Taking Stock: Really! Lower Your Taxes by Receiving In-Kind Employer Stock When Cashing-Out of Your 401(k) or ESOP

May 21, 2024 (4 min read)

If a qualified plan, like a 401(k) plan or an employee stock ownership plan (ESOP), offers employer securities as an investment, and the participant, on termination of employment, takes a total plan distribution (a lump-sum distribution) that includes actual shares of those securities, the participant has an opportunity to lower their income tax burden on the plan distribution. If the stock has appreciated in value while in the plan, the distributed stock’s value attributable to that appreciation is called net unrealized appreciation, or NUA. It won’t be taxable in the year of distribution; only the non-NUA value received is. So, go ahead, take the stock.

Read now »

Related Content

Employee Stock Ownership Plans: Fundamentals
Learn more about the benefits of NUA. When employer securities are sold after the participant receives a total plan distribution, any gain is treated as long-term capital gain to the extent attributable to net unrealized appreciation not previously taxed on distribution. Gain in excess of the NUA is treated as long-term or short-term capital gain depending on the holding period of the securities.

Employee Stock Ownership Plan Design and Compliance
Discover more about the plans that allow investment in employer securities. ESOPs are top on the list because they must invest primarily in employer securities. In a publicly held company, it’s very likely that the shares can be paid out in-kind. But plans, like 401(k) plans that don’t have an ESOP component plan, may permit investment in employer securities by offering an employer stock fund. Most plans unitize the shares so that they are more easily tradeable, but often those plans permit the fund units to be converted to shares and distributed.
Defined Contribution Plan Notices (Participant Events)Include notification about NUA in the tax notice provided to participants when they take a distribution that is eligible for rollover treatment. The notice is required under I.R.C. § 402(f). As long as the participant receives employer stock, in-kind, as part of a lump-sum distribution, the participant can roll the non-stock portion of the total distribution to an IRA or another employer plan and still benefit from NUA tax treatment.

Practical Guidance Updates
Featuring the latest updates from your Practical Guidance account.

Employee Benefits & Executive Compensation Key Legal Developments Tracker (Current)
Stay informed on new developments.
- Health and Welfare Plans. IRS announces cost-of-living adjustments to the applicable dollar limits for health savings accounts (HSAs), high-deductible health plans (HDHPs), and excepted benefit health reimbursement arrangements (HRAs) for 2025. Proc. 2024-25.
- Health and Welfare Plans. DOL's EBSA division issues a final rule that rescinds ''association health plans'' noting the expanded definition of ''employer'' under the prior final rule marked a substantial departure from the DOL's longstanding pre-rule guidance on ERISA's definition of "employer." 89 Fed. Reg. 34106 (Apr. 30, 2024); EBSA Fact Sheet.
- Health and Welfare Plans. HHS issues final regulations addressing section 1557 of the Affordable Care Act which prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in certain health programs and activities. HHS is also revising its interpretation regarding whether Medicare Part B constitutes federal financial assistance for purposes of civil rights enforcement. 89 Fed. Reg. 37522 (May 6, 2024); HHS, Section 1557 Final Rule: FAQs
Generative Artificial Intelligence (AI) Resource Kit is a frequently updated collection of current Practical Guidance materials on generative AI, ChatGPT, and similar tools.
For related Practical Guidance content on important recent trends, please review these easy-to-use Resource Kits on a variety of emerging topics:

Document alerts allow you to stay current on legal developments that affect your practice. Find out how to set up your document alerts.
Explore the Practical Guidance Journal Spring 2024 Edition, featuring guidance on protecting attorney-client privilege and work product in a generative AI world, using AI to manage the attorney client relationship, an overview of privacy regulations in the United States, and a primer on the new Corporate Transparency Act requirements.
Learn about the 2000+ leading attorney authors contributing to our 26 practice areas in the Practical Guidance Author Center. Interested in becoming a Practical Guidance author? Click here for details. Practical Guidance is committed to amplifying diverse voices of attorneys across all differences, including gender and race.
Legal Developments provide the latest updates and analyses of emerging topics impacting your practice area. Visit the Legal Developments page to see the latest topics, which also include breaking legal news and related Practical Guidance content.