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4000 - Advisory Opinions

Scope of Grandfather Provision Under New Insurance Regulation


August 20, 1990

Mark A. Mellon, Attorney

This is in response to your inquiry of July 24, 1990 pertaining to federal deposit insurance. You wish to ascertain whether the grandfather provision of the new uniform deposit insurance regulations for the accounts of 457 Plans (12 C.F.R. section 330.16(e)) applies to a 457 Plan which *** has established for a municipality. You state that *** has entered into a contract with the municipality, that employees have enrolled in the plan and authorized payroll deductions and that the first payroll deduction is scheduled for July 27, 1990. You further state, however, that *** will not receive the funds from the payroll deduction for deposit in the accounts of the 457 Plan until July 30, 1990, one day after July 29, 1990, the effective date of the new regulations.

Under the grandfather provision for 457 Plans of the new deposit insurance regulations, the funds of an existing 457 Plan which are deposited in a savings association will continue to be insured on a per-participant or "pass-through" basis for eighteen months following July 29, 1990 or the earliest maturity date of any time deposit after that date. This means that for existing 457 Plans (those in existence prior to July 29, 1990), any account balances, any new money deposited and any interest earned will continue to be insured on a pass-through basis until January 29, 1992, or, in the case of a time deposit, the first maturity date thereafter.

Based on the representations in your letter, it is evident that *** has created a 457 Plan for a municipality prior to July 29, 1990 but that the Plan will not deposit any funds with *** until after that date. The purpose of the grandfather is to promote depositor confidence, stability of deposits and to give Plan administrators and savings associations an opportunity to adjust to the new rules. The grandfather would not serve these purposes so well if the class of 457 Plans who are eligible for the provision was restricted to those who are not only in existence as of July 29, 1990 but also have deposits with savings and loan associations as of that date. The regulation does not speak in terms of 457 Plans with savings and loan deposits, it only discusses 457 Plans which exist prior to the effective date of the regulations. For these reasons, the grandfather provision for 457 Plans in the new deposit insurance regulations applies to all Plans which are in existence as of July 29, 1990 and not just to those Plans which are in existence as of that date and have deposits in savings and loan associations.

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

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