Pru Demutualization. Again...

[card]

Client has contributory group life plan. Has allocated demutualization proceeds between employer and employees, and has established a custodial account with Pru under the DOL Trust Policy, to be used to provide a premium holiday to employees.

What the heck is the tax impact of this?

When client instructs Pru to sell the stock, and use the proceeds for the premium holiday-

Is client taxed on the gain?

Does client get an immediate corresponding deduction? Do the section 419 welfare benefit rules apply?

Is there imputed income to employees? Is this an employer contribution under section 79, or is this an employee contribution?

My guess is that since this custodial account is not a separate taxable entity, the client has to take the proceeds of the stock sale into income; the client gets a corresponding deduction for the contribution to the group life premium; and the employees have imputed income.

Except for the imputed income, the net affect of handling the transaction this way is that the proceeds wind up as nontaxable. But had the stock been distributed instead to the employees, they would have tax liability on the sale of the shares.

Anyone work through this????????

Thanks-

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[mroberts]

The best advice I have for you is get some advice from a tax specialist. I was with MetLife when they went stock a few years back and let me tell you, nothing seemed straight forward.

[david rigby]

As so often is the case, the website can be a great place to start. Go here. Use the Search function with words such as "demutualization" or "prudential".

[card]

Thanks Pax. I always do that first. I've read all the messages, and all the articles. The problem is that the Pru demutualization introduces a new variable with the DOL Trust Policy- the custodial account that DOL has indicated would satisfy the ERISA trust requirement. None of the articles discuss the tax impact of using this custodial account, which unlike a trust, is not a separate taxable entity.

None of the messages or articles specifically deal in any great depth with group life plans and imputed income under section 79. If these demutualization proceeds are allocable to employee contributions in the first place, then when paid from the custodial account to provide the premium holiday are they employee paid premiums or employer paid premiums?

I don't think there are any definitive answers to any of these questions. However, employers have received their proceeds so there must be plenty of other group policyholders out there providing premium holidays- I was hoping someone could share their conclusions on how they are handling the tax consequences.

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[mbozek]

need to check: DOL opinions issued in 2001 on pru demutualizationwhich includes discussion of treatment of employee contributions and prospectus on pru IPO which also discusses these matters in general. I though the point of the getting the triust opinion was to provide a way for employers to avoid having to set up a separate trust under ERISA for holding the pru stock which was allocated to welfare plans as part of the demutulaizaton (since the stock could not be held as an asset of the employer).

Under the tax benefit, rule a refund of employer contributions deducted in a prior year would be taxable income in the year received but the employer treats it as a corresponding deduction if used to provide benefits in the year the refund is received. Employers generally sell the stock received in demutualization adn use it to pay for the cost of future premiums to the plan. U need to find counsel to review the plans and your options.

[card]

Thanks. But the facts are a bit different. This is a contributory group life plan. So the employer has made an allocation of the demutualization proceeds between employee and employer contributions. The employer keeps the employer derived portion, and uses the employee derived proceeds to provide a premium holiday for employees.

The question is: are these dollars the portion of the demutualization proceeds allocated to employee contributions) taxable to the employer when the stock is sold and the insurer is instructed to pay the group life premium? If so, then I assume the employer is entitled to an offsetting deduction (absent some section 419 complications). But are the premiums paid then employee or employer contributions for purposes of section 79 imputed income calculations?

The DOL has only addressed, obviously, the trust issues. I have not seen anything from the Service addressing the taxation issues.

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[mbozek]

Card: the tax benefit rule also applies to employees to the extent there is a taxable event,e.g., return of the premium to the employees. You should check the IPO to determine what is the basis of the stock - my understanding is that is is 0. You really need to comsult with tax counsel to determine whether the portion of the stock allocated to employees will be taxed to them if it not paid to them--- it is a facts and circumstances decision under the tax beneft rule.

[Guest ksuhre]

Did you ever get the tax issues resolved??? I am looking at a similar issue & it doesn't appear that the IRS has ruled on tax consequences since the DOL came out with its guidance saying that demutualization proceeds in a contributory welfare plan can be split between the employer and the plan (employees). Previously there was at least one PLR saying no excise tax under 4976 if 100% of demutualization proceeds were transferred to a VEBA -- but don't see anything post-DOL guidance saying whether the IRS agrees that the portion attributable to employer contributions is not plan assets.