4000 - Advisory Opinions
Whether Employee Benefit Plan Interest Accounts are Within the Definition of Bank Investment Contract
October 12, 1993
Joseph A. DiNuzzo, Senior Attorney
This is in response to your September 22, 1993 letter, on the deposit insurance coverage of [BANK X's] ["EMPLOYEE BENEFIT PLAN INTEREST ACCOUNT"].
You stated that the ["EMPLOYEE BENEFIT PLAN INTEREST ACCOUNT"] consists of multiple employee benefit plans commingling funds into a single account. The interest rate on the account is guaranteed for a six month period. The account permits daily withdrawals and there is no interest penalty on these withdrawals. The first of your inquiries asked whether such an account is a "Bank Investment Contract" within the scope of section 330.13 of the FDIC's regulations (to be codified at 12 C.F.R. § 330.13).
The Federal Deposit Insurance Corporation Improvement Act amended the Federal Deposit Insurance Act to exclude "benefit responsive" investment contracts from deposit insurance coverage, effective December 19, 1993. Section 330.13 of the FDIC's regulations provides, in essence, that any liability arising under an insured institution's investment contract between the institution and an employee benefit plan expressly permitting "benefit-responsive withdrawals or transfers" shall not be treated as an insured deposit and, thus, not be entitled to deposit insurance. The effective date of this exclusion of coverage for so-called "Bank Investment Contracts" is December 19, 1993.
The FDIC has not developed a regulatory definition of the term "investment contract" because of the variety of types of Bank Investment Contracts utilized by employee benefit plans. The regulation defines "benefit-responsive withdrawals or transfers" to mean any withdrawal or transfer during the period when any guaranteed rate is in effect, without substantial penalty or adjustment, to pay benefits provided by the employee benefit plan or to permit a plan participant or beneficiary to redirect the investment of his or her account balance. A "substantial penalty or adjustment" is defined to mean, in the case of a deposit having an original term which exceeds one year, all interest earned on the amount withdrawn from the date of deposit or for six months, which ever is less; or in the case of a deposit having an original term of one year or less, all interest earned on the amount withdrawn from the date of deposit or three months, whichever is less.
The account described in your letter has the characteristics of a Bank Investment Contract. [BANK X'S "EMPLOYEE BENEFIT PLAN INTEREST ACCOUNT"] has both a fixed interest rate and a no interest penalty on withdrawals. As a result, we believe the account would be subject to the insurance exclusion found in section 330.13 of the FDIC's regulations, and would not be entitled to deposit insurance.
Your second inquiry asked whether a modification to this account by eliminating the interest rate guarantee would alter the deposit insurance coverage. If the ["EMPLOYEE BENEFIT PLAN INTEREST ACCOUNT"] did not have an interest rate guarantee, the account would fall outside the scope of section 330.13(b) of the FDIC insurance regulations.
You also asked whether "pass-through" deposit insurance would be available under section 330.12 of the FDIC's regulations if the account described in your letter was modified to qualify as an insured deposit. As you may know, the availability of "pass-through" insurance coverage is based, in part, on the capital level of the depository institution where deposits are placed at the time "the deposits are accepted". Your letter indicates that [BANK X] is "well-capitalized". As such, employee benefit plan deposits placed with the Bank would be eligible for "pass-through" deposit insurance as long as the capital and other requirements of section 330.12 are satisfied. If pass-through insurance is available, the aggregation rules of section 330.12 would have to be considered for each participant's interest in the account.
I hope this letter is responsive to your inquiries. Please feel free to contact us with any other questions or comments.