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Thelen LLP
As
noted in our Business
Bulletin of May 8, 2000, many sponsoring employers of
welfare benefit plans are given the choice of approving
or disapproving programs offered by mutual (or member-owned)
insurance companies to convert the insurers to publicly
held corporations. This process, commonly called "demutualization,"
allows policyholders, including sponsoring employers, to
receive a distribution or allocation of stock or cash of
the restructured insurance company.
The
Department of Labor has issued new guidance relating to
how insurer demutualizations affect welfare benefit plans
subject to ERISA.
ERISA
Trust Requirements. The portion of demutualization proceeds
attributable to participant contributions is treated as
a plan asset subject to ERISA's trust requirements. However,
welfare benefit plans that are funded through insurance
contracts often are designed and maintained to be exempt
from ERISA's trust requirements. For such plans, it may
be burdensome to establish a formal trust (such as a VEBA
trust) to hold demutualization proceeds for a limited period
of time. Further, the allocation of plan assets in the form
of demutualization proceeds is a one-time, unintended consequence
of having elected to provide plan benefits through a mutual,
rather than a stock, insurance company.
Use
of Accounts. Recognizing these factors, the Department
of Labor said in a recent information letter that plan sponsors
will not violate ERISA's trust requirements by holding demutualization
proceeds and related earnings in certain accounts, provided
that the following conditions are met:
1.
The demutualization proceeds and any related earnings are
placed in the name of the plan in an interest-bearing account
(in the case of cash) or in a custodial account (in the
case of stock) as soon as reasonably possible after receipt.
2.
The proceeds are applied for the payment of participant
premiums or for plan benefit enhancements or are distributed
to plan participants as soon as reasonably possible but
no later than 12 months after receipt.
3.
The assets are subject to the control of a designated
plan fiduciary.
4.
The plan is not otherwise required to maintain a trust
under §403 of ERISA; and
5.
The designated fiduciary maintains the documents and records
required under ERISA.
Choices.
Based upon this new guidance from the Department of Labor,
sponsoring employers of welfare benefit plans that receive
demutualization proceeds now may place the proceeds in an
account rather than a trust. Because this new opportunity
is usually more cost-efficient than using a trust, it is
an option that sponsoring employers may wish to consider.
However, it should be noted that the use of accounts is
expressly conditioned upon the application of the proceeds
within 12 months of receipt. This contrasts with trusts
where the demutualization proceeds need not be exhausted
within 12 months of receipt. Further, the Department of
Labor's endorsement of the use of accounts does not address
any of the tax consequences related to the receipt, holding
or distribution of demutualization proceeds. The Department
of Labor defers to the Internal Revenue Service, which has
exclusive jurisdiction regarding these issues.
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For more information about the issues covered in this report, please contact David S. Foster in our San Francisco office at 415-369-7020 or at dsfoster@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2001 Thelen LLP
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