Net Unrealized Appreciation: What Stryker Employees Should Know Before a Rollover

For long-time Stryker employees, company stock held inside an employer-sponsored retirement plan can become a significant part of their overall wealth. Before retiring, leaving the company, or moving retirement assets, there is an important tax strategy worth understanding: net unrealized appreciation, commonly known as NUA.

NUA applies only in specific circumstances involving employer securities held inside a qualified retirement plan. For employees who qualify, it may provide an opportunity to have some of their company stock appreciation taxed at long-term capital gains rates rather than ordinary income tax rates.

I recently recorded an episode of Retirement Blueprint discussing how NUA works, when it may apply, and why employees should evaluate it before rolling over their retirement plan. Below are the key concepts Stryker employees should understand. For a deeper discussion and additional context, watch the full episode.

What Is Net Unrealized Appreciation?

Net unrealized appreciation is the increase in the value of employer stock while it is held inside a qualified retirement plan. In practical terms, it is the difference between the plan’s cost basis in the shares and their market value when they are distributed.

Suppose that over your career at Stryker, you acquired company stock inside your retirement plan with a total cost basis of $100,000. Years later, those shares are worth $600,000. The shares would have $500,000 of net unrealized appreciation. If retirement assets are rolled into a traditional IRA and later withdrawn, taxable distributions are generally subject to ordinary income tax rates. NUA can provide different tax treatment for qualifying employer stock.

When the NUA requirements are satisfied, the plan’s cost basis attributable to pre-tax contributions is generally taxed as ordinary income in the year the shares are distributed. Any after-tax basis is generally not taxed again. The NUA—the appreciation that occurred while the shares were held in the plan—is generally taxed as a long-term capital gain when the shares are eventually sold.

Because long-term capital gains rates may be lower than ordinary income tax rates, the potential tax difference can be meaningful. However, the immediate tax on the cost-basis portion, possible additional taxes, and the loss of continued tax deferral must also be considered.

Why Timing Matters With NUA

NUA is governed by specific IRS requirements. For purposes of the lump-sum distribution rules, the distribution generally must occur following one of these circumstances:

• The participant separates from service.
• The participant reaches age 59½.
• The participant dies.
• A self-employed participant becomes totally and permanently disabled.

To qualify as a lump-sum distribution, the participant’s entire balance from all of the employer’s qualified plans of the same kind generally must be distributed within a single tax year. The employer stock intended for NUA treatment is generally distributed in shares to a taxable brokerage account, while other eligible plan assets may be rolled over to an IRA or another eligible retirement plan.

Under Stryker’s current plan provisions, a participant taking a lump-sum distribution may elect to receive shares for the vested 2% subaccount invested in the Stryker Stock Fund, provided the applicable plan requirements are met. Those requirements currently include a minimum value of $1,000 in Stryker common stock. Because plan provisions can change, employees should confirm the available distribution options with the plan administrator before acting.

This is why NUA should be evaluated before moving retirement assets. Once company shares are rolled from an employer retirement plan into an IRA, the opportunity to apply NUA treatment to those shares is generally lost. For an employee with substantially appreciated Stryker stock, completing a routine rollover without first considering NUA could have long-term tax consequences.

A Common Mistake: Automatically Rolling Everything Into an IRA

Rolling a 401(k) or another qualified retirement plan into an IRA after retirement is common, and in many situations it can make sense. The mistake is not necessarily completing a rollover. It is doing so automatically without first evaluating the available alternatives.

If you have worked at Stryker for decades and accumulated highly appreciated company stock inside the plan, rolling the entire account into an IRA could eliminate the possibility of using NUA for those shares. Before initiating a rollover, determine how much Stryker stock you own in the plan, which portion is eligible to be distributed in shares, and the plan’s cost basis in those shares. You can then compare a potential NUA strategy with a traditional rollover to determine which approach better fits your circumstances.

NUA Is Not Automatically the Better Choice

The fact that NUA can provide favorable tax treatment does not mean every eligible employee should use it. An IRA rollover may make more sense if the stock’s cost basis is relatively high, the shares have limited appreciation, or you do not want to maintain a concentrated position in Stryker stock.

Other considerations may include:

• Your current and expected future ordinary income tax rates.
• Applicable long-term capital gains rates and state taxes.
• The cash available to pay tax on the cost-basis portion in the year of distribution.
• Your retirement-income and liquidity needs.
• The value of continued tax deferral inside an IRA.
• Your charitable-giving and estate-planning goals.
• Your broader investment strategy and exposure to Stryker stock.

If the distribution occurs before age 59½, the taxable cost-basis portion may also be subject to the 10% additional tax on early distributions unless an exception applies. One possible exception applies to certain employees who separate from service during or after the calendar year in which they turn 55. The availability of an exception depends on the employee’s specific facts.

The important question is not whether NUA is generally a good strategy. It is whether NUA is appropriate for your specific financial situation.

An Example of How NUA Could Affect a Retirement Decision

Consider a hypothetical Stryker employee named David. David has worked at Stryker for nearly 30 years and has accumulated company stock in the vested portion of his 2% subaccount invested in the Stryker Stock Fund. At retirement, those shares are worth approximately $900,000, while the plan’s cost basis is just under $200,000. David’s first instinct is to roll his entire retirement account into an IRA. Before doing so, however, he compares a traditional rollover with a strategy that preserves potential NUA treatment for the eligible Stryker shares.

Because there is a substantial difference between the stock’s cost basis and current market value, the tax treatment of that appreciation becomes an important part of the analysis. Depending on David’s circumstances, preserving NUA treatment may result in more favorable tax treatment for the appreciation than rolling the entire balance into an IRA. The lesson is not that David should automatically use NUA. It is that completing the rollover before performing the analysis could remove an option that may be valuable.

Do Not Forget About Stryker Stock Concentration

Taxes are only one part of an NUA decision. Long-time Stryker employees may already own company stock through their retirement plan, restricted stock units, previous option exercises, an employee stock purchase plan, or taxable investments. At the same time, their salary, bonus, benefits, and future equity compensation may all be tied to Stryker.

That raises an important question: How much of your family’s financial future should depend on one company?

The potential tax benefits of NUA should be considered alongside the investment risk of maintaining a concentrated position. You can generally sell the distributed Stryker shares immediately and still receive long-term capital gains treatment on the NUA that existed at the time of distribution. Any appreciation or loss occurring after the distribution is treated under the normal capital gains rules, with the character of additional gains depending on how long the shares are held after distribution. The goal is not necessarily to keep or sell Stryker stock. It is to make that decision intentionally as part of your broader investment and retirement strategy.

A Simple Framework for Evaluating NUA

If you hold Stryker stock inside your employer-sponsored retirement plan, start by answering a few questions:

• How much Stryker stock do I own inside the plan? Review its current market value and determine which shares may be eligible for an in-kind distribution.
• What is the plan’s cost basis? The amount of appreciation is central to evaluating the potential NUA opportunity.
• Am I approaching a qualifying event? Separation from service, reaching age 59½, death, and certain disability circumstances can affect when NUA treatment may be available.
• What are the tax consequences of each strategy? Compare potential NUA treatment with an IRA rollover, including immediate taxes, possible additional taxes, future tax rates, and the value of continued tax deferral.
• How concentrated am I in Stryker stock? Consider company stock held through the retirement plan, taxable investments, and equity compensation.
• How does this fit into my retirement plan? Consider your expected income, tax situation, investment strategy, charitable giving, estate plan, and cash-flow needs.

These questions will not produce the same answer for every employee, but they can help you make the decision deliberately rather than by default.

Final Takeaway

NUA can be an easily overlooked planning opportunity for Stryker employees who have accumulated highly appreciated company stock inside a qualified retirement plan. But the strategy is not appropriate for everyone, and both the tax rules and the plan’s distribution requirements matter.

The most important takeaway is simple: Do not automatically roll your entire retirement plan into an IRA without first determining whether NUA should be part of the conversation.

If you hold Stryker stock in your retirement plan and want to better understand this strategy, watch the full Retirement Blueprint episode on NUA. We walk through how the strategy works, why timing matters, and what to consider before making retirement-plan distribution decisions.

If you would like to discuss how Stryker stock and NUA may fit within your broader financial plan, you can schedule a complimentary consultation.