Prudential Demutualization

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This issue has been touched on in other threads, but I wanted to see if anyone has any additional thoughts on how to handle demutualization compensation distributed to a terminated noncontributory defined benefit plan.

Two specific questions:

1. Where do you intend to park the stock until you allocate the shares to employees (to avoid any reversion under section 4980)? (The plan I am dealing with has a group annuity contract held by the employer.)

2. Is anyone taking the position that the employer can keep the proceeds, and that section 4980 does not apply?

Thanks.

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(And thanks to Everett Moreland for his assistance.)

[MGB]

Prudential has been sending notices to these terminated plans that they may receive stock. I don't think they will, so there is no issue involved. It appears that they are doing mass mailings to all contractholders whether they will receive stock or not. Calls to Prudential produce no answers.

A group annuity contract under a terminated plan is a nonparticipating contract with specific contractual obligations. These should not receive stock as a mutual policyholder. If they do, then I don't know what Prudential is doing.

The only time a terminated plan should receive stock is if they had a participating contract (e.g., a GIC or other group annuity contract) in the plan when it was still active. The reason they may still receive stock is that the demutualization plan goes back a certain number of years...it is not just current policyholders.

Assuming there really is a receipt of stock, it is a plan asset. Either the benefits need to be increased under the contract, or it is a reversion to the employer with all of the attendant taxes.

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For what it's worth, the Pru guide states the following:

"SPECIAL ISSUES.

Some Prudential group contracts were issued to fund plans that were at one time subject to ERISA but are now terminated. These contracts include termination annuities. Because it is not clear under the relevant authorities how demutualization

compensation attributable to a terminated plan’s annuity contract should be treated, you may incur less risk of a challenge if you treat the compensation as a ‘‘ plan asset’’ and use it to provide enhanced benefits to the plan’s former participants whose benefits are provided under an annuity.24 Other uses of the compensation

could involve more risk of challenge. If you conclude that the demutualization compensation need not be treated as an ERISA plan asset, the disposition of the compensation may nonetheless be subject to constraints under state law. See Section

VIII below. You should consult with your legal advisor in resolving these issues."

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[jpod]

If the demutualization proceeds are received by the employer long after the db plan has been terminated and all assets distributed, how do you report the distribution of the proceeds by the employer to the plan participants, assuming the employer wished to give it to the participants? Are those distributions subject to the joint and survivor annuity requirements? Are they relevant for purposes of the 415 limitations?

The timing is critical in these cases. We start with the premise that the "value" of the surplus assets are subject to income tax and the 50% excise tax at the time the surplus is distributed. So, for example, if there was a terminal annuity involved, but at the time the surplus was distributed there was no demutualization plan, wouldn't it be reasonable to assign a zero value to the annuity? Yes, the right to participate in a demutualization is a "plan asset", but at the relevant point of time that plan asset had a value of $0. It would seem to follow, therefore, that if the demutualization process began afterwards, the demutualization proceeds would not be subject to the excise tax.

Maybe it's foolish to assume that the value could ever be $0, no matter how remote the possibility of a demutualization at the time of the distribution of db assets. The point I am trying to make, however, is that the value is whatever it is at the time the plan is liquidated, and that value may be $0 or only a tiny fraction of the demutualization proceeds which the employer may ultimately have the good fortune of receiving down the road. But, only that value at the time of the db plan liquidation should be considered a "plan asset" or subject to the excise tax.

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Thanks JPOD. Yes, another poster has indicated a similar position (that the value should be assigned at termination).

My client just informed me that the effective date of termination in my case is either 1973 or 1979. Either way predating the excise tax and perhaps predating ERISA.

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