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NUA Mini-Series - Part 4 - Qualifying Events and Rules Thumbnail

NUA Mini-Series - Part 4 - Qualifying Events and Rules

Welcome part four of the NUA mini-series. Yes, there are three previous segments you may want to review.  Although you are more than welcome to jump in here. 

So far we’ve covered distributions options for NUA, also dug deeper into when it makes sense to do NUA, and taxes, which is everyone’s favorite topic. As a reminder, NUA stands for Net Unrealized Appreciation. This is an advanced financial planning technique for people who own company stock within tax-deferred workplace retirement plans. The key here is the stock has appreciated since they acquired it. NUA is a way to potentially save significant amounts in taxes. I won’t go into an explanation of what NUA is as I’ve done that repeatedly in the previous episodes. 

Now that we’ve covered lots more details in previous episodes of this mini-series, I believe it is time to dig a bit more into qualifying events and some key rules with NUA. This is important because not just anyone can decide one day they want to do the Net Unrealized Appreciation technique. 


I’m starting a little bit out of order here by listing qualifying events first. Most documents you see on NUA have all these details on criteria you need to meet to do the NUA, which we will get to. However, I prefer to make sure you qualify for Net Unrealized Appreciation first. Because I would rather not waste your time going through all the details and then you realize you simply can’t do NUA because you don’t qualify. 

Per NUA and IRS provided rules, you must have met one of the four following events in order to qualify for NUA.

First is you are officially separated from an employer whose plan holds the company stock. Basically, you can no longer be employed at the company in which you wish to do the NUA. 

The next event is you have reached the ripe old age of 59 ½. This is the same as the age for avoiding early withdrawal penalties for tax-deferred accounts like IRAs. I’m not sure if there is a reason for the same age or is coincidence. My guess is it just makes it easier to keep track of. 

The third event is you are totally disabled. Now, this applies to self-employed workers only. Personally, I have never come across this one as it is rather unique, but the event does exist. 

The fourth and final qualifying event is death. So, I guess this is more applicable to your heirs, but death is one of the four qualifying events.

Again, you have to meet one of these four qualifying events. 


Since I went a bit out of order by listing qualifying events, I thought we should get back on track here. There are specific criteria you need to meet to be kosher with Net Unrealized Appreciation. And these are some of the IRS rules with NUA, so do not mess around with them otherwise your NUA may not actually be accomplished. 

The most important thing I want to mention right up front is you must meet ALL of these criteria. This isn’t horseshoes, hand grenades or anything else where you may get credit for being close. If you meet the criteria you are good to go with NUA. If not, well, good luck when trying to file for the NUA on your taxes. 

Now that I’ve given that warning, let’s dive into the actual criteria. The first is you must take a full distribution of all vested balances in your plan within one tax year.  Short version is not taking out a percentage every year, like maybe 25% a year for four years. Nope, it all has to be at once. 

Next criteria is you must distribute all assets with all qualified plans you hold with that employer. This even applies if you only hold one company stock. Again, the objective is to move it all out in one year and not piecemeal it out. 

I’m going to explain the third criteria assuming you work for a company with publicly traded stock. For this example, you have to take the distribution as actual company shares. You cannot sell the shares and convert them to cash before the distribution. Now, this is different for privately held stock in ESOPs, better known as Employee Stock Option Plans. For ESOPs, they require you to sell the shares back to the company as part of the NUA. This is doable, it can just add an extra layer of immediate taxes. 

Alright, the final criteria we actually already covered. That criteria is actually meeting one of the four qualifying events I mentioned at the beginning. As a refresher, they are very generally separation of service, hitting age 59 ½, total disability for self-employed, or death. 

I am going to purposefully repeat myself here. Be sure you meet these criteria and qualifying events. The IRS takes them seriously.  I would not recommend testing the system on Net Unrealized Appreciation. 


How about we wrap up this mini-series with a few other final rules and thoughts to share.

First, if you happen to have other holdings besides company stock in a workplace retirement plan, you need to move those holdings out of the plan first. The process is you roll those holdings into a Rollover IRA before you do the NUA. By doing this there will be no mandatory 20% withholding on the remaining company stock if it is all that is left in the plan. One item to stress here – rolling these other holdings into a Rollover IRA has to be done in the same calendar year as the NUA. 

As part of this thought you should confirm with your benefits people a key question. The question is whether there will be any withholding upon completion of this transaction. The answer should be No. This is because doing a direct rollover of the non-company stock into a Rollover IRA is not a taxable event that would cause withholding, and NUA itself does not cause withholding either. 

Another bit of homework on your end is to verify how the cost basis for your company stock is tracked. Your employer will most likely either track the basis separately per share or just give you an average share price for the cost basis. 

If you sell company shares and then rebuy them, the cost basis gets reset based on the new purchase. I’m not saying not to sell and then rebuy. All I’m saying is your cost basis will be updated based on the new purchase. I guess it depends on your individual situation whether this is a good or bad move. 

The final thought and/or rule to touch on is what happens with mergers. This isn’t unusual as companies merge over the years and NUA is usually applicable to long-term employees whose stock has had time to appreciate. The situation here is the good old “it depends.” If the merger causes shares of the old company to be sold and then shares of the new company to be bought, well, cost basis gets reset to the new company shares. However, if there is just a swap of shares, you may be able to maintain the original cost basis. Again, be sure to confirm with your benefits people. 


This seems like a great place to wrap-up this NUA mini-series. I appreciate you sticking through to the end. This is a topic that bores my family, friends, and honestly, most people. However, it is a great tax-savings tool for employees who have highly appreciated company stock in workplace plans. 

Let me finish where I started. This is an advanced financial planning technique that takes some deep knowledge to do properly. Most financial advisors and even CPAs don’t know the details. If you have company stock in a workplace retirement plan and that stock has grown over the years, it is worth you talking to someone to at least make an initial determination as to whether Net Unrealized Appreciation may make sense for you. If that financial advisor’s advice is to just roll it to an IRA without getting into details about cost basis, tax rates, or even if you meet some of the qualifying events, you need to find someone who specializes in this world. Because remember, it isn’t what you make, it’s what you keep. By not taking advantage of an approved tax reduction technique you may be losing a good chunk of your retirement funds to the IRS. And no reason to tip Uncle Sam. But, don’t rely on this series for all your answers. Talk to a professional.

FLASHBACK - Roller-Skating

Welcome to the flashback section. Today is going to be brief, I promise. The reason is because again, today’s flashback section is more of a question. 

The question is – did you have roller-skating rinks near you when growing up? If so, did you ever go to a skating party at one of the locations? 

The memories I have of roller-skating rinks is mostly from grade school events at one of the local rinks not far from where I grew up. Actually, there were two rinks near me, but for some reason we had the school parties at the one not as close to our grade school. 

Regardless, it was a great time. There was pizza, pop, video games and certainly skating.  I’m sure we all had the rinks that would play a slow song or two every hour. A couple of other unique memories from the school related rink. 

First, there were big poles in the middle of the skating rink. It wasn’t an open rink. So, hopefully you had enough skill to get around without running into one of the poles.   The other memory was the rink was up a set of stairs from the food and video games. You always had to be careful going down the stairs. Not for fear of injury, but embarrassment if you fell. 

Again, some great memories from these roller-skating rinks. Hopefully you had some in your youth too. 

As always, thanks for taking the time to read this. Please do not hesitate to reach out if I can be of help with your equity compensation-related questions. The easiest thing to do is to click the little green box that reads “Schedule a Meeting” that can be found at the bottom of every page on my website. Or, just click my Calendly link right here.


I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.