Employees lost a big chunk of their retirement savings to taxes after relying on incorrect advice after following their company’s Summary Plan Description (SPD) and a financial advisor counseled company employees that partial distributions would qualify for a net unrealized appreciation (NUA) tax break. This advice was wrong.
Employees were told partial distributions would qualify for the NUA, which allows employees to receive an in-kind distribution of their company’s stock from the retirement plan and pay income tax only on the average cost basis of the shares, rather than on the current market value. However, the distribution must have been a lump-sum distribution to qualify for NUA, not a partial distribution according to IRS rules (See IRS private letter rulings 200634017, 200634018, 200634019, 200634020, 200634021, 200634022 released August 28, 2006).
By not recognizing this devastating mistake, all of the stock withdrawn was taxable and all at ordinary income tax rates (plus a 10% penalty for any employees under age 59 1?,,2) causing a significant loss of these employees’ retirement funds to immediate taxation.