decides on your return. You will also have to determine how your broker handles NUA shares, eg will they accept your statement of what the cost basis is for those shares and report it on Form 1099 B when you sell?  If you sell before the IRS reaches a final decision you may have to amend Sch D as well as the cost basis to make the NUA amount consistent with the cost basis.


Submitted by Nicole limson on Tue, 2020-01-21 08:40

Thank you Alan. It is very informative. Yes I checked with the plan and despite the documnetaion they will not use share price by lot and would only rely on average cost basis. I understand your point about following the suit of the issued 1099R — but my research indicates that I have a reasonble chance to win the argument, if it comes up,  since I have a good documentation showing share prices by lot. I am not planning to rely on 60 days at all –as my thinking was to rely on the plan to do the rollover  of part of ESOP shares to IRA and then ask the plan to  send the the remaining   NUA shares to “compushare” for future distributions to the brokerage account (which I plan to classify as low cost basis shares) — or in my situation do you think I might be better off in requesting the plan to do the all distributions directly to me and then deal with it for rollover etc purpose   within the 60 day time frame?You also mentioned that I need to download form 4852, however I thought I need to call and request the IRS to provide this form directly to to me rather than using the downloaded version (I suppose that IRS wants to question me on why I need this form rather that trying to resolve it first with my plan)  —  can you please elaborate.Where on this form do I need to report the corrected amount of the NUA basis? — or I simply indicate this corrected amount under added line “k” with appropriate explanation? thank you



Submitted by Alan - IRA critic on Tue, 2020-01-21 17:22

  • After further review of the Form 4852 instructions, it is probably preferable to NOT use that form because using it to communicate how you wanted to have the 1099R completed is technically a misuse and there are potential penalties for that stated in the instructions. You cannot accurately characterize the plan issued 1099R as an error when it follows the plan accounting and procedures, and there is no chance of the plan correcting the 1099R since they would refute the contention that they made any error in the first place. Perhaps the IRS had a reason for not including an NUA line on the 4852.
  • Rather, if you still wish to pursue this, you could simply file your 1040 showing a reduced cost basis and include any explanatory statement with your return with the details. The documentation is far more than typical tax software will support, so you will probably need to file a paper return that year. I think there is a away to request a prompt decision from the IRS on this, otherwise you could be waiting a very long time before knowing if the IRS accepts your return or not, and that would also delay your knowing the cap gain to sell the shares.
  • My referral to the 60 day rollover reflects the option that all participants have to change their mind about NUA and roll over the shares within 60 days. Not sure if the IRS declines your reduced cost basis whether you would still want to use NUA with the 1099R cost basis or not. If you would NOT use NUA, the 60 day rollover deadline will have been exceeded by the time the IRS communicates their decision. You might then want to have the 60 days extended to do the rollover, but even then the reason you would have to use is plan error, and the IRS may well not see this as a plan error, but rather that you did not want to accept the plan accounting for your cost basis. 
  • As for the mechanics of the share distribution, ESOP plans have differing requirements and therefore you will have to contact the plan to determine whether you have to sell the shares back to the plan or if you can include the shares you do not wish to utilize for NUA along with the rest of the IRA direct rollover. Then you can sell shares in the IRA for diverisification purposes without any tax impact. Another option is to have all the ESOP shares distributed to your taxable brokerage account, then sell the shares in that account that you will not use for NUA and rollover the cash proceeds within 60 days. You would then report that value as a rollover on line 5a and 5b of your 1040. There wouldn’t be any withholding on the distribution of these shares to deal with. 
  • The final piece is your broker’s procedures for collecting share basis data for the shares you keep for NUA. Will they just accept your word for the basis or not, and will they even care if you differ from the average cost accounting of the plan. In fact, this is the other side of the coin since your accounting will produce a lower cost basis for the shares and thus a higher NUA and cap gain. Or perhaps the brokerage will not even report a cost basis on the 1099 B, and let you handle it all on Form 8949. 
  • In short, all these steps are interrelated. If the IRS does not agree with your cost basis, that will skew everything down stream from there. GIven this real possibility if not probability, you need to develop a strategy for the next steps if something falls apart. 
  • Note that until 2026, the cap gains rates are not as low compared to the ordinary income rates than they used to be because TCJA reduced ordinary income rates until 2026. 


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