4000 - Advisory Opinions
Inquiry regarding deposit insurance coverage of Medical Savings Accounts
June 22, 1998
Joseph A. Genova Jr., Senior Regional Attorney
Your letter of February 26, 1998, addressed to the Federal Deposit Insurance Corporation has been referred to me for response. In that letter, you inquired about the deposit insurance coverage for Medical Savings Accounts ("MSAs") established pursuant to section 220 of the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 220. Included with your letter were copies of several commercially available forms which a financial institution can use in establishing an MSA, rolling funds into and out of an MSA, and obtaining distributions from an MSA.
As we understand it, section 220 permits a deduction from income for individuals who are covered by "high deductible" health plans and who set aside no more than a designated amount of funds each year to cover any qualified medical expenses incurred by the individual, the individual's spouse, and any dependents. 26 U.S.C. §§ 220(a) and (b). The MSA must be established in the United States by means of a written trust instrument and must be established exclusively for the purpose of paying the qualified medical expenses of the account holder or other qualified beneficiaries. 26 U.S.C. § 220(d)(1). The trustee of such trust must be a bank, an insurance company, or a person approved by the Secretary of the Treasury. 26 U.S.C. § 220(d)(2). Any distribution to the MSA owner which is not for qualified medical expenses would be taxable. 26 U.S.C. § 220(f).
An MSA most commonly would be considered, for purposes of deposit insurance coverage, an individual-ownership account of the individual who establishes the MSA. As such, funds in the MSA would be added to any funds the same individual holds in other individual-ownership accounts at the same insured depository institution and be insured (for the principal and any interest earned on the accounts) up to $100,000 if the depository institution failed.
When an individual establishes an MSA and designates the account as payable on death to a "qualifying beneficiary" (i.e., his or her spouse, child or grandchild), the MSA would qualify as a revocable trust account for deposit insurance purposes, if the other applicable FDIC requirements are satisfied.
If an employer establishes an MSA for an employee (assuming this is permissible under the I.R.C.), the account would be treated as an employee benefit plan account for deposit insurance purposes. As such, the MSA would be insured separately from other types of accounts (i.e., those that are not employee benefit plan accounts) that the employee may hold at the same insured depository institution.
1. Individual-Ownership Accounts
Section 330.5 of the FDIC Rules and Regulations ("Rules"), 12 C.F.R. § 330.5, provides that funds owned by a natural person and deposited into one or more deposit accounts in his or her own name at an FDIC-insured depository institution are added together and insured up to $100,000 in the aggregate. Thus, unless they qualify for separate deposit insurance coverage under one of the other sections in Part 330 of the Rules, funds which an individual deposits in an MSA would be insured as an individual-ownership account.
2. Revocable Trust Accounts
You specifically have asked whether an MSA might be insured as a revocable trust account under section 330.8 of the Rules, 12 C.F.R. 330.8. By definition, a MSA must be a trust. I.R.C. § 220(d)(1). Since the owner can, subject to prescribed tax consequences, use the funds in the MSA account at any time, it is a revocable trust. The MSA Adoption Agreement, which was included with your letter, contains a block where the account holder can name one or more beneficiaries. To qualify for separate deposit insurance coverage, a revocable trust account must meet the following kinship and recordkeeping requirements:
A. The named beneficiary must be the owner's spouse, child or grandchild (qualified beneficiary).1
B. The owner's intention that, upon his or her death, the funds belong to the named beneficiary must be manifested in the title of the account using commonly accepted terms such as "in trust for," "as trustee for," or "payable on death" or the abbreviations for those terms, "ITF," "ATF," "POD."
C. The beneficiary must be specifically identified by name in the deposit account records of the depository institution.
D. A qualified beneficiary, at the death of the last owner, must have a vested or non-contingent interest in the trust.
Under section 330.8 of the Rules, accounts which meet these requirements are insured up to $100,000 for each qualifying beneficiary separately from any other accounts of the owner or beneficiary in the same institution. Notably, where a beneficiary has an interest in more than one revocable trust account established by the same owner, the beneficiary's interest in all such revocable trust accounts will be added together and the total will be insured up to $100,000.
An MSA titled, "John Doe, Medical Savings Account, payable on death to . . ." would satisfy requirement B. If the beneficiaries are specifically named in the institution's deposit account records (e.g., in the title of the account), it would also satisfy requirement C.
3. Employee Benefit Plan Accounts
In your letter you also asked whether an MSA might be insured as an employee benefit plan account under section 330.12 of the Rules, 12 C.F.R. 330.12. Section 330.12(a), among other things, provides "pass-through" deposit insurance coverage for "any deposits of an employee benefit plan." Section 330.12(g)(2) of the Rules states that, for deposit insurance purposes, the term "employee benefit plan" has: the same meaning given to such term in section 3(3) of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1002) and includes any plan described in section 401(d) of the I.R.C.2 [Footnote added.]
As defined in 29 U.S.C. § 1002(3), the term "employee benefit plan" means an "employee welfare benefit plan" or an "employee pension benefit plan"3 or both. The term "employee welfare benefit plan" is defined at 29 U.S.C. § 1002(1) as:
any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services. . . . . .
It appears that the typical MSA is established by an individual employee and, therefore, would not qualify for deposit insurance coverage as an employee benefit plan account under 12 C.F.R. 330.12 of the Rules. If under the I.R.C., however, an employer or employee organization is permitted to establish an MSA for an employee, and if the employee's interest in the MSA is non-contingent, funds in the employee's MSA would be eligible for separate insurance as an employee benefit plan account under section 330.12 of the Rules.
MSA Established by a Self-Employed Individual
Although you have not specifically requested our views on the deposit insurance coverage of an MSA established by a self-employed individual, we believe the foregoing analysis would apply equally to such an MSA. Thus, if a self-employed individual establishes an MSA as either an individual-ownership account or a revocable trust account, then the MSA would be eligible for deposit insurance under the analysis discussed above for those types of accounts. Likewise, if the self-employed individual establishes an MSA as an employee benefit plan account, then the analysis provided above on that type of account would apply.
Please note that the views expressed in this letter are based on and limited to the information and materials that you have provided to us, as well as our review of the applicable provisions of the I.R.C. Different facts and, in particular, different MSA trust agreements might lead to different conclusions on the deposit insurance coverage of MSAs. Feel free to call me at (816) 234-8042 with any other questions or comments.
1If an MSA trust owner fails to name a beneficiary, he or she will be the primary beneficiary of funds in the trust. For deposit insurance purposes, the owner cannot be a qualified beneficiary of his/her own trust. Under section 330.8(b) of the Rules, the funds in such a trust would be treated as an individually owned account of the owner. Go back to Text
2I.R.C. § 401, authorizes the establishment of retirement accounts. Section 401(d) lists additional requirements which are applicable when such accounts benefit owner-employees. Neither section 401 nor 401(d) is applicable here because MSAs are not established for retirement purposes. Go back to Text
3An MSA would not be an "employee pension benefit plan" because it is not established for retirement purposes. Go back to Text