NUA Mini-Series Part 4 - Rules and Qualifying Events
Welcome to Part 4 of the Equity Compensation Guidebook NUA mini-series. This is actually the final part. There are previous segments that you may want to listen to. However, as always, you're more than welcome to jump in right here. Thus far we've covered distributions for NUA, we dug into when it makes sense to do NUA, and everyone's favorite...taxes. As a reminder, NUA stands for Net Unrealized Appreciation.
It's an advanced planning and 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. Now that we've covered a lot of the details in previous episodes I believe it's 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 that they want to do Net Unrealized Appreciation, you have to qualify and today we will find out if you do!
I hope you’ve learned something useful throughout this mini-series. Please share it. You never know who you know that needs to know what you just learned!
You will want to hear this episode if you are interested in...
- Do you qualify for NUA? [2:04]
- Specific criteria you need to meet to be kosher with net unrealized appreciation [3:49]
- A few final rules and thoughts [6:36]
- This week’s FLASHBACK [11:08]
Making sure you’re eligible to do NUA
Let's make sure you qualify for Net Unrealized Appreciation first, because who wants to waste time going through all the details and then realize you can't do it because you are not eligible. Per NUA and IRS-provided rules you must have met one of the four following events in order to qualify for NUA.
First, you must be officially separated from the 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 and a half. The third event is you are totally disabled. This applies to self-employed workers only. I've never come across this one, as it is rather unique, but the event does exist. The fourth and final qualifying event is death. This is more applicable to your heirs, but death is one of those four qualifying events. You have to meet one of these events to be able to do NUA. Hopefully, it’s not the last one.
Meeting all the criteria for NUA
There are specific criteria you must meet to be kosher with NUA. These are IRS rules, do not mess around with them or your NUA may not be approved. The most important thing I want to mention is you must meet all of these criteria. This isn't horseshoes, you don't get credit for being close. 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. The next criteria are you must distribute all assets with all qualified plans you hold with that employer. This even applies if you only hold one company stock. I'll explain the third criteria assuming you work for a company with publicly traded stock. For this example, you have to take this distribution as actual company shares. You cannot sell the shares and convert them to cash before the distribution. However, for ESOPs they require that you 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. The final criteria are meeting one of the four qualifying events that I covered above. Be sure you meet these criteria and qualifying events, the IRS takes them seriously and I would not recommend testing the system on NUA.
Check out this episode of Equity Compensation Guidebook for a few other rules and thoughts on NUA.
This week’s FLASHBACK: The Roller Rink
Did you have roller skating rinks near you growing up? Did you ever go to a skating party? The memories I have of roller skating rinks are mostly from grade school events at one of the local rinks, not far from where I grew up. It was always a great time. There was pizza, pop, video games, and certainly skating. I'm sure we all had the rinks that played a slow song or two every hour as well.
I have a couple of unique memories from the rink. First, there were these giant poles in the middle of the roller skating rink. Hopefully, you had enough skill to get around without running into one of the poles. The other memory is that the rink was upstairs from the food and video games. You always had to be careful going down the stairs, not for fear of injury, but of embarrassment if you fell in front of your classmates! I have some great memories from those roller skating rinks. Hopefully, you have some from your youth and your town as well!
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.