“I’m familiar with employer stock and the special tax treatment for net unrealized appreciation (NUA), but what happens if the employer’s stock decreases in value?”
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
Highlights of discussion
- When distributed from the plan, if the value of the employer’s stock has decreased in value to an amount that is less than the plan participant’s cost basis (attributable to the participant’s after-tax contributions) in the shares, he or she may be able to claim a loss under Internal Revenue Code 165—but not until the year the stock is sold. For additional information, please see IRS Revenue Ruling 72-305. In order to claim the loss, the recipient would need to itemized deductions on his or her tax return.
- There is an exception to the above rule in cases where the stock becomes worthless as a result of the employer’s bankruptcy. A participant who receives a distribution of worthless stock of a bankrupt employer is entitled to an ordinary loss deduction in the year of the distribution for the total amount of his or her after-tax contributions used to purchase the stock. For additional information, please see IRS Revenue Ruling 72-328.
Investing in employer stock within a qualified plan can subject the investor to losses, and so should be carefully considered before undertaking. There are limited circumstances under which a plan participant may claim a loss in value to employer stocks distributed from a qualified retirement plan.