The Company has an ESOP and a 401(k). They are separate plans.

If participant A wants to use NUA or ten-year averaging, would A have to cash out both plans for the distribution to qualify as a lump sum distribution?

In other words, is the 401(k) the same "kind" of qualified plan as the ESOP (since they are both pension plans) for the purposes of determining a lump sum distribution?

(It probably doesn't matter, but for completeness, the Company is an S Corp owned 100% by the ESOP.)

And is there an IRS reference clarifying this?

OK. I found it.

Topic 412 at http://www.irs.gov/taxtopics/tc412.html says:


"A lump–sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participants accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution."


Which means that my participant has to cash out BOTH the ESOP and 401(k) to use NUA or 10-year averaging.

(Don't know why I couldn't find this before. No stupid questions, just stupid people, I guess.)

I think the IRS publication has made too general a statement. In the definition of a lump-sum in IRC Section 402(e)(4) specific reference to the aggregation of plans is made, as follows:

402(e)(4)(D)(ii) AGGREGATION OF CERTAIN TRUSTS AND PLANS. --For purposes of determining the balance to the credit of an employee under clause (i) --



402(e)(4)(D)(ii)(I) all trusts which are part of a plan shall be treated as a single trust, all pension plans maintained by the employer shall be treated as a single plan, all profit-sharing plans maintained by the employer shall be treated as a single plan, and all stock bonus plans maintained by the employer shall be treated as a single plan, and



402(e)(4)(D)(ii)(II) trusts which are not qualified trusts under section 401(a) and annuity contracts which do not satisfy the requirements of section 404(a)(2) shall not be taken into account.

[indent][/indent]

So - if the 401(k) plan is a stock bonus type plan, then it would be combined with the ESOP. But, if it is a profit sharing type 401(k) plan, you can take separate distributions. You need more information.

Thank you, Becky. That throws a different light on it.

The 401(k) is a plain old deferral and match plan (all cash) with mutual funds for investments. There is no employer stock in or associated with the 401(k).

The ESOP is all employer stock (and a little cash). The employer conrtributes shares of stock, and the ESOP can distribute them. (The employer, an S corporation, immediately and automatically buys any distributed shares).

So, now I think my participant need only cash out the ESOP account for a lump sum distribution and has the option to leave the 401(k) account in place.

Thanks again.