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4000 - Advisory Opinions

Insurance Coverage of Bank Investment Contracts


December 15, 1988

Faye L. Ferguson, Attorney

This is in response to your letter dated November 8, 1988 in which you have asked us to confirm the following concerning a bank investment contract (BIC) issued by ***:

1.  that a BIC issued to a qualified employee benefit plan will be insured up to $100,000 for each participant in the plan;

2.  that the FDIC insurance applies to both principal and accrued interest;

3.  that the FDIC insurance coverage is irrevocable; and

4.  that a participant who has an individual account and an interest in the plan assets with the same bank has insurance coverage of up to $100,000 on each account.

You have actually posed these questions in regard to a certificate of deposit or a BIC. Since a certificate of deposit is recognized as a deposit under 12 U.S.C. § 1813( 1 ), and since the primary question here is whether a BIC is a deposit, I have discussed only BICs in this response; however, deposit insurance coverage would be the same for all "deposits" of a qualified employee benefit plan.

We have received substantially similar inquiries from ***, and ***, two other individuals in your organization, who have asked essentially the same questions about BICs issued by ***. Due to the duplicative nature of your requests, I will consolidate the three individual responses into one and send a copy to each of you.

Your first concern is whether a BIC issued to a qualified employee benefit plan will be insured up to $100,000 per plan participant. Before addressing this concern, it is necessary to determine whether the BIC in question is a deposit. I have examined BICs issued by several financial institutions, including one from *** and one from ***. I concluded that the BICs from *** were deposits; however, my conclusion was limited to the particular documents I examined. Accordingly, any change to the instruments could change my opinion.

If the BIC is not a deposit, no FDIC insurance will apply to those funds. If the BIC is a deposit, then the rules regarding FDIC insurance coverage of deposits of an employee benefit plan will apply. FDIC regulations provide that the determinable interest of each participant in a deposit account held as an asset of a trusteed employee benefit plan is insured up to $100,000, without regard to whether or not the interest of each participant has fully vested. However, this per-participant insurance coverage is provided only when the value of each participant's interest can be determined without evaluation of any contingencies except for those contained in certain present worth tables in the Federal estate tax regulations. Thus, for example, while an employee pension or profit-sharing plan would normally have so-called "pass-though" insurance coverage, a health and welfare plan would not because, in the case of the health and welfare plan, the contingency giving rise to benefits, e.g., illness, is not determinable without evaluation of contingencies other than those contemplated by the above-mentioned present worth tables.

The per-participant insurance coverage afforded pension plans is further conditioned upon compliance with certain recordkeeping requirements. FDIC regulations provide that the deposit account records of the bank must disclose the fiduciary nature of the deposit by the trustee, and that the records of either the bank or the depositor, maintained in good faith and in the regular course of business, must show the allocable interest of each participant under the plan. This means that insurance coverage flows through the trustee to the individual plan participants as long as the issuing bank's records reflect the existence of the fiduciary relationship and the records of either the bank or the trustee disclose the details and interests of the true owners of the funds.

If the foregoing requirements are met, the allocable interest of each plan participant in the plan's deposit accounts at the bank in question would be separately insured up to $100,000 even though the total deposit exceeds the $100,000 maximum. Thus, if no one participant's pro rata interest in the plan's deposits at the bank in question exceeds $100,000, then the plan's deposits would be fully insured. However, all trust interests for the same beneficiary created by the same grantor at the same bank would be added together and insured up to $100,000 in the aggregate.

Your second question is whether FDIC insurance applies to both principal and accrued interest. The FDIC rules and regulations provide that insurance coverage applies to both the principal amount and interest at the contract rate that accrued up to the date of the bank closing. Of course, the coverage remains $100,000 in the aggregate as to each beneficiary.

Your third question is whether the FDIC insurance coverage is irrevocable. I am uncertain as to the meaning of your question, but if you are asking whether the coverage will continue if the FDIC terminates the depositary institution's insurance, the answer to your question is that the insurance coverage is not irrevocable. Instead, should the FDIC terminate the institution's insurance, § 8(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(a), provides that insured deposits of each depositor in the bank on the date the insurance terminates, less all subsequent withdrawals, shall continue to be insured for two years. However, the FDIC will not insure any additions to deposits or any new deposits made after the termination date.

Your final question is whether a plan participant's interest will be insured separately from other accounts the participant may hold with the same financial institution that issued the BIC. The FDIC rules and regulations provide that 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 depositary bank.

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