Case of the Week: Decrease in Employer Stock Value in a 401(k) Plan

John Carl

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in California is representative of a common inquiry involving employer stock in a 401(k) plan. The advisor asked:

“I’m familiar with employer stock and the special tax treatment for net unrealized appreciation (NUA), but what happens if the employer’s stock decreases in value?”

Highlights of Discussion

When distributed from the plan, if the value of the employer’s stock has decreased in value to an amount that is less than the plan participant’s cost basis (attributable to the participant’s after-tax contributions) in the shares, he or she may be able to claim a loss under Internal Revenue Code 165 — but not until the year the stock is sold. For additional information, see IRS Revenue Ruling 72-305.  In order to claim the loss, the recipient would need to itemized deductions on his or her tax return.

There is an exception to this rule in cases where the stock becomes worthless as a result of the employer’s bankruptcy. A participant who receives a distribution of worthless stock of a bankrupt employer is entitled to an ordinary loss deduction in the year of the distribution for the total amount of his or her after-tax contributions used to purchase the stock.  For additional information, see IRS Revenue Ruling 72-328.

Conclusion

Investing in employer stock within a qualified plan can subject the investor to losses, and so should be carefully considered before undertaking. There are limited circumstances under which a plan participant may claim a loss in value to employer stocks distributed from a qualified retirement plan.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017, Columbia Management Investment Advisers, LLC. Used with permission.

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