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The Department of Labor recently released several pieces of guidance with
important information for employers on how an insurer's demutualization affects
ERISA employee benefits plans. Demutualization is when a mutual insurance
company, which is owned by policyholders, converts to a stock company, which is
owned by shareholders. Ownership then transfers from the policyholders to the
new shareholders, and the accumulated surplus (in the form of stock or cash) is
distributed to the former policyholders. Some of the tax and other issues
involved in demutualization are quite complex and thus beyond the scope of this
article, which limits its focus to the recent DOL guidance.
Since many employee benefits plans are receiving shares of demutualized
insurance companies, employers need to be aware of how the receipt of
demutualization proceeds is likely to affect their plans. A law firm, the Groom
Law Group, recently requested guidance from the DOL regarding alternatives
available under ERISA's trust requirement as it relates to demutualization
proceeds distributed to an ERISA-covered plan. Since plans funded solely by
insurance contracts are exempt from the trust requirement, the law firm asserted
that it would be overly burdensome for welfare plan policyholders and certain
annuity contract holders to establish a formal trust merely to hold
demutualization proceeds for a limited period of time.
In its response, the DOL characterized demutualization proceeds as plan
assets. In a welfare benefits plan under which participants pay a portion of the
premiums, the portion of the demutualization proceeds that are attributable to
participant contributions is a plan asset. In a pension benefits plan, or where
any type of plan or trust is the policyholder, or where the policy is paid out
of trust assets, all proceeds received by the policyholder via demutualization
are considered plan assets.
The DOL also stated that plan sponsors may hold these assets and their
earnings in an interest-bearing account for cash, or in a custodial account for
stock, in the plan's name and subject to certain conditions. As soon as
reasonably possible—but no later than 12 months after the plan receives the
proceeds—the assets must be applied to payment of participant premiums or to
plan benefits enhancements, or else distributed to plan participants.
Alternatively, the assets could be applied to enhance plan benefits under
existing, supplemental or new insurance policies or contracts; applied toward
future participant premium payments; or otherwise held by the insurance company
on behalf of the plan. However, this would have to be done either before or at
the same time as the distribution of demutualization proceeds constituting plan
assets.
Plans that satisfy either DOL alternative will not be considered in violation
of ERISA's trust requirement and may continue relying on the Form 5500 limited
reporting exemptions for small, fully insured welfare plans and
employer-sponsored 403(b) arrangements.
In a separate letter to the Groom Law Group, the DOL stated that 403(b) plans
that are otherwise exempt from ERISA would remain exempt, notwithstanding the
fact that the employer as contract holder votes on the proposed demutualization
plan. The employer may also select a plan allocation method for demutualization
proceeds from among alternatives offered by the insurer without losing the
exemption.
In a separate advisory letter, the DOL stated that insurers will not be
considered plan fiduciaries solely as a result of providing information to their
clients and policyholders regarding administratively feasible actions for the
allocation of demutualization proceeds.
April 2001
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