Anyone care to weigh in on the following?

An employee is still working (i.e. no separation from service) at age 62 and wants to take a lump sum ESOP distribution at age 62.

I am confused as to how to read IRC 402(e)(4)(D)(i)(II). It says that a lump sum (for purposes of being able to exclude NUA) means a distribution 'within one taxable year' of the balance to the credit of the employee which becomes payable to the recipient after attaining age 59 1/2.

I know that 'within one taxable year' has been interpreted in various IRS rulings to mean payments included, literally within the same taxable year (i.e. two different payments, if made within the same taxable year, could still qualify as a lump sum for this purpose).

BUT, I am wondering whether 'within one taxable year' in the age 59 1/2 context ALSO means that an amount must be paid within 12-months of attaining age 59 1/2?

If so, then I guess the age 62 employee in this case can NOT exclude the Net Unrealized Appreciation from income.

If NOT, then my thought is that we are now in the time period "after" attainment of age 59 1/2, so bring on the NUA treatment.

Anyone else ever looked at this before?

Thanks for any thoughts.

Just a shot from the hip:

My understanding is that age 59-1/2 is a trigger event, and that 'within one taxable year' is a separate factor. That is, it doesn't matter if the one taxable year does or does not include the year of attaining age 59-1/2.

The one taxable year means that there can be one or more distribution payments if together the payments within the one taxable year amount to a lump sum distribution.

... but it would be interesting to hear from the experts.

The tax year for cash basis taxpayers which includes all individuals is the calendar year. Therefore a lump sum distribution requires that the balance to the credit of the employee under the plan must be taken in one or more payments between January 1- December 31. The problem occurs when additional contributions or earnings are credited to the employee's account later in the year after a lump sum is withdrawn.

Any employee who has attained age 59 1/2 is eligible for NUA if the balance to the credit of the employee's account under the plan containing the employer stock is distributed in a single calendar year which can be any year after 59 1/2 is attained.

In addition to the above comments, if we try to examine the construction of (D)(i)... Clauses I thru IV qualify the immediately preceeding words: "which becomes payable to the recipient". Further, clauses I and III would result in illogical statements when combined with "within one taxable year", making it illogical to try to combine clauses II and IV w/ those words.

Thanks to you all for your input! You were right! But you already knew that.

I found a citation, and thought I would post it here for reference.

Specifically, PLR 9049097 provides:

Generally, the "balance to the credit of the employee" who attains age 59 1/2 and intends to use such attainment as a "triggering event" for Section 402 purposes includes any amount credited to the employee under the plan on the date of the initial distribution received following said attainment. There is nothing in the Code or Income Tax Regulations that requires a lump sum distribution be received in any particular year following attainment of age 59 1/2. The essential factor in this context is that the distribution be after the employee attains age 59 1/2. (Emphasis added).

Thanks, again!

mbozek ---

It appears to me that NUA treatment under IRC section 402(e)(4)(B) is available to a "lump sum distribution" as defined in section 402(e)(4)(D). This would include an individual who has received the distribution on account of separation from service even if he/she has not attained age 59-1/2.

You're right but, in this instance, the OP indicates that the employee is still working.