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4000 - Advisory Opinions

Deposit Insurance Coverage of Individual Retirement Accounts Containing Simplified Employee Pension Deposits


December 7, 1995

Jamey Basham, Counsel

I am writing in response to your inquiry dated August 21, 1995, which was one of several recent letters we have received requesting advice about deposit insurance coverage on IRAs containing SEP funds. These requests all seek clarification whether SEP-IRAs will be insured as fractional interests in a single pension plan, with pass through insurance for each beneficiary being dependent on the capital requirements of 12 C.F.R. § 330.12(a)-(b), and whether a SEP-IRA depositor is covered by the capital status disclosure rules under 12 C.F.R. § 330.12(h). Although, as you know, the FDIC does not give binding advisory determinations, I can give you my considered opinion as a staff attorney on the legal questions you raise in your letter. Please accept my apologies for the time it has taken to give this question full consideration. For the reasons I discuss below, an individual's SEP funds deposited in an IRA will not be insured differently than other IRA deposits; such funds will be aggregated with any other IRA deposits the individual holds at the same institution and subjected to the $100,000 limit under 12 C.F.R. § 330.12(c)(2).

The present requirements under 330.12(a)-(b) implement amendments Congress made to section 11(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq. ("FDI Act"), in the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236 ("FDICIA"). Section 11(a) states that the FDIC should continue to provide "pass through" coverage to benefit plan participants:

[T]he Corporation shall provide deposit insurance coverage with respect to deposits accepted by any insured depository institution on a pro rata or "pass through" basis to a participant in or beneficiary of an employee benefit plan. . . .
12 U.S.C. § 1821(a)(1)(D)(i).1 Congress defined "employee benefit plan" to mean an employee benefit plan as defined by section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1000 et seq., or a Keogh plan as described in section 401(d) of the Internal Revenue Code of 1986, as amended ("Code"), 26 U.S.C. § 401(d). 12 U.S.C. § 1821(b)(8)(B)(ii).

In applying this statute, a SEP plan that provides employer contributions meets the ERISA section 3(3) definition of an employee benefit plan which is incorporated into the FDI Act. In addition, a SEP deposit is also treated as an IRA under section 408(a) of the Internal Revenue Code. 26 U.S.C. § 408(k) ("For purposes of , the term simplified employee pension' means an individual retirement account. . . ."). However, from a deposit insurance standpoint, the important issue is how the plan funds are legally held and deposited.

A SEP is structured differently from other employee benefit plans. Other ERISA employee benefit plans are required to hold any and all employer contributions and other plan assets in a trust, under the control of a plan trustee for the exclusive benefit of plan participants. 29 U.S.C. § 1103(b)(3). Similarly, Keogh plan assets are held in a trust for the benefit of participants. 26 U.S.C. § 401(a), 401(d). In contrast to these requirements for a special plan trust, SEPs have no plan trust; each participant's funds are required to be held in a regular IRA in his or her own name that meets all the requirements for any IRA under section 408(a) of the Code. 26 U.S.C. § 408(k)(1). IRAs are required to take the form of a trust for the exclusive benefit of an individual. 26 U.S.C. § 408(a).

Congress' use of the words "pro rata" and "pass through" when it amended section 11(a) is, in this case, significant. These terms have long been well-recognized technical terms of art in deposit insurance law, and are known to refer to the separate insurance of the ascertainable, noncontingent interests of multiple beneficial owners of a common fund. Thus, pass through insurance is applicable to the insurance of regular employee benefit or Keogh plans, in which all plan participants' interests are maintained in the same trust.2 But with SEPs, the employer's contributions are made to an IRA where the bank acts as trustee for one individual participant, and pass through coverage is therefore irrelevant. Nothing in FDICIA indicates that Congress, by enacting section 11(a), intended the FDIC to take pass through insurance beyond its understood application and somehow aggregate legally separate IRA trusts into a single "plan" for deposit insurance purposes.3 This is also consistent with the FDIC's pre-FDICIA practice of insuring regular employee benefit plans on a pass through basis, but treating SEP-IRAs as IRAs under the now-repealed statutory provision for separate insurance of IRAs. See, e.g., FDIC--91--61 (July 29, 1991).

As a result, IRAs containing funds that originated from a SEP will be treated the same as IRAs containing individual contributions or rollover funds, without reference to the pass through rules contained in sections 330.12(a)-(b) of the FDIC's deposit insurance rules. This means that SEP funds will be aggregated with any other IRA funds, section 457 plan interests, or self-directed employee benefit plan interests subject to section 330.12(c)(2) of the deposit insurance rules. This result would also pertain to any non-SEP IRA that still met the technical ERISA 3(3) definition of an employee benefit plan because of employer sponsorship.4 Further, since SEPs are insured without reference to the pass through rules, the FDIC will not require insured depository institutions to make the disclosures required by 330.12(h) to SEP depositors.

Please note that this opinion revises and updates prior opinions issued by the FDIC Legal Division on this subject.

I hope this letter responds to your concerns. If you would like to discuss any issues further, I can be reached at (202) 898-7265.

1As you know, Congress also conditioned this coverage on an inquiry whether the depository institution, at the time it accepted the deposit, satisfied certain capital requirements, issued certain notices, or obtained certain regulatory waivers. 12 U.S.C. §§ 1821(a)(1)(D)(ii)-(iii). Go back to Text

2One of the purposes of the FDICIA amendments was to extend pass-through coverage to section 457 plans, which could not otherwise qualify for pass-through coverage because the plan participants did not have a non-contingent interest in the plan assets. Go back to Text

3This is not to say that the trustee of a regular employee benefit plan or Keogh could expand the insurance available to each plan participant by creating separate trusts under the plan for each participant (assuming for the sake of argument that such an arrangement is even possible under ERISA and the Code). Whereas the use of separate IRA trusts in connection with SEPs is statutorily required by the Code, other ERISA plans and Keoghs can make no such claim to a legal requirement for multiple trusts, which would presumably be created in an effort to evade the plain intent and effect of sections 330.12(a)-(b). Go back to Text

4Any IRA, SEP-releated or not, can be deemed an ERISA 3(3) plan if contributions are made by the employer, participation is not completely voluntary to employees, the employer endorses an IRA program, or the employer receives compensation from an IRA program. 29 C.F.R. § 2510.3-2(d)(1). Go back to Text

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