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4000 - Advisory Opinions

Explanation of Insurance Coverage Provided for Deposits of 457 Plans Under Section 301 of FDICIA


April 2, 1992

Claude A. Rollin, Counsel

This is in response to your letter inquiring about the deposit insurance which is provided by the FDIC for deposits of deferred compensation plans which qualify under section 457 of the Internal Revenue Code of 1986 ("457 Plans").

On December 19, 1991, President Bush signed into law the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Section 311 of FDICIA mandates the continuance of "pass-through" insurance coverage for 457 Plan deposits. Under that provision of the law, 457 Plan deposits in both FDIC-insured savings and loan institutions and FDIC-insured banks will be entitled to deposit insurance in the amount of up to $100,000 per participant, provided that the FDIC's recordkeeping requirements are satisfied.

However, we note that the new law provides an exception in certain limited instances. Beginning one year following the date of enactment, the FDIC cannot provide "pass-through" insurance for 457 Plan deposits in an insured institution if, at the time the deposits are accepted, the institution is prohibited from accepting brokered deposits under Section 29 of the Federal Deposit Insurance Act. This will be the case if an institution does not meet minimum capital requirements or is only adequately capitalized (as distinguished from "well capitalized") but has not obtained permission from the FDIC to accept brokered deposits. This exception will not apply if, at the time the deposits are accepted, the institution meets each applicable capital standard and the depositor (i.e., the 457 Plan) receives a written statement from the institution that such deposits are eligible for "pass-through" insurance coverage at that institution.

Finally, the new law provides that a participant's interest in a 457 Plan deposit must be added, for insurance purposes, to any IRA accounts and any interests that the participant may have in Keogh Plan accounts and certain self-directed defined contribution pension plan accounts maintained at the same insured institution. The aggregate of those amounts will be insured up to $100,000 for each participant. This provision, however, will not go into effect until two years following the date of the legislation's enactment.

The FDIC cannot know for sure exactly what Congressman Gonzalez, Senator Garn and Senator Cranston meant with respect to the various statements in their letters. You should contact them directly for a definitive answer. We will, however, seek to answer the questions raised in your letter based upon what we think they may have been referring to.

Congressman Gonzalez indicated, in his letter to the ***, that a pension fund could opt to move plan assets to a "level one" or a "level two" institution. Congressman Gonzalez may be referring to "well-capitalized" and "adequately capitalized" institutions since those are the only two types of institutions that will still be able to provide "pass-through" deposit insurance as of December 19, 1992. While the terms "level one" and "level two" were mentioned during the legislative process, they were not ultimately incorporated into FDICIA.

Senator Garn indicated in his letter that the capitalization of an insured institution will be a factor in determining insurance coverage. I think Senator Garn was also referring to the fact that only "well-capitalized" and "adequately capitalized" institutions will be able to provide "pass-through" insurance.

Finally, Senator Cranston's letter makes reference to "self-directed pension plan" accounts and you ask us to tell you what that means. I think Senator Cranston was referring to those types of pension plans in which the employees have the right to choose investments for their accounts, as opposed to those plans in which the employer chooses the investments. This becomes important because only an employee's interest in self-directed defined contribution plan accounts is to be aggregated with his/her IRA accounts and any interests the employee may have in a Keogh or 457 Plan account.

Within the next few months, the FDIC will promulgate amendments to its regulations to implement these statutory changes and further clarify some of the statutory provisions. In the meantime, there will be no reduction in the existing level of insurance coverage.

I trust that this has been responsive to your inquiry. If you have any further questions, please let me know.

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