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"Plan Assets" (demutualization or premium refund) and Welfare Plans


Guest erisafried
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Guest erisafried

The Situation: XCo maintains a fully-insured health plan. Both XCo and its employees contribute towards the cost of coverage (XCo bears the larger share). For whatever reason (e.g., demutualization or premium refund), XCo receives a check back from the insurance company.

As far as the DOL is concerned, at least a portion of the "refund" XCo received consists of participant contributions. As such, the allocable portion of the refund attributable to participant contributions (say 20%) must be used to benefit the plan. This could be accomplished through premium holidays, issuance of rebate checks, or increased plan benefits.

The Question: Must the benefit (whatever it is) flow only to people who participated in the plan during the year to which the refund relates (e.g., the year in which the demutualization occurred or the year in which claims experience was less than premiums paid) or can it be used to benefit current and future plan participants?

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This is just my off-the-cuff unresearched opinion. Since the refund is based on a formula that includes the premiums paid and claims made/not made by the participants at certain known times, the refunds should be distributed to those same known participants.

Where did you see this DoL opinion?

Is there an IRS "opinion" concerning the taxation of this refund?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest erisafried

The DoL opinion I referenced was expressed by an investigator during the course of some interviews with plan personnel. Although I understand the argument, I don't think that there's any formal authority for it. In fact, this position is contrary to the approach the DoL took for demutualization proceeds. There, the DoL indicated that it was not necessary to track down the terminated participants to give them a share of the demutualization proceeds. Since the analysis for premium refunds is essentially the same as for demutualization proceeds (says the DoL), what's sauce for the goose ought to be sauce for the gander.

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  • 3 weeks later...
Guest Doug Johnston

We had a demutualization situation similar to this several years ago in Virginia. We talked to some individuals high up the chain at the DOL in DC, and some of our clients were "investigated" by field agents. Although the DOL never gave any formal opinions, they took a very pragmatic approach that the plan assets could be used for the benefit of the employees as a CLASS rather than to the specific individuals who paid the premiums. They also allowed employers to provide a wide range of benefits with the proceeds, from cash refunds to additional vacation time.

The issue that DOL really enforced was that the plan assets must be used to provide the benefits within a short period of time or they must be put in a trust account (potentially leading to the requirement to have an independent accountant's audit of the Plan.)

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My experience was less favorable.

We had to use the demutualization proceeds for a different type of plan because the employer no longer provided that type of benefit.

Another complicating factor was that the client had very high turnover (about 30 or 40% per year). Thus, because of the lag time between when the premiums were paid and when the demutualization proceeds were received, the majority of the participants who had paid the premiums under that plan were no longer employed there.

The auditor was very upset. However, because the client had contacted me as to how to use those proceeds, and I had run the potential idea by a senior DOL official prior to my client implementing it, the agent grudgingly accepted that approach. But he made it very clear that if the employer had implemented that approach unilaterally, he would have done his best to make life miserable for my client.

It is interesting to note that he didn't offer any suggestions as to how we could have done it in a way that would have been palatable to him. I think that being forced to resurrect a terminated plan for a one-time contribution would be a monumental waste of time. Also, I'm not sure that the client could locate those former employees, even if it tried. Furthermore, there might be a question as to whether those benefits would qualify for favorable income tax treatment. Nevertheless, the DOL auditor didn't let any those practical considerations affect his view on the matter.

Kirk Maldonado

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Has anyone fought the DOL on this issue? It's been a couple of years since I looked, but at that time I don't think there were any reported cases. Here in Hawaii, the typical plan structure is essentially "employee pays $x and employer pays the rest" because of state-law limits on employee premium contributions. It's always seemed to me that with this structure, a strong factual argument can be made that any marginal dollars coming back as a refund should be the employer's money, but I have yet to encounter a situation where it made sense to fight the DOL.

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Kirk, is that because you think it's wrong or because you don't think they'd buy it? If the latter, I agree. I wouldn't raise it unless I was prepared to litigate it (which is highly unlikely). But if the former, why? As I understand it, the DOL's position is that participants' rights to premium refunds are based on the terms of the plan. If the plan says employee pays 20% and employer pays 80%, a refund needs to be allocated 20/80 in order to keep the parties' respective cost shares consistent with the plan. But if the plan says employee pays $50 and employer pays the rest, any marginal change increase in premium comes straight out of the employer's pocket, and it seems reasonable to treat a marginal decrease in premium the same way. I suppose the analysis might be different if you're dealing with demutualization proceeds, but what's wrong with this analysis for experience rebates?

Thanks for your thoughts.

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Both. I don't think that the DOL will buy your theory and I think that the DOL position is right.

What might or might not have happened (to the premium cost) is irrelevant. All that counts is what really happened, which is the portion of the total premium dollars that were contributed by each of the respective parties.

I'll bet that (1) the DOL would love to litigate this issue (because of the great precedential value it will create for them) and (2) the court will agree with the DOL position.

If you have a client that is willing to pay the litigation costs, that's great. I just wouldn't be very optimistic that you will prevail.

Kirk Maldonado

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Guest erisafried

For what it's worth, I was recently talking with a fairly well-known (although perhaps not as well-known as Kirk :) ) ERISA counsel from DC about this issue, and he said that he encountered similar arguments in the demutualization context several years ago, particularly with some investigators from the San Francisco field office. He was able to back them down with some assistance from the National Office.

However, I can see that the DOL would have a concern where there has been a lot of turnover: even rough justice in that circumstance might not be good enough. I just have some problems with the practical implications of being forced to track down a bunch of ex-employees to give them (potentially) itty bitty checks. Then again, administrative practicality is not necessarily a hallmark of DOL's enforcement activities.

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In demutualizaton it is impossible to relate the refunds to premiums paid by participants since the dividend paid by the ins co is for the entire period that the employer had a policy. Therfore all participants over an extended period would be eligible for insignificant amounts which is why employers choose a premium holiday or increased benefits for the current participants.

mjb

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  • 2 weeks later...

For what it's worth, we were involved in a DOL demutualization audit a couple of years ago. Although the employer continued to sponsor the same plan in our case, as in Kirk's example our client also had very high turnover. So high in fact that I believe less than half of the participants covered during the two Plan Years generating the demutualization proceeds were still around. In that case, the DOL agent we were working with was very pragmatic and did not balk at all about having the employer simply provide a premium holiday for current employees with no attempt to return amounts to former employees. The amounts were not terribly large in our case but, as with so many things, I think much of this just depends on the particular agent involved.

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  • 9 months later...
Guest dsyrett

Anybody have any guidance or comments:

I am on my Church's finance committee. The Church has maintained Trigon health coverage on a portion of the staff employees for a number of years. Mostly Church paid (maybe 90% +) but to a small extent employee paid (only on dependent coverage; perhaps four employees involved).

When the demutualization unfolded a fews years ago, shares of stock were issued to the Church which were recently sold and generated a few tens of thousands in cash.

We would like to be fair and pay a fair portion of the proceeds to the employees in question. If records are available, we would do this via some spreadsheet ratioing. Goal for solution would be fairness but simple.

As a church plan, we are not subject to ERISA. Apparently other churches in the area have kept all proceeds.

Any comments??

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let's suppose two fully insured plans are identical as to demography and benefits and the claims are also identical for the period which is experience rated.

Both plans call for employee contributions of $40 per month and employer "pays the balance of the cost of the plan"....and it is so stated in all spds and other ee communications.

In both cases, the claims per employee plus retention equal $90 per month.

Employer A's contract with the insurance company provides for an advance premium of $100 per month per employee (total) with an experience refund if the advance premium is redundant. So, the retroactive experience refund is $10 per month per employee.

Employer B's contract is of the "a + b" type; where "a" is the advance premium (say $85),

"b" is the additional premium required by the carrier if claims plus retention exceed "a".

In this case, an additional $5 per month per employee is required.

I believe we can agree the DOL will not require the employees to pay any portion of the $5 additional premium required in scenario B.

Why, then, should it require Employer A to share the return of the excess premium (excuse me - refund amount) with the employees?

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A fully insured plan with retroactive experience rating causing retroactive premiums? I doubt that such an animal exists.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Would you have preferred the term "retrospective" experience refunds?

Yes, there still are fully insured plans which are experience rated.

And, yes, the two types of premium adjustment noted in my previous comment are currently in use. Mind you, you need a cooperating insurer and plan sponsor, where both are financially astute. (the definition of "astute" includes having exceptionally good consultants....)

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  • 2 years later...
Guest qualified plan

Slightly off topic, but do people generally file a Fom 5330 in a welfare plan demutualization, where the amounts were held out of trust for more than 12 months; or can the IRS plan asset analysis be treated differently?

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