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Demutualization after plan termination


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I'm hoping someone can provide a helpful suggestion for an odd set of facts.

Employer had Trigon/Anthem health insurance for many years. It never received shares in the demutualization process; they found their way to the state unclaimed property fund, which eventually sold them for cash, and just recently distributed the cash to the employer.

Problem is, the employer terminated all its employees several years ago. Some now work for a related entity over which the employer has no control. The employer (getting the demutualization proceeds) has no employees, no group health plan, etc. At least some, but not a lot, of the demutualization proceeds were from employee premium payments. Many were from the 1990s and payroll records have been lost/destroyed.

The DOL guidance doesn't seem to squarely address the situation. There are cases where funds from a terminating welfare benefit plan are transferred to another welfare benefit plan covering the same employees, but I can't find anything where the plan was out-and-out terminated and no employees remain. 

Regs say upon termination of a welfare benefit plan, the remaining assets will be distributed in accordance with the plan. Here it was just a group health and dental policy.

Is it a reversion if the employer takes the money back? Subject to excise tax? A PT? Is the only option track down former employees and give them a check for an arbitrary amount? Can we give the money to the other related employer to use toward these employees' current premiums/benefits?

Appreciate any thoughts.

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I think the DOL guidance is liberal enough that you could give a portion of the money to just the employees who were participants on the date the demutualization proceeds were distributed by the insurance company based on some reasonable formula that reflects their level of contributions vs. employer contributions.  (That's just a suggestion but there may be other simple approaches that would work.)  Of course, you could use that money to pay the expenses of searching for these folks, performing the allocations and otherwise wrapping this up (including counsel fees).

I don't think there would be any "reversion" taxes, but the portion attributable to employee contributions is in the DOL's view a "plan asset" so if the employer just keeps it that would be a Title I fiduciary breach and a PT.  Some might say "just give it to charity," but I don't think that eliminates the Title I exposure.  

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Thanks. We've considered the options in your first paragraph, but are reduced to making a barely-informed guess for several reasons (different entities issuing paychecks without breakdown of deductions; records destroyed in storms; etc.). At best we would be returning it to some employees from some point in time with no records of who paid how much in premiums and for how long. 

In other words, we know that some portion is plan assets, but any guess as to how much and how it's allocated is almost arbitrary at this point. I'm not sure sending out checks to a subset of former employees for random amounts is any more prudent than keeping the money. 

Both the employer and related entity where some former employees work are tax-exempt. I agree it doesn't resolve the Title I issue, but it's not going back into, say, an owner's pocket. 

 

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I assume the policy was not paid for through a VEBA? Otherwise, there could be a 100% tax on the reversion under 4976. Assuming that does not apply, then as jpod points out the portion attributable to employee contributions must be used for employee benefits, otherwise you have issues jpod points out. The portion allocable to employer can be taken by it, I think, but could be taxable income under tax benefit rule. Some gray areas as to what is allocable to whom and application of tax benefit rule. You might want to look at PLRs 201530022 and 201532037, although those are VEBA rulings, but they discuss tax benefit.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Thanks Luke. 

No VEBA involved.

The employer is, and always has been, tax-exempt so there shouldn't be any tax benefit issues as they never "benefited" from the original premium payments. 

Sounds like there may not be an easy answer other than to find some way to allocate a decent approximation of the plan asset portion. 

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Note that what is the "plan asset portion" may be difficult to determine and subject to arguments based on whether you allocate proportionally, FIFO, LIFO, what the plan and policy docs said, etc. And the contributions will have gone in over many years. If there's enough money involved and the employer really wants to do the right thing, maybe seek an Advisory Opinion from DOL?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I considered putting a call into DOL to see if anyone was willing to provide informal guidance, although I doubt their answer will be "just keep it." The portion we think may be plan assets attributable to employee premium payments is in the six figures, so it's definitely worth poking around. Appreciate your input. 

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