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4000 - Advisory Opinions

Insurance for Deposits of a Deferred Compensation Plan: Section 457 Internal Revenue Code


September 21, 1989

Claude A. Rollin, Senior Attorney

This is in response to your letter to Mr. John L. Douglas, our General Counsel, dated September 14, 1989, concerning the deposit insurance provided for deposits of a deferred compensation plan which qualifies under section 457 of the Internal Revenue Code ("IRC"), 26 U.S.C. § 457 (a "457 Plan'').

As you know, prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (the "FIRRE Act") there was a difference in the manner in which the FDIC and the FSLIC insured the deposits of a 457 Plan. The FDIC took the position (and continues to take the position) that 457 Plan deposits in an insured bank would be added together and insured up to $100,000, which is to say that such deposits would not be insured on a per-participant basis. The basis for the FDIC's position has been the plain language of section 457 of the IRC which requires the funds of 457 Plans to "remain (until made available to the participant or other beneficiary) solely the property and rights of the state . . ." 26 U.S.C. § 457(b)(6). Since the state, rather than the employees, is deemed to be the sole owner of the funds until they are distributed, the FDIC has maintained that deposits of those funds could not be insured on a per-participant basis.

The former FSLIC, however, took an entirely different approach with respect to the deposit insurance it provided for 457 Plan deposits maintained with FSLIC-insured institutions. An FSLIC regulation provided, in relevant part, that ". . . all trust estates as defined in § 561.4(b) of this subchapter shall be added together and insured separately up to an additional $100,000." 12 C.F.R. § 564.10. The term "trust estate'' was defined to include "the interest of a participant in a deferred compensation plan, which plan shall be considered a trust for purposes of applying § 564.10 of this subchapter.'' 12 C.F.R. § 561.4. It is my understanding that the staff of the FSLIC had interpreted those provisions to mean that the interest of each 457 Plan participant in the deposits of the plan would be insured up to $100,000.

Section 402 of the FIRRE Act requires the FDIC to continue to apply the FSLIC's regulations and interpretations concerning deposit insurance coverage, for deposits in all institutions that were previously insured by the FSLIC, until such time as the FDIC adopts uniform regulations governing the insurance for deposits in all FDIC-insured institutions (including both FDIC-insured banks and savings associations that were previously insured by the FSLIC). The FDIC is required to promulgate such uniform regulations within 270 days of the date of enactment of the FIRRE Act and such regulations must become effective within 90 days of the date they are published in final form. In compliance with section 402 of the FIRRE Act, the FDIC will continue to apply the aforementioned regulation and interpretation of the FSLIC (concerning the deposit insurance provided for deposits of 457 Plans and other deferred compensation plans) to deposits in savings associations that were formerly insured by the FSLIC until the effective date of the FDIC's uniform regulations.

Although FDIC staff have been working on a proposal for uniform deposit insurance regulations, a proposed regulation has not been published as of yet. In fact, the FDIC's Board of Directors has not fully considered the issues which the uniform regulations will address, much less voted on any kind of proposal. Therefore, I am unable to advise you about what the FDIC will ultimately propose on the issue of the amount of deposit insurance to be provided for 457 Plan deposits.

After the FDIC publishes its proposed uniform regulations in the Federal Register, I would encourage you to submit any comments you may have with respect to the relevant proposed provisions within the time-frame set forth in the Federal Register notice.

Thank you for sharing your thoughts on this issue. If you have any questions, you may contact me at (202) 898-3985.

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