4000 - Advisory Opinions
Are Funds Underlying Certain "Payroll Cards" Considered Deposits and Insured by the FDIC
FDIC--03--05 February 17, 2004 Joseph A. DiNuzzo, Counsel
This responds to your letter requesting our views on whether the funds underlying certain "payroll cards" will be "deposits" insured by the FDIC. These cards will be issued by Bank X. For the reasons explained below, we agree with your conclusion that the funds will be "deposits."
As explained in your letter, the funds represent wages to be paid by "participating employers" to "participating employees." Payment will occur in a two-step process. First, the employers will place the funds at Bank X. Second, the employees will withdraw the funds. The means of withdrawal will be the "payroll cards" issued by the bank. These cards will enable the employees to make withdrawals through automated teller machines or to effect transfers to merchants through point-of-state terminals.
In holding the funds, the bank will maintain a "Card Account" in the name of each employee. The balance of this account will be reflected in periodic statements. When the employee uses his/her "payroll card," the account will be debited. If a card is lost or stolen, the employee will be able to obtain relief by contacting the bank.
The "payroll cards" described in your letter are "stored value cards." The FDIC's position with respect to "stored value cards" is set forth in General Counsel's Opinion NO. 8 ("GC8"). See 61 Fed. Reg. 40490 (August 2, 1996). In GC8, the FDIC recognized two types of stored value card systems in which the cards are issued by an insured depository institution. These systems are (1) a "Bank Primary-Customer Account System"; and (2) a "Bank Primary-Reserve System."1 In the former system, the depository institution maintains an account for each cardholder. In the latter system, the depository institution maintains a pooled or commingled "reserve account" for multiple cardholders. In GC8, the FDIC determined that the funds in the former system are "deposits" but the funds in the latter system are not "deposits." See 61 Fed. Reg. at 40492--93.
In this case, the system will be a "Bank Primary-Customer Account System" because Bank X will maintain an account for each cardholder. Therefore, under GC8, the funds underlying the "payroll cards" will be "deposits."
In your letter, you expressed a concern that the system offered by Bank X may not be a "Bank Primary-Customer Account System" (or any other type of system discussed in GC8) "because the Program involves cards in which the primary record of balance of funds available to the cardholder is maintained at the Bank, and not on the card itself." You also expressed a concern that "the Bank's system is on-line, while [GC8] addressed amounts actually loaded on stored value cards." Nothing in GC8 describes a "Bank Primary-Customer Account System" as a type of system in which the "primary record of balance" is the stored value card and not an account at the bank. Moreover, in GC8, the FDIC recognized that stored value cards are not loaded with funds. On the contrary, the FDIC described a "Bank Primary-Customer Account System" as a system in which the funds "remain in a customer's account" until the funds are transferred to a merchant or other party. 61 Fed. Reg. at 40490.
In short, the funds in the "Card Accounts" will be "deposits" belonging to the cardholders. A second issue raised in your letter is whether the funds in a "Funding Account" and an "Activity Account" will be "deposits." As explained in your letter, the funds placed by employers at Bank X initially will be recorded in a "Funding Account." On the "payment date," the funds will be recorded in an "Activity Account." Finally, the funds will be recorded in the individual "Card Accounts" in the names of the various employees. You have explained this procedure as follows: "The Bank's agreements with employers and payroll servicers require wages of participating employees to be deposited in the Bank two business days prior to card loading. This requirement is necessary to assure the Bank that the funds are good and collectible' in advance of credit to individual accounts. As a result, there is a two-day delay between deposit of the funds and deposit into the underlying transaction accounts, which occurs on pay day."
Please note that no "deposit" can exist in the absence of "assets and hard earnings entrusted to a bank." FDIC v. Philadelphia Gear Corporation, 106 S. Ct. 1931, 1936 (1986). If the "funds" in the "Funding Account" or the "Activity Account" are not "good and collectible," they may not represent "assets and hard earnings." Consequently, they may not qualify as "deposits." Moreover, any "good and collectible" funds received by Bank X from the employers cannot be insured to the employees until ownership of the funds has passed to the employees. As discussed in Advisory Opinion No. 02-03 (August 16, 2002), deposits are insured by the FDIC to the actual legal owners.
In this case, the employees will not be the owners of the funds in question until payment is made on "pay day." This conclusion is confirmed by the "Cardholder Agreement." Nothing in that agreement provides that the employees shall own any funds in a "Funding Account" or an "Activity Account." On the contrary, the agreement provides that the employees shall be the owners of funds in "Card Accounts." Under these circumstances, I believe that the funds in the "Funding Account" and the "Activity Account"--to the extent that any such funds represent "assets and hard earnings"--will be "deposits" insurable not to the employees, but to the employers. Any such funds will be "deposits" under paragraph 3(1)(3) of the statutory definition because the funds will be held by Bank X for the "special or specific purpose" of making payments of wages to employees. See 12 U.S.C. § 1813(l)(3).
In essence, the "Funding Account" and the "Activity Account" will be corporate payroll accounts with insurance coverage limited to $100,000 for the portion of funds owned by each employer in aggregation with any other deposits owned by the same employer at Bank X. See 12 C.F.R. § 330.11(a)(1) (providing that the deposit accounts of a corporation are added together and insured up to $100,000). See also Advisory Opinion No. 87--10 (September 2, 1987) (stating that a payroll account owned by a corporation is insured to the corporation in aggregation with other accounts).
In your letter, you asked about the sufficiency of the bank's records. In the case of the "Card Accounts," the fact that each account is titled in the name of an employee is a sufficient indication that the account is owned by the employee. In the case of the "Funding Account" and the "Activity Account," the bank's account records should indicate that the accounts represent multiple employers (e.g., "Funding Account for Multiple Employers"). Further, the bank should maintain records reflecting the amount contributed by each employer. These records will enable the FDIC to provide "pass-through" insurance to each employer. See 12 C.F.R. § 330.5(b). As discussed above, however, the "Funding Account" and the "Activity Account" will not be insured except to the extent that the funds in these accounts represent actual "assets and hard earnings entrusted to [the] bank." FDIC v. Philadelphia Gear Corporation, 106 S. Ct. 1931, 1936 (1986).
For the reasons discussed above, I believe that the "payroll cards" issued by Bank X will be "stored value cards" in a "Bank Primary-Customer Account System." Therefore, under GC8, the funds in the "Card Accounts" will be "deposits" insurable to the employees. Any funds in the "Funding Account" or "Activity Account," however, will be "deposits" insurable to the employers.
This opinion represents the staff's current interpretation of the law. Staff opinions are not binding on the FDIC or the FDIC's Board of Directors. At a later date, in a more formal manner, the FDIC may decide to clarify the insurance coverage of funds underlying stored value cards.
1The FDIC also recognized two systems in which the stored value cards are issued by a sponsoring company and not issued by an insured depository institution. These systems are (1) a "Bank Secondary-Advance System"; and (2) a "Bank Secondary-Pre-Acquisition System." See 61 Fed. Reg. at 40491--93. Go back to Text