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4000 - Advisory Opinions

Eligibility of 403-B Plan Account for Deposit Insurance


November 8, 1990

Jeffrey M. Kopchik, Senior Attorney

This responds to your letter of August 4, 1990, which was recently forwarded to the Legal Division by the Office of Consumer Affairs, requesting information on the insurability of your 403-B Plan account, which is managed by ***.

Your letter raises two distinct issues. First, are the funds in your 403--B Plan account insured by the FDIC. Second, assuming that the account is insured by the FDIC, whether the beneficial owners, such as yourself, are entitled to "pass-through" deposit insurance coverage.

With regard to the first issue raised in your letter, federal deposit insurance only applies to funds deposited with an FDIC insured depository institution. Thus, funds invested in a money market fund which is managed by an entity other than an insured depository institution and which invests in financial instruments other than certificates of deposit from insured depository institutions, such as the fund referred to in your letter which is managed by ***, are not federally insured. However, since some money market funds are covered by private insurance, you may want to inquire with ***.

Since the funds in your 403--B Plan account with *** are not insured by the FDIC, the question of pass-through deposit insurance coverage is hypothetical. However, in the event that you have the option of transferring your account to an FDIC insured depository institution, I will comment on this issue in the hope that you may find it helpful.

Generally, 403--B Plans are, in substance, annuity contracts purchased by public schools for the benefit of their employees. The annuity contract consists of a payment by the school to an insurance company or other corporation that funds annuity contracts (the "investment advisor"). The investment advisor then agrees to pay the annuitant a stated amount for a specific period of time. With regard to federal deposit insurance coverage, annuities can be structured in two ways.

In the first case, the investment advisor invests the funds in various types of financial instruments (possibly including bank certificates of deposit), but these investment assets belong to the investment advisor. In such cases, the FDIC does not recognize any ownership interest of the annuitant in the asset. Therefore, assuming that the funds are invested in a certificate of deposit of an insured depository institution, the investment advisor would be considered the owner of the funds and its CD would be insured up to a maximum of $100,000. Accordingly, the annuitant's beneficial interest in the asset would not be federally insured.

In the second case, the investment advisor agrees to pay the annuitant an amount to be determined by the success of the investment that is made (a variable annuity). The annuitant may be able to select the investment (CDs, mutual funds, money market funds, etc.). In this case, the particular assets to be used to fund the annuity can be identified. For federal deposit insurance purposes, if the funds are deposited in an insured depository institution and the account meets the requirements of section 330.6(f) of the FDIC regulations (described below), each annuitant would be entitled to pass-through insurance coverage up to $100,000.

Section 330.6(f) of the FDIC regulations provides that funds held by an insurance company or other corporation for the purpose of funding annuity contracts are insured up to $100,000 per annuitant, provided that (1) the corporation establishes a separate account for such funds; (2) the account cannot be charged with the liabilities arising out of any other business of the corporation; and (3) the account cannot be invaded by creditors of the corporation. I am unable to determine from your letter whether you would be entitled to pass-through deposit insurance coverage if the funds in your account were deposited by *** in an insured depository institution. I suggest that you contact *** to determine whether or not your account conforms to the requirements of section 330.6(f) of the FDIC's regulations.

I trust that the foregoing responds to your inquiry. Should you have any questions, please feel free to contact this office.

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