New Update: Healthcare Costs Increasing by Over 60% in Some States. Will you be impacted?

NiSource Employees: How to Use Options Collars to Manage Appreciated Stock Without Triggering Taxes

Healthcare Provider Update: NiSource provides employees with a variety of health insurance options including PPO, HMO, and high-deductible plans with HSAs. Dental and vision coverage is available, along with FSAs for healthcare and dependent care. Life insurance equal to twice base pay is company-paid, with options to purchase additional coverage. Disability benefits, accident insurance, and paid sick leave are also included. Retirement benefits feature a 401(k) plan with matching, and employees may receive opt-out credits if they decline coverage 2. NiSource As ACA premiums rise, NiSources employer-sponsored plans and pre-tax savings accounts offer employees a more affordable and stable alternative to marketplace coverage. With insurers requesting double-digit increases and federal subsidies potentially expiring, employer-backed plans like NiSources help shield employees from steep out-of-pocket costs. Click here to learn more

'NiSource employees navigating concentrated stock positions should view strategies like collars as part of a broader wealth and tax planning discussion that requires careful coordination with qualified professionals.' – Paul Bergeron, a representative of The Retirement Group, a division of Wealth Enhancement.

'NiSource employees with significant stock holdings can benefit from understanding how thoughtful planning techniques provide both flexibility and time to make informed decisions about future diversification.' – Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

How an options collar can help manage concentrated stock positions without triggering immediate taxes.
Key considerations for constructive sale treatment under Section 1259.
Practical examples and alternatives for NiSource employees holding appreciated stock.

By Tyson Mavar, advisor at Wealth Enhancement

The Difficulty of Keeping Valuable Stock

Many NiSource employees hold highly valued company stock, which may have been built up over years of employment or from investments that performed better than expected. Leaving these shares without a hedge exposes them to downside risk if the stock price falls, but selling would create a significant capital gains tax liability.

One method of limiting potential losses without selling outright is an options collar. Even if the stock is not sold, certain hedging techniques can be treated as taxable sales under Section 1259 of the Internal Revenue Code, which governs 'constructive sales.'

The Operation of an Options Collar

A collar strategy combines shares already owned with two option positions:

Put option: Purchasing a put option gives you the right to sell shares at a set strike price. For example, if you own stock at $100 and buy a $90 put, you can still sell at $90 even if the price falls further.
Covered call: Selling a call requires selling at a higher strike price. For instance, selling a $120 call limits gains above $120.

When paired, the call premium can offset the put’s cost. This creates a range where downside is limited and upside is capped. Additionally, with careful planning, the collar can often be cost-neutral.

The Use of Collars by Investors

NiSource stockholders and others might use collars in the following cases:

Concentrated positions: A large portion of wealth tied to one company.
Market uncertainty: When downside management is needed but selling isn’t desirable.
Estate and legacy planning: Preserving value while postponing capital gains.

The Problem of Constructive Sales

Section 1259 defines some hedges as constructive sales, including:

- Short sales of stock you already own.
- Contracts for future delivery of the stock.
- Deep in-the-money calls and puts that eliminate both risk and reward.

If the IRS views a collar as removing nearly all economic exposure, it can be treated as a constructive sale, triggering immediate recognition of capital gains.

Collar Design to Steer Clear of Constructive Sales

To reduce the risk of Section 1259 issues, NiSource employees can structure collars with careful attention:

- Keep strike prices wide enough to allow both risk and reward.
- Use out-of-the-money calls and puts rather than in-the-money options.
- Roll collars forward instead of holding outdated positions.
- Document investment intent with an advisor.

An Example

Suppose you hold $2 million in stock purchased years ago for $200,000. Selling outright could result in over $400,000 in federal taxes, depending on your state.

Instead, you might sell calls at 120% of the stock’s value and purchase puts at 80%. In this design:

- Losses are limited to 20%.
- Gains are capped above 120%.
- The position retains risk and reward, so it generally avoids being classified as a constructive sale.

This approach can provide time to manage sales across multiple tax years or to wait for a more favorable tax environment.

Considerations

NiSource employees considering collars should note:

Liquidity: Large-cap companies usually have strong options markets.
Rolling: Positions can be extended as expiration approaches.
Alternatives: Other hedging tools include donor-advised funds, charitable remainder trusts, gifting strategies, or exchange funds.
Advisory guidance: Given the complexity of constructive sale rules, consulting tax and legal professionals is critical.

The Bottom Line

Options collars can help NiSource employees preserve the value of appreciated stock while limiting downside and postponing taxable events. This strategy allows time for thoughtful diversification while maintaining both risk and opportunity. However, collars must be carefully designed to reduce the chance of triggering constructive sale treatment under the Internal Revenue Code.

Disclaimer: This material is for educational purposes only. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity. Investing involves risk, including possible loss of principal. Always consult your tax professional before making decisions, as tax laws are complex and subject to change.

Featured Video

Articles you may find interesting:

Sources:

1. United States Congress. 26 U.S. Code §1259 - Constructive Sales Treatment for Appreciated Financial Positions. Cornell Law School, Legal Information Institute, 5 Aug. 1997, amended 4 Oct. 2004. https://www.law.cornell.edu/uscode/text/26/1259.

2. Internal Revenue Service. Revenue Ruling 2003-7, 2003-1 C.B. 363. 2003. https://www.irs.gov/pub/irs-drop/rr-03-7.pdf.

3. Options Industry Council (OIC). Options Strategies Quick Guide. The Options Clearing Corporation, 2021. https://www.optionseducation.org/getattachment/007fe864-029a-490d-8dc1-3b58bd558f64/options-strategies-quick-guide.pdf?lang=en-US

4. Internal Revenue Service. 2024 Instructions for Form 5227, Split-Interest Trust Information Return. 26 Nov. 2024. https://www.irs.gov/pub/irs-pdf/i5227.pdf

As an employee of National Grid, what are the key eligibility criteria for participating in the Pension Plan specifically for Niagara Mohawk Power Corporation employees? How might these criteria impact your personal retirement planning and the benefits you expect to receive upon retirement from National Grid?

Eligibility Criteria for Niagara Mohawk Pension Plan: Employees of Niagara Mohawk Power Corporation who are represented by Local Union 97 of the IBEW and work at least 20 hours per week or accumulate 1,000 hours in a Pension Plan year are eligible. Participation begins automatically on the first day of employment. These criteria directly impact retirement planning by determining when employees begin accruing pension benefits and how much they will receive at retirement(National_Grid_2023_Niag…).

Within the framework of the National Grid Pension Plan, how does the cash balance formula work in calculating retirement benefits, and what implications does this have for employees of Niagara Mohawk Power Corporation when considering their long-term financial outlook?

Cash Balance Formula: The National Grid Pension Plan for Niagara Mohawk employees uses a cash balance formula that provides monthly pay-based credits (starting at 4% and increasing with years of service) and interest credits. These accumulate in a hypothetical account, growing until retirement, allowing employees to track their retirement benefits much like a savings account. This formula impacts financial outlook by providing predictable growth tied to service and pay(National_Grid_2023_Niag…).

For employees at National Grid, what are the specific rights and options available during the pension benefit application process? How do these rights protect the interests of individual employees and ensure they receive fair treatment under the Niagara Mohawk Pension Plan?

Pension Benefit Application Process: National Grid employees must apply for their pension benefits by submitting the required forms at least 90 days before retirement. Spousal consent is required if opting for any form of payment other than the default. This ensures employees understand and select the best payment option for their circumstances, protecting their interests under the Niagara Mohawk Pension Plan(National_Grid_2023_Niag…).

Given the different types of credits that contribute to the pension benefit for employees of National Grid, how are Pay-based Credits and interest credits calculated? What strategies might Niagara Mohawk Power Corporation employees employ to maximize these credits before retirement?

Pay-based and Interest Credits Calculation: Pay-based credits are determined by years of service, starting at 4% of pay and increasing to 8% after 20 years. Interest credits are based on an annual interest rate tied to the Treasury securities and corporate bond rates. Employees can maximize these credits by continuing to work and contributing to their pension balance(National_Grid_2023_Niag…).

How do pension benefits work for Transition Group Employees specifically within National Grid's framework, and what unique provisions apply to them under the Pension Plan as compared to regular employees of Niagara Mohawk Power Corporation?

Pension Benefits for Transition Group Employees: Transition Group Employees under the National Grid Pension Plan have benefits calculated using both the former final average pay formula and the cash balance formula, with the greater benefit being paid out. This differs from regular employees who only receive benefits calculated under the cash balance formula(National_Grid_2023_Niag…)(National_Grid_2023_Niag…).

What are the repercussions for National Grid employees in terms of benefit loss or limitation if they have not met the Vesting requirements under the Niagara Mohawk Pension Plan? How can understanding these repercussions influence an employee's decision-making regarding their career and retirement?

Impact of Vesting Requirements: Employees must complete three years of service to become vested in the Niagara Mohawk Pension Plan. If they leave before vesting, they lose all accrued pension benefits. Understanding vesting requirements is crucial for career and retirement planning, as it ensures employees retain their pension benefits if they meet the criteria(National_Grid_2023_Niag…).

As a current employee at National Grid, what does the termination of the Pension Plan imply for accrued benefits under the Niagara Mohawk Pension Plan? Specifically, how do federal protections through ERISA and the Pension Benefit Guaranty Corporation come into play for employees seeking assurance regarding their retirement funds?

Termination of Pension Plan and Federal Protections: If the Niagara Mohawk Pension Plan is terminated, accrued benefits are protected by ERISA and insured by the Pension Benefit Guaranty Corporation (PBGC). Employees can feel assured that their benefits will be secured up to the PBGC's limits in case of plan termination(National_Grid_2023_Niag…).

How does the National Grid Pension Plan accommodate the unique situations of employees during times of disability or military service, and what steps should Niagara Mohawk Power Corporation employees take to ensure their benefits continue during these periods?

Disability and Military Service: Niagara Mohawk employees receive service credits during periods of disability or military leave, ensuring continuous pension accrual. Employees should ensure their disability or military status is properly documented with the company to avoid interruptions in their pension benefits(National_Grid_2023_Niag…).

When considering the various forms of pension payments available to retirees from National Grid, what are the potential advantages and disadvantages of choosing an annuity versus a lump-sum payment for employees from Niagara Mohawk Power Corporation?

Annuity vs. Lump-Sum Payment: Retirees at National Grid have the option to choose between an annuity, providing a steady income for life, or a lump-sum payment. The annuity provides financial stability, while a lump sum offers flexibility. The choice depends on individual financial needs and retirement goals(National_Grid_2023_Niag…).

For those looking to gain further clarity on the nuances of the Niagara Mohawk Pension Plan, what are the most effective ways for employees to contact National Grid for assistance? How can engaging with the Pension Service Center enhance an employee's understanding of their benefits and rights?

Contacting National Grid for Pension Assistance: Employees seeking more information about their Niagara Mohawk Pension Plan can contact the National Grid Pension Service Center or use the online pension modeler. Engaging with the Pension Service Center provides personalized guidance, helping employees understand their benefits and make informed decisions(National_Grid_2023_Niag…).