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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."
Background
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.
Analysis
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
{{2-28-06 p.4984.82}}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
{{2-28-06 p.4984.83}}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).
Conclusion
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
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