What is the Difference Between ESOP & Common Shares in Your Chevron 401k?
If you are an employee of Chevron and contribute to the Chevron Employee Savings Investment Plan (ESIP), there is a good chance you have a significant amount of Chevron stock in your 401(k) plan. Depending on your length of service with Chevron, you may have both common shares and Employee Stock Ownership Plan (ESOP) shares in your ESIP. While they are both essentially shares of Chevron stock, there are some differences in how they are treated that can have significant tax consequences when utilizing Net Unrealized Appreciation (NUA) at retirement.
The common Chevron shares that are in your ESIP consist of the shares you have purchased during your employment and other company matching contributions. The ESOP, created in 1989, deposited shares of Chevron stock into employee 401(k) plans as matching contributions until 2013.
Utilizing NUA for the Chevron stock in your ESIP can enable you to take advantage of the capital gains tax rate on the difference between the cost basis and current market value of the Chevron shares. This tax rate is lower than the normal income tax rate levied when taking distributions from your 401(k) plan. Keep in mind you will still need to pay ordinary income tax on the cost basis of your shares when you utilize NUA and convert them from your 401(k) into a brokerage account.
It should also be noted there are some qualifying guidelines you should be aware of when considering utilizing NUA:
- The entire balance of your ESIP must be distributed within one tax year. The distributions do not have to be taken at the same time.
- The distribution must be taken as actual shares of company stock. The shares cannot be converted to cash before the distribution. The NUA distribution must be the first withdrawal taken after retirement.
- You must experience a qualifying event that includes either separation from service from Chevron, reaching age 59½, or suffer an injury resulting in total disability or death.
Now let’s look at how your shares of Chevron stock can be treated for NUA purposes. Let’s say you have 150 shares of Chevron stock with 100 consisting of common stock shares with an average cost basis of $75 and 50 ESOP shares with an average cost basis of $17.70. We will assume Chevron stock is currently trading at $100. For NUA on the common stock shares, the value of the shares is $10,000 (100 x $100), the cost basis taxed at ordinary income will be $7,500 (100 x $75), and the converted amount that can be taxed later at the capital gains rate when the shares are sold will be $2,500 ($10,000 – $7,500). For NUA on the ESOP shares, the value of the shares is $5,000 (50 x $100), the cost basis taxed at ordinary income will be $885 (50 x $17.70), and the converted amount that can be taxed later at the capital gains rate when the shares are sold will be $4,115 ($5,000 – $885).
As the example above illustrates, utilizing NUA can lead to significant tax savings depending on your current and future income situation, but the strategy can be complex to implement. Insight Wealth Strategies can help you determine if utilizing NUA is a viable option for your Chevron common stock and ESOP shares and work with you to implement the best distribution strategies to help you meet your unique financial goals.
Insight Wealth Strategies, LLC is not affiliated with Chevron.