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Theodore R. Groom
Groom Law Group
1701 Pennsylvania Ave., NW
Washington, D.C. 20006-5893
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Dear Mr. Groom:
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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 America’s (Prudential) proposed
plan of demutualization.
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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 Prudential’s 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 Prudential’s policyholder obligations will remain unchanged and fully
in force after the conversion.
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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 Prudential’s profits
are determined and that calculation serves as the basis for allocating the
value of Prudential to its eligible policyholders.
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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 Prudential’s
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.
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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.
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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.
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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.
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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.
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Further, in recognition of the unique circumstances
giving rise to the distribution of plan assets to policyholders in
conjunction with Prudential’s 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.
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We hope this information will be of assistance to you.
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Sincerely,
Alan D. Lebowitz
Acting Assistant Secretary
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See 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).
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The department believes that it is
significant that the affected policyholders designed and maintained
employee benefit plans intended to be exempt from ERISA’s 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.
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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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