8918 / What rules govern distributions from an employer-sponsored stock bonus plan?

Distributions from a stock bonus plan are subject to mandatory 20 percent withholding, unless the employee elects a direct rollover.¹ The mandatory withholding requirement does not apply to any distribution that consists only of securities of the employer-corporation and cash of up to $200 that is received in lieu of stock. The maximum amount to be withheld under the mandatory withholding rules may not exceed the sum of the amount of money received and the fair market value of property other than securities of the employer corporation received in the distribution.²

The plan must provide that if a participant, with the consent of his or her spouse, so elects, the distribution of the account balance will begin within one year after the plan year:

(1)  in which the participant separates from service by reason of attainment of the normal retirement age under the plan, disability, or death; or

(2)  which is the fifth plan year following the plan year in which the participant otherwise separated from service.

Distribution under (2) will not be required if the participant is re-employed by the employer before distributions actually begin under (2).³

The plan also must provide that, unless the participant elects otherwise, distribution of the participant's account balance will be made in substantially equal periodic payments (at least annually) over a period not longer than the greater of (1) five years, or (2) in the case of a participant with an account balance in excess of $1,380,000 as indexed in 2024 ($1,330,000  for 2023, $1,230,000 for 2022 and $1,165,000 for 2021), five years plus one additional year (not to exceed five additional years) for each $275,000 (for 2024), or fraction thereof, by which the employee's account balance exceeds $1,380,000.⁴

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Planning Point: An employer whose stock is not publicly traded, and therefore is subject to the employer's potential obligation to repurchase its stock from terminating plan participants, should be concerned about the impact that obligation could have on its cash flow. The employer should consider writing its plan to take the maximum time allowed, generally five years, to begin the process of distributing stock from the plan and then repurchasing that stock from former employees. Martin Silfen, J.D., Brown Brothers Harriman Trust Co., LLC.

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Notwithstanding these requirements, if the general rules for commencement of distributions from qualified plans require distributions to begin at an earlier date, those general rules control.⁵