4000 - Advisory Opinions
Whether 457 Plan Accounts of a Savings Association which a Bank has Acquired are Subject to the Separate Insurance Provision of 12 C.F.R. §330.3 or the Grandfather Provision of 12 C.F.R. §330.16
December 4, 1990
Douglas H. Jones, Deputy General Counsel
This is in response to your letter, dated August 24, 1990, concerning the deposit insurance that would be afforded to certain deposit accounts maintained with your institution. I apologize for the delay in responding to your inquiry.
In your letter, you indicate that *** Savings and Loan Association (hereinafter "[*** S&L]") has accounts maintained by one or more deferred compensation plans which are qualified plans under section 457 of the Internal Revenue Code, 26 U.S.C. §457 (hereinafter "457 Plans"). You indicate that [*** S&L] may be acquired by a commercial bank and inquire whether section 330.16(e) of the FDIC's uniform deposit insurance regulations (which is the "grandfather" provision for 457 Plan accounts) or section 330.3(g) of the FDIC's uniform deposit insurance regulations (which provides separate insurance for a limited period whenever two institutions merge) would apply if [*** S&L] is acquired by a commercial bank. It is my understanding that subsequent to our receipt of your letter, [*** S&L] was, in fact, acquired by [*** Bank].
Section 330.12(e) of the FDIC's new uniform deposit insurance regulations (to be codified at 12 C.F.R. §330.12(e)) provides as follows:
Funds representing the interests of employees under a deferred compensation plan of a state or local government, or a tax-exempt organization, which plan qualifies under section 457 of the Internal Revenue Code of 1954 (26 U.S.C. §457), shall be added together and insured up to $100,000 in the aggregate.
Section 330.16(e) of the FDIC's new uniform deposit insurance regulations (to be codified at 12 C.F.R. §330.16(e)) provides as follows:
With respect to any deposit account in a savings association which is maintained by a deferred compensation plan in existence on July 29, 1990, which qualifies under section 457 of the Internal Revenue Code, 26 U.S.C. §457 (a "457 Plan"), the provisions of section 330.12(e) shall not be applicable until January 29, 1992 or, in the case of any time deposit, the first maturity date thereafter. With respect to such deposit accounts, the insurance coverage provided as of April 30, 1990 shall continue until January 29, 1992.
Section 330.16(e) delays the effective date of section 330.12(e) with respect to certain 457 Plan deposits. The issue your letter raises is whether the delayed effective date applies to 457 Plan deposits in a savings association that becomes insolvent and is subsequently acquired by a commercial bank.
The plain language of section 330.16(e) does not seem to address the issue of whether deposits in an S&L subsequently acquired by a commercial bank would be "grandfathered."
The purpose of section 330.16(e) was, however, to continue to insure 457 Plan funds for 18 months from the effective date of the regulations so as to (1) provide 457 Plan sponsors with an opportunity to make alternative arrangements for the investment of 457 Plan funds (e.g. to obtain collateral for the uninsured portion of the deposits or make alternative investments); (2) permit 457 Plan participants to make alternative investments if they so desired; (3) provide Congress with an opportunity to change the law so that 457 Plan deposits would be insured on a per-participant basis if Congress so desired; (4) prevent the immediate outflow of funds from insured institutions that would have resulted had there not been a "grandfather" provision.
These objectives would not be well served if the "grandfather" provision were deemed to be inapplicable whenever a bank acquires a failing thrift. If, upon such an acquisition, the per-participant insurance coverage were suddenly to disappear, it is quite likely that the 457 Plan funds would be withdrawn from the acquiring institution and a liquidity problem could result. This is precisely the kind of result that the "grandfather" provision was designed to prevent.
Moreover, limiting the application of the "grandfather" provision so that it applies only to deposits which remain in S&L would give an unfair advantage to S&L in the failed thrift acquisition process. If the "grandfather" provision were deemed applicable only to accounts in S&Ls, then when an S&L acquired a failing S&L that had 457 Plan deposits, the per-participant insurance coverage would continue to be available but if a commercial bank acquired the same S&L such insurance coverage would not be available. In enacting section 330.16(e) of the recently amended regulations, the FDIC certainly did not intend to give S&Ls such an advantage in acquiring failed thrifts. We simply intended to maintain the status quo with regard to the deposit insurance provided for 457 Plan accounts.
In enacting the "grandfather" provision, the FDIC was addressing the mandate of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") that, in promulgating the uniform deposit insurance regulations, we consider all relevant factors necessary to promote safety and soundness, depositor confidence and the stability of deposits in insured institutions. These factors were indeed considered in the process of formulating the rules applicable to 457 Plan deposits but the consideration of those factors did not cause us to be concerned about 457 Plan deposits in commercial banks. The only reason we were not concerned is because the overwhelming majority of 457 Plan accounts were in S&Ls as opposed to commercial banks.
For the aforementioned reasons, it is my opinion that section 330.16(e) of the FDIC's uniform deposit insurance regulations which "grandfathers" the insurance provided for 457 Plan deposits would be applicable to any deposits acquired by [*** Bank] from [*** S&L]. This is to say that the per-participant insurance coverage will continue to apply to the 457 Plan deposits acquired by [*** Bank] from [*** S&L] until January 29, 1992 or the first maturity date of any CD thereafter.
The second question raised in your letter is whether section 330.3(g) of the FDIC's recently amended regulations would provide any continued coverage when a bank acquires 457 Plan deposits from a failing S&L.
Section 330.3(g) of the FDIC's Uniform deposit insurance regulations (to be codified at 12 C.F.R. §330.3(g)) provides, in relevant part, as follows:
Whenever the liabilities of one or more insured depository institutions for deposits shall have been assumed by another insured depository institution, whether by merger, consolidation, other statutory assumption, or contract.... the separate insurance of deposits so assumed continues for six months from the date such assumption takes effect or, in the case of a time deposit, the earliest maturity date after the six-month period.
This provision provides for the continuation of the separate insurance that was provided for deposits in two or more separately insured financial institutions prior to a merger of the institutions. It is intended to protect depositors from suddenly finding themselves in an uninsured position because two deposits in previously separate institutions are combined for insurance purposes.
For instance, if a depositor has a $75,000 deposit in Bank A and a $75,000 deposit in Bank B and the two banks merge, the depositor would have $150,000 in the merged entity which, absent section 330.3(g) of the uniform deposit insurance regulations and the underlying statutory provision, would be uninsured for $50,000. Under section 330.3(g), the separate insurance of the two deposits continues for six months or, if they are time deposits, the earliest maturity date of the deposits.
In my opinion, section 330.3(g) would not be applicable given the facts in this situation. Section 330.3(g) applies only when a depositor has deposits in two or more separately insured institutions that merge.
I trust that this has been responsive to your inquiry. If you have any further questions, please contact me or Mr. Claude Rollin of my staff at (202) 898-3985.