Demutualization Correction

[Guest AEA]

Company maintains PS/401(k) plan which was at least partially invested in a group annuity contract. Received demutualization shares and some cash in late 2001. It is my understanding that the shares and cash were added to the trust for the Plan and appear to have been reported as assets of the Plan on the Schedule H for its 2001 Form 5500. However, the shares were never sold and have never been allocated to participant accounts. Now, in 2007, the employer wants to sell the shares; current document allows participant directed investments (still trying to get 2001 document).

My question is how to correct this and is there a program I can use?

The DOL guidance (looked at Adv Op 2001-02A, 2003-05A & 2005-08, PLRs 200214031 & 200317049, & FAB 2006-1) is practically dead silent on how to allocate, but it appears that we could allocate to the "affected" particpants based on accounts in 2001 or to all participants based on accounts in 2001. Assuming turn-over, either could be fun; but do not see real support for simply dividing among current plan participants or using to offset employer contributions.

As for the correction program, I am not sure that I have a qualification issue. These aren't deferrals, employer contributions, forfeitures, TH contributions, etc. They seem to be more like investment earnings or just a flat-out windfall to the Plan. If this isn't a qualification issue and all of the guidance is basically from the DOL, will the IRS even accept a VCP request? Hate to go to the expense to just get denied....

As for the DOL, the Voluntary Fiduciary Correction Program only applies to a small number of issues. Would I use Delinquent Participant Contributions and just give all of the affected participants their percentage share of the 2007 sale proceeds? For terminated participants, would Payment of Benefits w/o Properly Valuing Plan Assets work if the term'd participant gets their share of the sale proceeds?

I have also seen some discussion of simply filing a Form 5330, but not sure if that would be appropriate for a PS/401(k) Plan....

Any insight or war stories appreciated!