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4000 - Advisory Opinions

Insurance Coverage Afforded Defined Contribution Plans


March 27, 1990

Mark A. Mellon, Attorney

This is in response to your letter of March 9. You request clarification of Federal insurance coverage of the bank deposits of a union annuity trust fund. Based on a conversation with you and * * * it is my understanding that these are the accounts of a defined contribution plan. Funds are supplied by the employer for the benefit of the plan participants. The funds are fully vested upon deposit. If the participant leaves employment, he is entitled to the money in a lump sum and has the option of rolling the funds over into an IRA or other tax-deferred account. If the employee retires, he may receive a lump sum distribution or an annuity or he may have the funds distributed to his estate upon his death. The funds are administered by a board of trustees pursuant to a trust indenture.

The Federal Deposit Insurance Corporation (the "FDIC") insures the interest of each participant in a defined contribution plan to $100,000 as trust funds pursuant to 12 C.F.R. section 330.10. The value of a participant's interest in a defined contribution plan is deemed to be the participant's account balance in the plan as of the date of default of the insured depository institution. The deposits of the plan are aggregated with other deposits which represent the interests of a participant in any other employee benefit plans established by the same employer. If the account is administered for the plan by another entity on the plan's behalf, the disclosure requirements of 12 C.F.R. section 330.1(b)(1) must be complied with before ownership will be recognized.

To illustrate how this works, assume that a participant has an account balance of $20,000 in a defined contribution plan with total assets of $2,000,000. A bank defaults in which the plan has an account with a balance of $100,000. The participant's plan account balance is divided by the total plan assets. The resulting percentage (1%) is multiplied by the account balance of the defaulted bank. The resulting sum ($1,000) is the value of the trust estate in the account attributable to the participant. In this example, the participant's trust estate is fully insured since it is well below $100,000.

Pursuant to section 402 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Pub. L. No. 101--73, 103 Stat. 183), the FDIC must prescribe new regulations for all depository institutions. The FDIC is proposing a new regulatory provision to codify the current FDIC policy on insurance of employee benefit plans which has already been described as it applies to defined contribution plans.

I hope that this letter is responsive to your inquiry. Please contact me if you have any questions about this or any other matter.

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