Now we will discuss how to qualify for NUA treatment.
You must meet all 4 of the following criteria to take advantage of the NUA rules:
- You must distribute your entire vested balance in your plan within one tax year (though you don't have to take all distributions at the same time).
- You must distribute all assets from all qualified plans you hold with the employer, even if only one holds company stock.
- You must take the distribution of company stock as actual shares. You may not convert them to cash before the distribution.
- You must have experienced one of the following:
- Separation from service from the company whose plan holds the stock (except in the case of self-employed workers)
- Reached age 59½
- Total disability (for self-employed workers only)
- Death
The IRS enforces these rules strictly, if you do not meet one of the criteria—for example, if you fail to distribute all assets within one tax year - your NUA election will be disqualified, and you would owe ordinary income taxes and any penalty on the entire amount of the company stock distribution.
For more information on these complex rules, as well as situations that trigger additional tax restrictions, review IRS Publication 575, Pension and Annuity IncomeOpens in a new window, which is available at IRS.gov.
In our next blogpost, we will discuss when to use NUA treatment.