Demutualization proceeds

[Guest Jose Rosario]

DOL has made it clear that demutualization proceeds representing the payment to a plan that is a polcyholder by way of a group annuity contract are plan assets. Please advise how these should be reported on Form 5500?

Prior threads have indicated that such payments are to be regarded as investment gains. Is there agreement and/or disagreement with this approach?

[KJohnson]

This was from the Prudential demutualization guide.

Schedule H (for plans with 100 participants or more) and Schedule I (for plans with less than 100 participants) of the ‘‘new’’ Form 5500 (effective 1999) are designed to

report the Plan’s assets and liabilities, and income and expenses. The plan’s receipt of the compensation might be reported as, for example, ‘‘other income’’ on Line 2c or as ‘‘net gain on the sale of an asset’’ on Line 2b(4) of Schedule H, or ‘‘other income’’ on Line 2c of Schedule I (if appropriate). If you determine that compensation is an asset of the plan, and report the receipt of

the compensation as income or a gain, you would report the investment and disposition of this asset as any other plan asset. Thus, if the compensation were not disposed of prior to year-end, it would be included in Schedule H, Part I (Assets and

Liabilities), or Line 1a of Schedule I (if appropriate) as of the end of the year with the plan’s other assets. You should consult with your legal advisor on how to report demutualization compensation on your Form 5500.

[Guest IWIS]

It was my understanding that demutualization proceeds did not belong to the plan unless the policy itself was paid for, at least in part, with participant contributions or plan assets. In that case, I thought that a portion, but not necessarily all, of the demutualization proceeds would be considered plan assets.

True?

[KJohnson]

In a defined contribution pension plan/group annuity context, generally everything that went into the policy is a "plan asset" and nothing can revert to the employer.

However, in broad strokes, your understanding is correct with regard to welfare plans. Most of the insurance companies that have demutualized put out detailed guides that dealt with both reitrement plans and welfare plans.

[Guest IWIS]

I see. Thanks. I was an investigator at the DOL field office that initiated the demutualization cases, but never actually did one myself. I only know what I've heard from the other investigators. And most, if not all, of the cases in our office at that time were of the health variety.