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4000 - Advisory Opinions

Insurance Coverage of Pension Fund Deposits Under New Rules


July 12, 1993

Walter P. Doyle, Counsel

I am writing in response to your letter of June 23, 1993, requesting confirmation of a telephone call you had recently with Valerie Best, one of our staff attorneys, concerning pension fund deposits.

Section 311 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required the FDIC to change some of the insurance rules applicable to employee benefit plan deposits, effective December 19, 1992. Previously, funds deposited by an employee benefit plan were insured up to $100,000 on a per-participant basis, provided the participant's allocable ownership interest was non-contingent and certain recordkeeping requirements were met. The amendments made by section 311 of FDICIA to section 11(a) of the Federal Deposit Insurance Act ("FDI Act"), however, prohibit the FDIC from providing per-participant or "pass-through" insurance coverage for certain employee benefit plan deposits in institutions which, at the time the deposits are accepted, may not accept brokered deposits pursuant to section 29 of the FDI Act. Under section 29 of the FDI Act, only "well-capitalized" institutions and "adequately capitalized" institutions that have obtained a waiver (permission) from the FDIC may accept brokered deposits. "Undercapitalized" institutions may not accept brokered deposits under any circumstances.

This restriction on "pass-through" coverage does not apply to adequately capitalized institutions that have not obtained a waiver, however, if, at the time the deposit is accepted (a) the insured depository institution meets each applicable minimum capital standard, and (b) the depositor receives a written statement from the institution that such deposits are eligible for insurance coverage on a "pass-through" basis.

The relevant time period for determining whether or not an institution can accept brokered deposits, and thus provide "pass-through" coverage, is the time that the employee benefit plan deposit is accepted. Accordingly, if a bank subsequently becomes ineligible to accept brokered deposits, that would not affect the "pass-through" deposit insurance coverage provided for deposits made when the institution could accept brokered deposits. Any rollover or renewal of a time deposit would, however, be considered an "acceptance" and thus the institution's ability to take brokered deposits at that point in time would determine whether the deposits were entitled to "pass-through" insurance coverage.

Section 311 of FDICIA also requires, as of December 19, 1993, that a participant's interest in any IRA, self-directed Keogh, 457 Plan (a type of deferred compensation plan established by state/municipal governments and non-profit organizations for their employees) and self-directed defined contribution plan deposits held at the same insured institution be aggregated and insured to $100,000. Under the FDIC's previous regulations, these accounts were insured separately. This provision of FDICIA effectively reduces coverage from $400,000 to $100,000 if a participant has interests in all four types of plans at the same institution.

To summarize the changes required by FDICIA, so long as an insured institution can accept brokered deposits as described above, then each participant in an employee benefit plan will be entitled to "pass-through" insurance of up to $100,000 (subject to the aggregation rule for certain plans). In order to qualify for this coverage, however, two requirements must be met.

First, the allocable ownership interest of each participant in the plan must be determinable without the evaluation of contingencies, except for those covered by the present worth tables and rules of calculation for their use set forth in the Federal Estate Tax Regulations. It is important to note that, under the new rules, only a participant's present vested interest in IRAs, self-directed Keoghs, "457 Plans," and self-directed defined contribution plan deposits will be insured upon the date of failure. A participant's interest in all other types of employee benefit plan deposits will be treated as vested on the date of failure, however.

Second, certain recordkeeping requirements must be met. Sections 330.4(b)(1) and (2) of the FDIC's regulations provide that the deposit account records of an insured depository institution must disclose the nature of any relationship that may provide a basis for the additional insurance coverage. § 330.4(b)(1). In the case of a pension or employee benefit plan, this would entail clearly identifying the deposit as a trust or custodial account. In addition, records of either the insured depository institution or the depositor, maintained in good faith and in the regular course of business, must reveal the allocable ownership interest in the account of each beneficiary under the plan. § 330.4(b)(2). Such records may be maintained for the depositor by a third party, such as a plan administrator or actuary.

If these requirements are met, then the allocable interest of each participant in the plan's deposit accounts would be separately insured up to $100,000, even if the total plan deposits exceed $100,000. If these requirements are not met, or if the plan's deposits are held in an institution that is undercapitalized, then all plan deposits would be insured up to a total of $100,000.

I might point out that, for deposit insurance purposes, the ownership interest of a participant in a deposit of plan funds is deemed to be the amount that is proportionate to that participant's interest in the entire assets of the plan. For example, if a plan participant owns a $100,000 interest in a plan that has total assets of $1,000,000, then the participant owns 10% of the plan's assets and would be treated for deposit insurance purposes as owning 10% of each deposit of plan funds. Also, if a participant has an interest in both a pension and profit-sharing plan established by the same company and held at the same insured depository institution, each participant's interest in both plans would be aggregated and insured up to $100,000.

For your reference, I have enclosed a copy of our final deposit insurance rules reflecting the changes required by FDICIA, as well as a copy of the existing rules. Please let us know if we can be of further assistance.

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