>The Employee Benefits Security Administration (EBSA) issued the guidance in a situation involving the Principal Mutual Life Insurance company’s conversion from a mutual to a stock company, a process known as a demutualization. In this situation, an award was paid to Fred Church by the Principal for a group annuity contract purchased with termination of a retirement plan that had been established and maintained by Church.
>The EBSA advised an employer that terminates its defined benefit plan is not required to treat demutualization proceeds paid in the form of stock for its ownership interest in the plan’s termination annuity as plan assets, if the employer is the actual owner of the proceeds. That is because the termination annuity consisted of a guaranteed annuity contract, the members of which were former vested plan participants and beneficiaries.
>When the annuity provider demutualized, it provided the employer, the annuity’s named contract holder, with stock in exchange for the ownership interest resulting from the annuity. Normally, demutualization proceeds are plan assets, and must be placed in a trust. EBSA, however, stated that, as long as the plan was properly terminated, and all plan obligations and claims were paid prior to the annuity provider’s demutualization, the employer did not have to treat the demutualization proceeds as plan assets, but could keep the proceeds.
>It was cautioned however, that the Department of Labor (DoL) does not have the jurisdiction to determine if actual owner of the proceeds are the termination annuity beneficiaries or the employer. The EBSA said the issue is governed by the terms of the contract and state law.
EBSA’s advisory opinion can be found at http://www.dol.gov/ebsa/regs/aos/ao2003-05a.html .