The Segal Company's Compliance Alert

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May 31, 2001

Guidance on ERISA Treatment of Demutualization Proceeds

The Department of Labor (DOL) released an Information Letter that addresses the proper treatment of insurance company demutualization proceeds under ERISA. (To see the Letter, which was released in February 2001, click here ).

Briefly, the letter concludes the following:

All proceeds attributable to an insurance contract purchased by an employee benefit plan, whether a voluntary employees beneficiary association (VEBA) or a pension plan, are plan assets that must be held in trust for the participants.
With regard to an unfunded health plan, any proceeds that are attributable to employee contributions are plan assets.
If the employer does not have a trust to hold the assets, the Department of Labor will not take action to enforce ERISA's trust requirements if they are held in an earmarked, interest-bearing bank account that is overseen by a fiduciary, for a period of no more than 12 months.

The DOL's Information Letter was issued to counsel for the Prudential Insurance Company of America and specifically discusses the Prudential demutualization. It is unclear whether the DOL's view would change if a different insurance company were involved.

Of course, plan sponsors and fiduciaries considering how to handle the proceeds of an insurance company demutualization should rely on their attorneys' advice regarding the ERISA requirements.

To see The Segal Company's Compliance Alert on the Demutualization of MetLife, click here.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.