Demutualization Proceeds in Connection with a Contributory Terminated Defined Benefit Plan

[Guest wednesday]

Does anyone know if the Department of Labor has audited or taken enforcement action in connection with the treatment of demutualization proceeds issued with respect to a terminated contributory defined benefit plan?

A client previously sponsored a contributory defined benefit plan. The defined benefit plan was properly terminated and benefit liabilities fully funded in 1985. At the time of the defined benefit plan's termination, it was converted into a 401(k) plan.

More than fifteen years later the client received demutualization proceeds in connection with the group annuity contract that funded the plan. I am familiar with the Groom opinion letter (2001-02A) and the Bianchi opinion letter (2003-05A), as well as any other guidance that is even remotely close to the issue.

Although my client's defined benefit plan was contributory, I think the key to the Bianchi letter was that the plan was properly terminated and all obligations and claims satisfied. Subsequent demutualization proceeds are not plan assets even if the terminated plan was a contributory plan.

Conversations with the DOL have been unproductive. No one seems to know what the answer is.

I'm just wondering if anyone has been audited out there and what position the DOL has taken on audit with respect to this issue?

Thanks.

[mbozek]

W- Why would the DOL audit a plan that was terminated 15 yrs ago? Why has the s/l not expired for any claims. Under case law plan participants are only entitled to their accrued benefits - they have no rights to any other funds since they do not take investment risk.

[Guest wednesday]

We have thought of that, too, but because the DB plan was converted into the current ongoing DC plan, distributions from the DB plan were made to the DC plan, and there are some other facts that make it a bit questionable whether we can just take the position, we are just wondering what the experience is out there. Is the DOL even looking into this or are they just focusing on welfare plans or non-terminated pension plans?

[MGB]

How do you "convert" a DB plan into a 401(k) plan? (Seriously!)

Aren't you just terminating the DB plan and allowing the participants to rollover their distributions into the new profit sharing plan? Or, did you come up with some way to force the transfers without the participant electing it?

[david rigby]

MGB is correct. Not only that, you cannot "terminate" and "convert". Those are mutually exclusive.

[AndyH]

Could have been a replacement plan with excess assets, together with rollovers. If so, as implied by the responders, it has nothing to do with the old db plan. There is no "converted" plan.

Hey K plan, "Who's your Daddy?"

[Guest wednesday]

We have a PBGC notice of sufficiency, IRS favorable determination letter on plan termination and an IRS favorable determination letter on the restated plan (not a brand new plan). Don't exactly now how or why it was done that way - it was before my time and we don't have much in terms of documentation. We have old db accounts with distribution options that are not available to the other non-db accounts (which I don't believe the plan would have had to preserve if these were truly rollover contributions).

[david rigby]

Bizarre. However, mbozek's comments will probably be the most relevant.