“Can the portion of a distribution from a 401(k) plan that takes advantage of NUA tax treatment be used to satisfy the receiving participant’s RMD for the year?”
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. A recent call with an advisor in Colorado is representative of a common inquiry involving net unrealized appreciation (NUA) and required minimum distributions (RMDs).
Highlights of discussion
- Yes— amounts excluded from income at the point of distribution, such as NUA on employer securities, are amounts a plan participant may count toward satisfying an RMD under Internal Revenue Code Section (IRC §) 401(a)(9). (NUA is eventually included in the participant’s income as taxable long-term capital gains when the employer securities are eventually sold.)
- According to Treas. Reg. 1.401(a)(9)-5, Q&A 9,  with a few, limited exceptions, all amounts distributed from a qualified plan are amounts that are taken into account in determining whether an RMD is satisfied for a participant, regardless of whether the amount is includible in income.
- For example, amounts that are excluded from income as recovery of “investment in the contract under IRC§ 72” (i.e., after-tax contributions) are taken into account for purposes of determining whether an RMD is satisfied for a year. Similarly, amounts excluded from income as NUA on employer securities are counted towards satisfying an RMD of the participant.
- The following amounts are not taken into account in determining whether a participant’s RMD is satisfied for the year:
- Amounts returned to a participant to correct plan excesses;
- Loans treated as deemed distributions;
- The cost of life insurance coverage (i.e., PS 58 costs);
- Dividends on employer securities; and
- Other similar amounts as deemed by the IRS and published in the Internal Revenue Bulletin from time to time.
The IRS is clear that NUA on employer securities is a distribution amount that a plan participant may count toward satisfying his or her RMD for the year.