4000 - Advisory Opinions
Insurance Coverage for Certificates of Deposits From Pension Plan
December 10, 1986
Robert E. Feldman, Senior Attorney
This responds to your letter of November 24, 1986, in which you inquire about the deposit insurance coverage available to a pension plan with assets totaling $400,000,000. According to your letter, $200,000,000 of the assets correspond to employee contributions, while the other $200,000,000 amount corresponds to overfunded corporate contributions. You further state that the plan wishes to place a $20,000,000 certificate of deposit with your bank. You wish to know whether the $20,000,000 CD would be fully insured if the plan can "identify each employee's contribution to the $20,000,000 CD, and each contribution is less than $100,000."
Employee benefit plans are regarded as a form of trust, and their funds, when deposited in insured banks, are insured pursuant to the rules for insurance of trusts. Section 330.1(c)(1) of the FDIC's regulations (12 C.F.R. § 330.1(c)(1)) provides that:
Trust interests in the same trust deposited in the same account will be separately insured if the value of the trust interest is capable of determination, without evaluation of contingencies, except for those covered by the present worth tables and rules of calculation [contained in the Federal Estate Tax Regulations].
Section 330.1(c)(1) also provides that employee benefit plans, including plans qualifying under section 401(d) or 408(d) of the Internal Revenue Code of 1954, are evaluated for insurance purposes as if the interest of each participant had fully vested as of the date of default of the FDIC-insured depository bank. As a result, the interest of each plan beneficiary is insured to the $100,000 maximum, provided that the interest of each plan beneficiary is capable of determination.
In order for the interest of each beneficiary to be insured to $100,000, the deposit account records of the bank must first disclose the existence of a relationship which may provide a basis for additional insurance, i.e., provide a "red flag" that signals the account is an employee benefit plan and does not consist of funds owned by an employer or union. In addition, the deposit account records of the bank or of the depositor maintained in good faith and in the regular course of business must detail the interests of the beneficiaries. Such detail may be provided by actuarial statements as outlined below.
The interest of a participant in an employee benefit plan may be determined by any reasonable actuarial method. The interest of a participant in a deposit is assumed to be that amount that is proportionate to the participant's interest in the entire assets of the plan. If no participant has an interest in the deposit of greater than $100,000, then the entire deposit will be fully insured. If any participant has an interest in the deposit of greater than $100,000, that portion of the deposit in excess of $100,000 will not be insured. The following example illustrates this point with respect to a plan that is only 50% funded:
Assume a pension trust is established for beneficiaries "A," "B," and "C." Total assets of the trust, amounting to $300,000, are deposited in Bank X which fails. Employee B's beneficial interest is calculated to be $200,000 and Employee C's beneficial interest is calculated to be $100,000. Employee A's beneficial interest totals one-half of the aggregate beneficial interests of the pension trust; therefore, A is assumed to own a one-half interest in the trust assets, or $150,000. This interest would be insured to $100,000. B's beneficial interest equals 33-1/3 percent of the aggregate beneficial interests of the trusts and his interest in the trust asset equals $100,000. This beneficial interest is insured in full to the amount of $100,000. C's interest in the total benefits of the plan equals 16-2/3 percent and his 16-2/3 percent of the assets, equaling $50,000 is fully insured. The total of A, B, and C's insured interests therefore equals $250,000 leaving $50,000 uninsured.
In the event of a bank's closing it would not be necessary for the FDIC to receive an actuarial determination of each and every insured participant in the plan. It would ordinarily be sufficient to furnish to the FDIC only a letter from the plan actuary determining whether the interest in the deposit of the one or two plan participants with the greatest interest is more or less than $100,000. Thus, if the actuary's letter states that John Smith has the greatest interest of all the insured participants, furnishes data showing that John Smith's interest in the deposit is less than $100,000, and concludes that therefore no participant has an interest in the deposit of more than $100,000, the FDIC would ordinarily be satisfied that the entire deposit was fully insured, but would reserve the right to require more extensive proof whenever it deemed necessary.
The actuarial letter should further state, however, that the assets of the trust fund under the plan do not exceed the value of all participants' interests as of the date the bank is closed. It is understood that ordinarily the actuary for the plan would be in a position to so state.
Therefore, it is unclear to me, under the facts you pose, how the $200,000,000 in overfunded corporate contributions can be said to belong to anyone other than the employees who are the beneficiaries of the plan. It would seem to me that each employee would have an allocable interest in the entire $400,000,000. For that reason, it seems highly unlikely that the $20,000,000 CD could be earmarked to employee contributions alone. Rather, the CD would be representative of all funds in the plan.
Upon the closing of the depository bank and receipt by the FDIC of adequate evidence relating to the participants' interests in the deposit as outlined above, payment of insurance would ordinarily be made without delay.
Deposit insurance runs separately to the interest of each plan participant. Any payment by the FDIC of such deposit insurance would be payable, however, to the plan by a single check. The insurance payment could be retained by the plan trustee to distribute such payment among the insured participants.
Insurance coverage applies to both the principal amount and interest accrued at the contract rate (assuming the contract rate of interest is not otherwise in violation of any applicable laws). The coverage, of course, remains $100,000 in the aggregate as to each beneficiary.
In summary, the determinable interest of each plan beneficiary will be insured up to $100,000 without regard to any individual deposits the beneficiary may have in the depository bank. Any determinable sum attributable to a beneficiary which is in excess of $100,000 will not be insured. To achieve full deposit insurance coverage, the determinable interest of each plan beneficiary deposited in one insured bank must not exceed $100,000.
As a final note, I would add that an employee's interests in pension and profit sharing plans established by the same employer would be regarded as being held in the same right and capacity and would be aggregated for insurance purposes. Employees' interests in certain employee benefit plans, such as health and welfare plans and disability plans, are seldom capable of allocation on the same basis as pension plans, and would therefore be insured to the employee-beneficiaries as a group to the maximum amount of $100,000. Portions of the fund corresponding to unallocable benefits need not be segregated from ascertainable and allocable amounts, however, in order for insurance on a per beneficiary basis to be applicable to the latter.
I trust that the foregoing explanation has helped clarify the insurance coverage afforded by FDIC to deposits of employee benefit plans. Please feel free to contact me if you have further questions in this regard.