Common Misunderstandings about FDIC Deposit Insurance Rules

This chapter describes some common misunderstandings about the deposit insurance rules that have resulted in unintended uninsured deposits when banks fail. The examples listed reflect the FDIC’s experience with actual bank closings as well as information the FDIC has received from bankers and depositors.

Common Misunderstandings Affecting All Ownership Categories

1. Many depositors do not realize that placing funds in different types of deposit accounts (for example, checking, savings, CDs) does not provide for separate insurance coverage. All types of deposit accounts that a depositor has in the same ownership category are combined and insured up to the insurance limit for that ownership category. As an example, if Mary Jones has three accounts in her name alone at a bank — a checking account, a savings account, and a CD — the funds in all three accounts will be added together and insured up to $100,000 in total, not $300,000.



2. Many depositors do not know that outstanding official items such as interest and cashiers checks are deposits that will be combined with their other deposits in the same ownership category when calculating insurance coverage. For example, John Smith has a single account in his name alone with a bank for $100,000. Every month he receives a check for $200 representing the interest earned on this account. Until this check is presented and has cleared, John Smith has $100,200 in the single account category. If his bank should fail and this check is outstanding, he will be uninsured for $200.



3. Some depositors who use the services of a fiduciary, such as a deposit broker or a real estate agent, to deposit funds on their behalf at a bank have unwittingly exceeded the insurance limit when the fiduciary and the depositor have both opened deposit accounts for the depositor at the same bank. Since deposit insurance coverage applies to the owner of the funds, not the party placing the funds, the account opened by the depositor directly is added to the account opened by the agent or broker, and the total is insured up to the limit for the applicable insurance category. Both the depositor and the agent or broker need to know where the other is depositing funds.

   As an example, James Johnson invests $100,000 with ABC Brokerage. The broker then deposits the $100,000 with Bank A. James Johnson separately deposits $50,000 in a single account in his name alone with Bank A. James Johnson now has $150,000 in the single account category with Bank A and will be uninsured for $50,000 if the bank failed.

4. Depositors may not realize when they have deposit accounts that fail to meet the requirements for insurance coverage in different ownership categories. As described in this Employee's Guide, there are specific requirements that must be met to qualify for deposit insurance coverage under each of the different ownership categories. When the requirements for a specific ownership category are not met, the insurance coverage will change to a different ownership category, most often the single account category.

   For example, Michael Mathews has an account at a bank in his name alone for $100,000. He opens another account at the same bank titled "Michael Mathews POD Susan Jackson (his niece)" for $80,000. He may believe he has separate insurance for these two accounts because they are set up as a single account and a POD account, but a niece is not a qualifying beneficiary for the revocable trust category. Consequently, Michael Mathews is considered to have $180,000 in the single account category and will be uninsured for $80,000 if his bank fails.

Common Misunderstandings About Single Accounts

1. Owners of sole proprietorships often do not realize that deposit accounts belonging to the sole proprietorship are added together with any other single accounts they may have in their name alone at the same bank and the combined total is insured to a maximum of $100,000.



2. Some estate executors are under the mistaken impression that accounts held in the name of a decedent or by the executor or administrator of a decedent's estate are fully insured regardless of the deposit amount. In fact, such accounts are insured up to a maximum of $100,000 only, and insured in the name of the decedent.



3. Some depositors are under the mistaken impression that accounts established under the Uniform Transfer to Minors Act (UTMA) are owned by the custodian. Rather, such an account is owned by the minor and added with any other single accounts the minor may have at the same bank, and insured in total up to a maximum of $100,000.

Common Misunderstandings About Self-Directed Retirement Accounts

1. Some depositors do not understand that all self-directed retirement deposits, such as IRAs (whether in one account or multiple accounts) owned by the same person at a bank are added together and the combined total is insured to a maximum of $250,000.



2. Some depositors are under the mistaken impression that naming beneficiaries on an IRA account will increase deposit insurance coverage for the owner's IRA. The number of beneficiaries listed on an IRA account does not affect insurance coverage. All IRAs are insured up to a total of $250,000 per owner at an insured bank.



3. Some former participants in employee benefit plans mistakenly believe that they must deposit all of the proceeds of their lump sum distribution (from their former employer) into a single IRA account at one bank. This assumption is incorrect. The funds received from a lump sum distribution can be divided and deposited into several different banks and all the funds will retain tax-exempt status provided they are deposited into qualified IRA accounts.

Common Misunderstandings About Joint Accounts

1. Many depositors do not understand that the calculation of insurance coverage for joint accounts requires combining each co-owner’s share of all joint accounts at the same bank. This misunderstanding is of particular concern when a depositor is the co-owner of multiple joint accounts that have different sets of co-owners. To calculate the coverage of joint accounts, the following requirements must be met:
   
   
   1. Determine each co-owner's share of each joint account by dividing the number of owners into the account balance.
   
   
   
   2. If a person is the co-owner on more than one joint account, add together all of the shares that the person has in joint accounts at the bank. This amount (for example, the co-owner's share of all joint accounts) is insured to $100,000. Any person's share of joint accounts that exceeds $100,000 will be uninsured, even if the other co-owner’s shares for each account are less than $100,000.
   
   
   
   The result is one or more of the co-owners’ actual ownership interest in all of the accounts in the joint account category may exceed $100,000. Any deposits in excess of $100,000 will be uninsured.



2. Some co-owners of a joint account fail to sign the account signature card. FDIC rules state that all of the owners of an account must sign the signature card to qualify for coverage under the joint account category. This requirement does not apply if the account is a CD or a negotiable instrument, or if the account is set up by an agent or broker.



3. Some depositors believe they can establish a joint account with a corporation, association or other entity and qualify for joint account coverage. Under FDIC rules, only natural person(s) qualify for coverage under the joint account category. Business entities do not qualify under this category even if multiple officers, shareholders or any other legally authorized representatives sign on behalf of the legal entity.

Common Misunderstandings About Revocable Trust Accounts

1. A common mistake that depositors make in calculating coverage for revocable trust accounts is assuming that every person named on a revocable trust account — both the owner(s) and the beneficiaries — receives up to $100,000 in insurance coverage. This is not correct. Insurance coverage up to $100,000 is provided for each qualifying beneficiary that the account owner names on a revocable trust account. The owner of the revocable trust account does not receive an additional $100,000 of coverage in the revocable trust account category.

Explanation: As discussed above, the insurance coverage of qualified revocable trusts is based on the number of qualifying beneficiaries each owner names, not the number of people whose names appear on the account. In this example, the two owners each have one qualifying beneficiary, so each owner’s share is insured to $100,000, for total coverage of $200,000.

2. When a revocable trust account has more than one owner, the owners can encounter problems when a beneficiary is a qualifying beneficiary for one owner but not the other(s). When this situation occurs, all of the deposits that the owner holds for a non-qualifying beneficiary are ineligible for coverage under the revocable trust category. The owner’s ineligible deposits will then be considered the owner’s single account deposits and will be combined with any other funds the owner may have in the single ownership account category.

Explanation: Since Mr. Jones’ mother and father are not qualifying beneficiaries for Mrs. Jones (they are her in-laws), Mrs. Jones’ share of the account (50% or $150,000) does not qualify for insurance in the revocable trust account category. Her share of the account, therefore, is insured as her single account funds. In this example, Mrs. Jones does not have any other single accounts at the bank so $100,000 is insured in the single ownership category and $50,000 is uninsured.

3. Some depositors believe they can obtain additional insurance coverage by opening several revocable trust accounts at the same bank for the same beneficiaries. If a depositor opens multiple revocable trust accounts at a bank and those deposits are held in trust for the same beneficiary, the funds in all of an owner’s deposit accounts held for the beneficiary will be combined and insured up to $100,000.

Explanation: When an account owner names the same qualifying beneficiary on multiple accounts at the same bank, the amount placed in trust for that beneficiary in each account is added together and the total is insured to $100,000. Since Carol was named as a beneficiary by Mrs. Banister on both accounts, those amounts attributable to Carol on each account are added together, even though one account is co-owned by Mr. and Mrs. Banister and the other is owned solely by Mrs. Banister. The combined total is insured to $100,000 and $100,000 is uninsured.

4. 4. Some depositors do not understand that insurance coverage for revocable trust accounts is provided to each owner based on the actual interests that a qualifying beneficiary has in the trust's deposits. The FDIC insures each owner for the interests of each qualifying beneficiary up to $100,000. When a trust provides for the beneficiaries to receive different interests, the different interests must be calculated for each beneficiary, then the insurance limit is applied for each beneficiary to determine the total amount of insurance coverage.

Explanation:The trust relationship of the parents (Alan and Jill) to the child (Henry) of $150,000 exceeds the $100,000 limit, resulting in $50,000 uninsured from each parent for a total of $100,000 uninsured.

In order for the account to be fully insured, the owner must ensure that the deposits attributable to the beneficiary with the largest percentage interest do not exceed $100,000. Since Henry holds a 50% interest in the trust assets, the most that this trust can have on deposit at one bank and still be fully insured is $400,000. This results in each owner having a trust relationship to Henry of $100,000 ($200,000 in total for both co-owners) and a trust relationship to Art and Kate of $50,000 each ($200,000 in total for both co-owners.)

Common Misunderstandings About Corporation, Partnership and Unincorporated Association Accounts

1. Corporations, partnerships and unincorporated associations often mistakenly believe that coverage for the entity’s deposits is based on the number of individuals who own or have an interest in the entity. Deposits owned by a corporation, partnership or unincorporated association are insured up to $100,000. FDIC insurance does not pass through to the individual partners, officers or shareholders of the entity. Similarly, deposit accounts owned by a homeowners association are not entitled to “pass-through” insurance coverage to the individual members. Even though the homeowners benefit from the activities of the association, the funds are owned by the association and are insured up to $100,000.



2. Many corporations, partnerships and unincorporated associations mistakenly believe that deposits designated for different purposes and established in different accounts (for example, Research & Development and Operating Funds) receive separate insurance coverage. This is incorrect. All deposits owned by an entity at one bank are added together and insured up to $100,000. Deposits belonging to an entity but designated for different functions or departments of the same organization are not separately insured unless those divisions are separately incorporated and engaged in an independent activity.

Common Misunderstandings About Irrevocable Trust Accounts

1. Some depositors fail to recognize that deposits held by two or more irrevocable trusts established by the same grantor for the same beneficiaries are not separately insured. Under the FDIC’s rules, the interests of a beneficiary in two or more irrevocable trust accounts established by the same grantor are added together and insured up to $100,000.



2. Some irrevocable trust owners are not aware that if an irrevocable trust does not meet the requirements for separate coverage in the irrevocable trust category (for example, if the grantor retains an interest in some or all of the trust), the portion of the trust that does not meet the requirements (for example, the retained interest) will be combined with the owner’s single accounts, if any, and the total insured up to a maximum of $100,000.

Common Misunderstandings About Employee Benefit Plan Accounts

1. It is important to remember that any deposits representing an employee benefit plan, where the beneficiaries' interests are contingent (such as a health and welfare plan), do not qualify for “pass-through” coverage. All deposits in one or more accounts in a bank linked to such a plan are combined and insured up to a maximum of $100,000.



2. Employee benefit plan administrators may not recognize that insurance coverage for the plan is based on the actual interests of each plan participant rather than the number of participants. FDIC rules state that “pass-through” coverage for employee benefit plans that qualify for such coverage (see § 330.14) is provided for the “non-contingent” interest of each participant in the plan. Coverage is not calculated by adding up the number of plan participants and multiplying by $100,000. Rather, coverage is based on the “non-contingent interest” of each plan participant up to $100,000. Plan participants usually have different interests in any given plan and it is important to correctly calculate the insurance coverage to ensure that none of the participants’ interests exceed $100,000.
   
   The following calculation can be used to determine the maximum insurable amount for an employee benefit plan that qualifies for “pass-through” coverage:



• Identify which plan beneficiary has the largest interest in the total plan assets;
• Determine his or her percentage share; and
• Divide $100,000 by that percentage.

This is the maximum amount the plan will be insured for at any one bank ($100,000 divided by the largest percentage interest in the plan equals the maximum insurable amount).

The following example illustrates the application of this calculation to an employee benefit plan:

Explanation: As illustrated above, it does not matter if other employees' shares are under the insurance limit — if any employee's share exceeds $100,000, the amount over the limit will be uninsured. In the above example, the most that this plan can have on deposit and still have all participants fully insured is $250,000 ($100,000 divided by 40% — the share attributable to the largest participant — equals $250,000).

3. Some plan administrators do not understand that the interests of the same participant in multiple plans established by the same employer are added together before calculating insurance coverage. As an example, if an employee is the participant of more than one plan established by his employer (such as a deferred compensation plan and a money-purchase plan) and funds from both plans are deposited into the same bank, a participant’s interest from each plan will be added together and the total insured to a maximum of $100,000.

Common Misunderstandings that can Result in Uninsured Funds in the Government Account Category

1. Some public unit custodians incorrectly believe that if their deposits at a bank are collateralized, then their deposits are fully insured. The existence of collateral has no effect on whether the public unit deposit is insured and on the amount of coverage available to the public unit. The existence and the liquidation of collateral can be a source of recovery for the depositor if the bank fails and there are uninsured funds.



2. Custodians for public units may not realize that to obtain $200,000 in total coverage at one bank, no more than $100,000 can be deposited into interest bearing accounts (for example, savings accounts, CDs and interest bearing checking accounts) and no more than $100,000 in non-interest bearing (for example, demand deposit) accounts. To receive up to $200,000 in total coverage, the deposits must meet the requirements for the location of the bank as described in 12 C.F.R. § 330.15.



3. Custodians for public units may not realize that public unit deposits designated for different purposes are not separately insured. If the funds are all held by the same official custodian of the same public unit, they will be added together when calculating insurance coverage and insured up to $100,000 for all demand deposit accounts and $100,000 for all time and savings accounts, as provided by 12 C.F.R. § 330.15.