MMC Benefits Handbook
Tax Treatment of an In-Kind Distribution of Marsh & McLennan Companies Stock
Special Tax Treatment of In-Kind Distributions
You can choose to receive all or part of the value of your MMC Stock Fund investment in the form of shares of Marsh & McLennan Companies stock or in cash. A distribution in shares, called an in-kind distribution, offers Federal tax treatment that could be more favorable, in certain circumstances, than the tax treatment generally available for other distributions.
To qualify for this special tax treatment, you must receive a lump sum distribution of your entire account balance, either entirely in Marsh & McLennan Companies stock or in a combination of Marsh & McLennan Companies stock and cash (partial distributions and Installment payments do not qualify for this special tax treatment). Also, the distribution must be made because you have terminated employment with the Company and its affiliates, attained the age 59-1/2 or died. The special tax treatment for in-kind distributions applies only to the Marsh & McLennan Companies stock portion of the distribution and only if you don't roll over that portion to a traditional IRA, Roth IRA or another employer's tax-qualified plan.
In the year you receive an in-kind distribution, you pay tax only on the portion of the distribution representing the cost of the Marsh & McLennan Companies shares, which is known as your "cost basis". Your aggregate cost basis in Marsh & McLennan Companies shares is shown on your quarterly account statements.
You may postpone paying tax on any increase in the value of Marsh & McLennan Companies shares above your cost basis, called "net unrealized appreciation". When you sell the Marsh & McLennan Companies shares—either immediately after distribution or sometime later—you pay tax on the net unrealized appreciation at long-term capital gains rates which are lower than ordinary income tax rates.
For example, if Marsh & McLennan Companies common stock was allocated to your Marsh & McLennan Companies 401(k) Savings & Investment Plan account when the stock was worth $50,000 (your cost basis), and the stock is worth $80,000 (market value) when you take your distribution, you would not be liable for tax on the $30,000 increase in value (the net unrealized appreciation) until you sell the stock at which time it would be taxed at long-term capital gains rates. Any post-distribution gains (e.g., if the stock value increases above $80,000 after the distribution date) may or may not qualify as long-term capital gains, depending on how long you hold the stock after the distribution date.
If you have made Roth 401(k) and/or Roth catch-up contributions to the Plan, your tax basis for qualified Roth 401(k) and/or Roth catch-up distributions that include Company Stock is the fair market value of the distributed shares at the time of the distribution. In the case of a non-qualified Roth 401(k) and/or Roth catch-up distribution that includes Marsh & McLennan Companies Stock, the net unrealized appreciation (NUA) is not included in the tax basis of the distributed shares and is treated as a capital gain to the extent realized in a later sale of the stock. The NUA is excludable from your income at the time of the distribution.
If the Marsh & McLennan Companies shares decline in value between the date you receive them and the date you sell them, the loss reduces the amount of net unrealized appreciation that is taxed at long-term capital gains rates. If the shares decline below your cost basis, you will have a capital loss when you sell them (either long-term or short-term, depending on whether you have held the shares for at least 12 months).
Note that the special rules apply to withdrawals or distributions of Marsh & McLennan Companies stock purchased with after-tax contributions; these amounts may qualify for the special treatment described above, even if you do not receive a lump sum distribution of your entire balance. However, please be aware that if you converted after-tax account balances invested in the Marsh & McLennan Companies Stock Fund as part of an in-plan Roth conversion, the potentially available special tax treatment for NUA will be lost.
Take Time to Consider
Taking an in-kind distribution is a personal decision and many variables can affect your tax liability. For more information about Plan distributions generally, you may want to read the IRS Special Tax Notice Regarding Plan Payments. In any event, since this tax information is not, nor is it intended to be, tax advice tailored for any individual employee, you may want to consult a tax professional.