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4000 - Advisory Opinions

Insurance Coverage For 457 Plans/Deferred Compensation Plans


July 24, 1990

Claude A. Rollin, Senior Attorney

This is in response to your letter of June 1, 1990, in which you request an explanation of the insurance coverage provided by the FDIC for deposits of "457 plans" (also known as deferred compensation plans) in "layman's language." First, I will respond to your questions. You ask:

As of January, 1992, will the entire City [of *** ***] fund be insured for $100,000 or will each investor be insured for $100,000?

The answer is that as of January 29, 1992, or the first maturity date of any certificate of deposit thereafter, all deposits of the City in one insured institution will be added together and insured up to $100,000. Each 457 plan participant will not be separately insured under the FDIC's new uniform regulations.

If my $400,000 were spread over four savings and loan associations, would each one of my accounts be insured for $100,000?

Yes, until January 29, 1992. Up to that date, or the first maturity date of any certificate of deposit thereafter, each participant in a 457 plan will be insured for up to $100,000 at each insured financial institution. After January 29, 1992, however, the plan's deposits in each institution will only be insured for $100,000.

This change in deposit insurance rules for 457 plans came about because of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA"), enacted August 9, 1989. FIRREA abolished the Federal Savings and Loan Insurance Corporation ("FSLIC"), which insured savings associations, and transferred its functions to the FDIC. FIRREA required the FDIC to reconcile its regulations with those of the former FSLIC and to issue new uniform regulations covering deposits in both banks and savings associations by May 5, 1990. As a result, the FDIC's Board of Directors adopted final deposit insurance regulations on April 30, 1990, which, for the most part, will become effective July 29, 1990.

The provision concerning insurance coverage of 457 plan deposits was controversial because the rules of the FDIC and the former FSLIC differed significantly. The FDIC insured such accounts in banks up to $100,000 per plan. Conversely, the former FSLIC had insured the accounts of deferred compensation plans in savings associations in the amount of up to $100,000 per participant, separately from any other deposits maintained by the employer or the participants at the same insured savings association.

The FDIC proposed to extend its rule (which limits insurance to $100,000 per plan) to accounts of deferred compensation plans held at insured savings associations. The proposal was based on a staff interpretation of section 457 of the Internal Revenue Code (26 U.S.C. § 457) which provides that the employer is the sole owner of the funds until they are distributed. The staff opinion is that this provision effectively prevents the FDIC from providing "pass-through" insurance to participants in such plans. The FDIC sought public comment on its proposed deposit insurance regulations which were published December 21, 1989 in the Federal Register, held a public hearing on 457 plan deposits, and even extended the comment period one month in order to give the public every opportunity to voice their opinions on the issue, before making a final decision.

The FDIC Board of Directors adopted the final rule as proposed for 457 plans ($100,000 per plan), but included a lengthy "grandfather" provision for existing deferred compensation plans (those in existence as of July 29, 1990) as a result of the thousands of comment letters received and testimony presented at the public hearing. During the "grandfather" period, deposits for both existing and new participants in 457 plans will be insured on a per-participant basis until January 29, 1992, or, in the case of any certificate of deposit, the first maturity date following that date.

Although this regulation represents a significant change from the rules of the former FSLIC, the FDIC believes that the extended "grandfather" period will give plan participants and savings associations ample time to adjust to the new rules. Moreover, the "grandfather" period gives Congress an opportunity to enact specific legislation to permit the FDIC to insure such deposits on a per-participant basis if it so chooses. Therefore, you may wish to write to your Congressman in order to express your views on this subject.

I hope that this information has been helpful. If I can be of further assistance, please write or call me at (202) 898-3985.

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