February 15, 2001
Theodore R. Groom
Groom Law Group
1701 Pennsylvania Ave., NW
Washington, D.C. 20006-5893
Dear Mr. Groom:
This is in response to your request for guidance from the Department of Labor (Department) regarding the alternatives available under the trust requirement of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) with respect to receipt by policyholders of demutualization proceeds belonging to an ERISA covered plan in connection with The Prudential Insurance Company of Americas (Prudential) proposed plan of demutualization.
You represent that Prudential is a mutual life insurance company. As a mutual life insurance company, Prudential has no authorized, issued, or outstanding stock. Instead, the insurance and annuity policies issued by Prudential combine both insurance coverage and proprietary ownership rights (sometimes referred to as membership rights) in Prudential. You indicate that Prudential is reviewing a proposed draft plan of reorganization (Plan or Plan of Reorganization) to convert from a mutual life insurance company to a stock life insurance company (a process known as demutualization). The Plan of Reorganization is subject to the review and approval of Prudentials Board of Directors and the Commissioner of Banking and Insurance of the State of New Jersey. The Plan will propose that 100% of the equity value of Prudential (currently estimated to be between 15 and 20 billion dollars) will be distributed to eligible policyholders in the form of stock, cash, or policy credits. All of Prudentials policyholder obligations will remain unchanged and fully in force after the conversion.
If the Plan of Reorganization is approved, all policyholders membership interests in Prudential will be extinguished. Payments of stock, cash, or policy credits (i.e., enhancements to policy values) will be made in consideration of the policyholders extinguished membership rights. The amount of consideration each policyholder will receive will be determined pursuant to actuarial methods. The amount of contribution each policy has made and will make to Prudentials profits are determined and that calculation serves as the basis for allocating the value of Prudential to its eligible policyholders.
Generally, the Plan of Reorganization provides that consideration will be distributed directly to the policyholders. Prudential has issued tens of thousands of contracts that provide benefits under ERISA-covered employee benefit plans. With respect to these ERISA plans, Prudential recognizes that some or all of the consideration paid to policyholders may constitute plan assets and, therefore, require policyholders to take appropriate steps to secure those assets for the benefit of plan participants and beneficiaries, including placing such assets in trust. In this regard, you represent that many of Prudentials policyholders do not currently maintain trusts to hold plan assets because their plans are funded solely by insurance contracts, and therefore, are exempt from the trust requirement. This is generally true for welfare plan policyholders and smaller employers holding group annuity contracts to fund retirement benefits. You state that requiring these policyholders to establish a formal trust merely to receive and hold demutualization consideration, often for only a limited period of time, imposes a burdensome obligation on policyholders. You note that frequently a smaller employer will be concerned about the costs, complexity and legal implications of establishing a formal trust, and may simply not complete the task properly even if the demutualization consideration is used for the benefit of plan participants.
You have requested guidance on the applicability of ERISA's trust requirement to this particular circumstance and any alternatives available to policyholders in dealing with demutualization proceeds.
The application of the trust requirement of section 403 will depend on whether demutualization proceeds received by a policyholder constitute plan assets. Generally, those proceeds of the demutualization will be plan assets if they would be deemed to be owned by the plan under ordinary notions of property rights.1 It is the view of the Department that, in the case of an employee welfare benefit plan with respect to which participants pay a portion of the premiums, the appropriate plan fiduciary must treat as plan assets the portion of the demutualization proceeds attributable to participant contributions. In determining what portion of the proceeds are attributable to participant contributions, the plan fiduciary should give appropriate consideration to those facts and circumstances that the fiduciary knows or should know are relevant to the determination, including the documents and instruments governing the plan and the proportion of total participant contributions to the total premiums paid over an appropriate time period. In the case of an employee pension benefit plan, or where any type of plan or trust is the policyholder, or where the policy is paid for out of trust assets, it is the view of the Department that all of the proceeds received by the policyholder in connection with a demutualization would constitute plan assets.
With regard to demutualization proceeds constituting plan assets, ERISA section 403(a) provides that the assets of an ERISA-covered plan shall be held in trust by one or more trustees pursuant to a written trust agreement unless subject to one of the exceptions in section 403(b) of ERISA. 29 CFR 2550.403a-1. Section 403(b) provides that the requirements of subsection (a) shall not apply to plan assets which consist of insurance contracts or policies issued by an insurance company qualified to do business in a State; or to any assets of such an insurance company or any assets of a plan which are held by such an insurance company. 29 CFR 2550.403b-1. It should also be noted that the other fiduciary obligations under Title I of ERISA, including those in sections 404 and 406 of ERISA, apply to dealing with demutualization proceeds that constitute plan assets.
Consistent with the provisions of section 403, policyholders receiving demutualization proceeds constituting plan assets could place those assets in trust until appropriately expended in accordance with the terms of the plan. Alternatively, the Department believes that, prior to or simultaneous with the distribution of demutualization proceeds constituting plan assets, such assets could be applied to enhancing 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 without violating the requirements of section 403.
Further, in recognition of the unique circumstances giving rise to the distribution of plan assets to policyholders in conjunction with Prudentials demutualization,2 the Department has determined that, pending the issuance of further guidance, it will not assert a violation in any enforcement proceeding solely because of a failure to hold plan assets in trust, provided that: such assets consist solely of proceeds received by the policyholder in connection with the demutualization; such assets, and any earnings thereon, are placed in the name of the plan in an interest-bearing account, in the case of cash, or custodial account, in the case of stock, as soon as reasonably possible following receipt and such proceeds are applied for the payment of participant premiums or applied to plan benefit enhancements or distributed to plan participants as soon as reasonably possible but no later than twelve (12) months following receipt; such assets are subject to the control of a designated plan fiduciary; the plan is not otherwise required to maintain a trust under section 403 of ERISA; and the designated fiduciary maintains such documents and records as are necessary under ERISA with respect to the foregoing.3 Nor, with respect to plans satisfying the foregoing, will the Department assert a violation in any enforcement proceeding or assess a civil penalty with respect to such plans because of a failure to meet the reporting requirements by reason of not coming within the limited exemptions set forth in 29 CFR §§ 2520.104-20 and 2520.104-44 solely as a result of receiving demutualization proceeds constituting, in whole or in part, plan assets.
We hope this information will be of assistance to you.
Alan D. Lebowitz
Acting Assistant Secretary
1See Advisory Opinion 92-02A, Jan. 17, 1992 (assets of a plan generally are to be identified on the basis of ordinary notions of property rights under non-ERISA law).
2 The Department believes that it is significant that the affected policyholders designed and maintained employee benefit plans intended to be exempt from ERISAs trust requirements and that the allocation of plan assets, in form of demutualization proceeds, is a one-time, unintended consequence of having elected to provide plan benefits through a mutual, rather than stock, insurance company. Taking into consideration the nature of the affected plans and expected short-term exhaustion of demutualization proceeds, the Department is persuaded that the costs and burdens attendant to compliance with the trust and reporting requirements may significantly outweigh the realized benefits to participants and, accordingly, finds that, under the circumstances described herein, interim relief for affected plans is appropriate.
3 The Department expresses no view concerning the tax consequences of any action taken by a policyholder with regard to the receipt, holding or distribution of demutualization proceeds. Such issues are exclusively within jurisdiction of the Internal Revenue Service.
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