4000 - Advisory Opinions
Status of Deferred Income Investment Account As Deposit for FDIC Insurance
March 18, 1988
Pamela E. F. LeCren, Senior Attorney
Your inquiry to Mr. Jessie Joseph, Regional Attorney, FDIC Memphis Regional Office, regarding whether a Deferred Income Investment Account is a deposit for the purposes of the Federal Deposit Insurance Act was forwarded to the Washington, D.C. office of the FDIC's Legal Division for review and response.
According to your letter, in 1987 the Arkansas State Legislature enacted a statute which authorizes banks to create Deferred Income Investment Accounts (hereinafter referred to as "deferred income accounts"). As enacted, the statute provides that banks may open on behalf of depositors deferred income accounts in one of two ways:
(1) the depositor may make a lump sum deposit in the bank in consideration for which the bank agrees to pay the depositor an agreed upon monthly or annual payment for life or for a term certain beginning immediately or beginning at some future time, or
(2) the depositor makes periodic deposits on an agreed upon basis in consideration for which the bank agrees to pay the depositor an agreed upon monthly or annual payment, beginning at some time in the future, for life or a term certain.
Under the statute the depositor and the bank are free to contract: (1) that a partial refund of the deposit may occur upon specified events or that no refund may occur; (2) that the depositor may elect to stop payments from the bank for a set term; (3) that the payments may go to a designated beneficiary or beneficiaries both before and after the death of the depositor; (4) that the amount of the payments to the bank, and to the depositor, will be fixed for the term agreed upon; and (5) that the payment to the depositor may be determined by an index or criteria beyond the control of the depositor or the bank.
The Arkansas Bank Commissioner is given the authority under the statute to promulgate regulations to carry out the purposes of the statute. Those regulations are directed to incorporate, where applicable, §§ 23-81-121 through 128 of the Arkansas Code Annotated pertaining to annuities. The statute makes deferred income accounts exempt from §§ 23-42-501 and 502 of the Arkansas Code which pertain to the registration of securities and the filing of prospectuses and sales literature. Finally, the statute provides that it is the intent of the legislature that distributions from deferred income accounts be treated as nontaxable for federal tax purposes to the greatest extent possible.
(1) "Deferred Income Investment Account" is defined to mean an account or contract created on behalf of a depositor which is recognized as an annuity for Federal income tax purposes and which is subject to the provisions of Section 72 of the Internal Revenue Code;
(2) "Deferred Income Investment Account Company" is defined as a bank, or any organization wholly-owned by one or more banks, whose main office is in Arkansas and which creates and opens on behalf of depositors deferred income accounts;
(3) Banks may create deferred income accounts in one of three ways: (i) a bank may accept a lump sum or periodic payment from the depositor as agent for an insurance company authorized to transact insurance in Arkansas and place an annuity issued by the insurance company with the depositor, (ii) a bank may accept a lump sum or periodic payment from the depositor and issue a contract to the depositor creating a deferred income account which qualifies for treatment under Section 72 of the Internal Revenue Code, or (iii) a bank may cause an organization, wholly-owned by the bank alone or in combination with other banks, to issue a deferred investment income contract;
(4) The bank, its subsidiary, or any officer or employee of the bank or the bank's subsidiary may act as agent for any Arkansas insurance company in the solicitation and placement of annuities or act as agent for a deferred income investment account company in the solicitation, creation and opening on behalf of depositors deferred income accounts;
(5) Any Arkansas bank may qualify as a deferred income investment account company, organize a wholly-owned subsidiary as a deferred income investment account company, or invest in a deferred income investment account company provided that such investment does not exceed twenty percent of the bank's equity capital;
(6) A deferred income investment account company shall be required by the Arkansas Bank Commissioner to adopt such policies, practices and procedures as may be necessary for the deferred income account to be eligible for treatment by the depositor under section 72 of the Internal Revenue Code;
(7) The deferred income investment account company is to invest the funds in a manner consistent with the asset deployment authority of banks, and in addition thereto, may loan to, deposit with, or invest the funds in any national bank or state bank provided that such asset deployment complies with any applicable provisions of section 72 of the Internal Revenue Code;
(8) The deferred income investment account company shall be required to establish reserves to liquidate, either by payment or reinsurance, future unaccrued benefits arising from the deferred income accounts;
(9) The deferred income investment account company may establish variable or fixed rates of return on the funds in the deferred income account;
(10) The funds and all accumulated income shall remain on deposit in the deferred income account for any agreed upon period prior to the first payment to the depositor or his/her designated beneficiary or beneficiaries;
(11) The depositor may elect to withdraw the funds at any time prior to the agreed upon first payment and may exchange the deferred income account for any other deferred income account or for an annuity issued by an insurance company qualified to transact business in Arkansas;
(12) The deferred income investment account company may establish early withdrawal or exchange penalties;
(14) Prior to the first payment to the depositor, the depositor shall elect to receive payments for a single life, or joint life with survivorship, for a term certain or for any other manner of payment approved by the board of directors of the deferred income investment account company;
(15) The deferred income investment account company may allow the depositor to borrow the funds in his/her deferred income account provided such loan provisions comply with the requirements of section 72 of the Internal Revenue Code;
(16) If the applicable payout can only be determined by reference to mortality tables, the deferred income investment account company shall cede all of the funds in the depositor's deferred income account to an insurance company qualified to transact business in Arkansas, reinsure 100% or the mortality risk with a qualified reinsurer, or allow the depositor to exchange the deferred income account for an annuity issued by an insurance company qualified to do business in Arkansas; and
(17) The Bank Commissioner shall be the sole state regulatory authority with jurisdiction over deferred income investment account companies and deferred income accounts.
Section 3(l) of the Federal Deposit Insurance Act in relevant part defines "deposit" as "the unpaid balance of money or its equivalent received or held by a bank in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to a commercial, checking, savings, time, or thrift account, or which is evidenced by its certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar name. . .". 12 U.S.C § 1813(l)(1). Not all liabilities of a bank are deposits for the purposes of the Federal Deposit Insurance Act. Whether a particular liability falls within the definition is a question that turns upon all the facts as well as the intent of the parties.
After carefully reviewing the above information, we can only advise you at the present time that we are unable to indicate whether a deferred income account would qualify as a deposit. The statute and regulations as structured provide for too many variables (both with respect to the account itself, which entity issues the deferred income contract, and which entity holds the funds) for the FDIC to issue an opinion generally on the issue of insurability as opposed to rendering an opinion with respect to a particular deferred income account and the contract under which it is established.
We can say, however, that we do have reservations about the insurability of accounts established pursuant to the regulations given the information before us. While the deferred income account does have some features that are typical of certificates of deposits issued by banks, in many respects the accounts resemble annuities and are in fact required under the regulations to be eligible for treatment as annuities for federal tax law purposes. Like an annuity, a deferred income account may provide for fixed or variable amount payments at set intervals for life or for a shorter period and the accounts may be funded by a lump sum payment or by periodic payments. Although the account holder may withdraw the funds in the account, he/she is only able to do so prior to the date of the agreed upon first payment after which time the account holder does not have access to, nor control over, the funds in the account. (The determining characteristic of an annuity is that the annuitant only has an interest in the payments and not in any principal fund or source from which payments are derived. 4 Am. Jur. 2d Annuities § 1 (1962)). Furthermore, while both annuities and deposits create a debtor/creditor relationship (Chatham County Hospital Authority v. John Hancock Mutual Life Insurance Co, 325 F.Supp. 614 (S.D. Georgia, 1971) and cases cited therein, 5 Michie on Banks and Banking Ch. 9 § 11 (1987)) unlike the traditional "deposit'' described at common law, the funds in the deferred income account are not deposited for safekeeping and are not subject to the order and direction of the account holder with the exception that the account holder may "exchange" one deferred income account for another. Moreover, several provisions of the Arkansas Code governing annuities apply to deferred income accounts; if the account holder dies while the funds are still held by the deferred investment account company, the funds are to be distributed in accordance with § 72 of the Internal Revenue code governing annuities; and the deferred income investment account company is required to establish a special reserve to assure payment of "future unaccrued benefits" (something akin to reserve requirements insurance companies are typically required to maintain in order to cover annuity and other policy obligations).
Given the above, we have serious doubts that the funds received by the deferred income investment account company will qualify as money received or held by a bank "in the usual course of the banking business". As indicated above, however, we cannot render a definitive opinion until such time as we are presented with a particular deferred income account program to review.