Qualified Plans: NUA in Employer Securities

Tax News You Can Use | The Northern Trust Institute

David M. Barral, Senior Wealth Advisor
Jane G. Ditelberg, Chief Tax Strategist

August 2026

Distributions from a retirement account are generally taxed as ordinary income. There is a useful but complex exception to that rule governing net unrealized appreciation (NUA) in employer securities owned in a qualified plan. The NUA rule, where applicable, reduces the amount of tax and defers part of the tax. When the rule applies, the taxpayer pays ordinary income tax on the basis in the employer securities distributed from a qualified plan (the amount the plan participant paid for the investment). The  appreciation that accrued while the employer securities were inside the plan is not taxed on distribution. Instead, the taxable amount becomes the taxpayer’s basis in the securities, and the NUA is taxed as capital gain when the securities are ultimately sold. NUA can frequently be overlooked when taxpayers look to consolidate older plans into one IRA, or even at death when the qualified plan account is payable to the designated beneficiary of the plan.

Qualifying for this beneficial tax treatment requires the plan participant or beneficiary to know ahead of time whether their shares qualify and follow the steps precisely and in order. Otherwise the NUA treatment will not be available, and the distribution of the securities will be taxed as ordinary income. In this case, forewarned is forearmed.

General Mechanics

NUA is available only for a lump-sum distribution from a qualified plan that occurs after one of the triggering events. These events are:

• The employee attains age 59 ½;
• The employee’s death;
• The employee’s separation from service;

To qualify as a lump-sum distribution, the qualified plan (e.g., 401(k)) must be completely distributed over the course of the recipient’s single tax year. For this purpose, aggregation rules apply to determine the definition of an account. If the employer has multiple qualified plans, then the employee must receive a lump sum distribution in a single tax year of the employee’s entire balance from all of the employer’s qualified plans. The NUA rule will not apply if the employer securities are held in an IRA account instead of a qualified plan, so it is crucial not to do an IRA rollover before evaluating the application of the NUA rule.

Income Tax Reporting and Compliance

In the example above, when John transfers the employer securities in-kind to a taxable brokerage account, he could sell the securities immediately and the NUA gain would be treated as a long-term capital gain (taxable at 20% for federal purposes). Even if the positions were not held for more than a year and a day, it is afforded long-term capital gain treatment. Any post-distribution appreciation is a short-term capital gain (taxed at ordinary income tax rates) if the stock was not held for more than a year and a day.

There is an exception for net investment income tax purposes (imposed at a rate of 3.8%) for distributions of NUA from qualified plans. The capital gain on the NUA is not included in “net investment income” for purposes of the net investment income tax. It is important to note that any appreciation in value in the employer securities after the distribution from the qualified plan is not included in net investment income and can be subject to the 3.8% tax.

Income in Respect of a Decedent

In general, a taxpayer who receives assets that were included in a decedent’s estate is entitled to receive a step-up in cost basis to the fair market value of the property on the date of death. There is an exception to the step-up rule for property that constitutes a right to receive income in respect of a decedent (IRD). If John in our example dies after the lump-sum distribution and still owns the employer securities, then there is no step-up in basis for the NUA portion. However, any appreciation after the lump-sum distribution may receive a step-up in basis. Net unrealized appreciation in the securities of the employer is includible in gross income as IRD in the taxable year of their disposition by either the executor or beneficiary, subject to an adjustment for the amount of estate tax attributable to the asset.

Making a Plan

A plan participant needs to evaluate not just the tax implications of the lump sum distribution, but also their investment outlook and liquidity needs. If the employee is comfortable retaining the securities for the long-term, and expects them to rapidly appreciate, then paying tax later on a higher value may be more expensive, even if the tax rate is lower. On the other hand, if the employee is in a higher tax bracket at the time of the lump sum distribution than they expect to be later, or if they plan to sell the securities in the short term to meet liquidity or investment diversification goals, then the NUA rule may be the key to maximizing tax efficiency. But a taxpayer who consolidates all their plan accounts into an IRA, or who spreads the distributions between two tax years, will lose the opportunity to make the choice.

Another focus is liquidity planning. Choosing NUA treatment requires liquidity to pay the tax on the cost basis, even if the shares are not immediately sold. And NUA is not an all or nothing proposition — a plan participant could decide to distribute a portion of their employer stock in-kind and roll over the rest to an IRA when they take this lump-sum distribution. In general, NUA is attractive if the employer stock has low basis and there is a large gain, because only the basis is subject to tax, while the NUA is deferred until it is later sold.

In the example above, John was 60 years old when he took the lump-sum distribution. What if John was 30 years old, taking a lump sum distribution after separation from employment? At such a young age, there could be a stronger argument to roll over most of the employer stock to an IRA, where there could be continued tax deferral for 40 or more years until he begins his required minimum distributions (RMDs). Conversely, what if John were 75 years old? At that age, John is likely subject to RMDs from the plan and those are taxed as ordinary income, which could make for a more compelling argument if capital gain rates are lower than his effective ordinary tax rate. Plan participants must also be cognizant of RMDs that need to be taken first in the year that they take a lump-sum distribution.

What may deter many from pursuing NUA is dealing with the income tax due on the cost basis. For those who are charitably inclined, they might entertain donating some or all their employer securities outright to charity, or possibly to a charitable remainder trust (CRT). A CRT could provide a charitable deduction for income tax purposes, which can alleviate the pain of paying tax on the shares’ basis. In addition, the income tax can be deferred and paid as distributions are received from the CRT. Lastly, for those concerned about creditors, the protection for retirement assets is lost when the employer securities leave the plan and are instead held outright in a taxable account.