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4000 - Advisory Opinions
Deposit Insurance Coverage of Individual Retirement Accounts
Containing Simplified Employee Pension Deposits
FDIC--95--33
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,
{{4-30-96 p.4961}}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.
{{4-30-96 p.4962}}
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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