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

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.

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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 
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  • 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
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