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NUA ESOP and 401(k) Plan
Last Updated June 6, 2012
The following is a question from our webinar: Mistakes That Can Kill IRAs, which was held on June 6.
Does the NUA Option apply to ESOPs? And if so, how does it affect the participant;s balance in a 401(k) plan?
Yes. The NUA rules apply to ESOPs.
In order to take advantage of the NUA option, the employer stocks must be part of a lump-sum distribution. The employer stocks would be distributed to the participant (such as distributing the stock to a regular non-IRA brokerage account), and the balance can be rolled to an IRA.
A 401(k) plan can be a stand-alone plan, part of a profit sharing plan, part of a money purchase pension plan, or part of an ESOP. This is important for purposes of determining if all of the amounts in both plans need to be distributed in order to take advantage of the NUA provision.
If a participant has funds in a 401(k) plan and an ESOP, when distributing the assets from the 401(k) plan, the assets from the ESOP plan is not required to be distributed ( as well) in order to take advantage of the NUA provision, unless the 401(k) is part of the ESOP.
As such, if the participant wants to distribute only the assets from the 401(k) plan, the participant should check to make sure that the 401(k) is not part of the ESOP.
Lump-sum distribution definition:- please click here
Response provided by Denise Appleby