“One of my clients is currently receiving quarterly dividend payments on employer stock he has in his 401(k) plan. Does the receipt of dividends on employer stock held in a 401(k) negate his ability to receive a lump sum distribution and, consequently, my client’s ability to take advantage of the special tax rules for net unrealized appreciation (NUA) in employer securities?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in New Jersey is representative of a common scenario involving participants with employer stock in a 401(k) plan.

Highlights of the Discussion

While payments of dividends are considered distributions for certain purposes (Temporary Treasury Regulation 1.404(k)-1T, Q&A3), the IRS has, in at least two private letter rulings (PLR 19947041 and 9024083[1]) concluded that such dividends are not treated as part of the “balance to the credit” of an employee for purposes of determining a lump sum distribution under IRC § 402(e)(4)(D). Therefore, such distributions do not prevent a subsequent distribution of the balance to the credit of an employee from being considered a lump sum distribution for NUA purposes if all other requirements are met.

For more information on the definition of lump sum distribution, please see RLC’s Case of the Week Lump Sum Distribution Triggers and NUA.

Conclusion

A participant’s receipt of dividends from employer stock held in a qualified plan do not prevent a subsequent distribution of the balance to the credit of the participant from being a lump sum distribution for NUA tax purposes.

[1] See www.legalbitstream.com