DATE: February 20, 1998
LETTER NO.: 98-CU-5
TO: ALL FEDERALLY INSURED CREDIT UNIONS
SUBJECT: NEW FEDERALLY-INSURED CREDIT UNION ACCOUNTS
This letter is intended to inform you of several new member accounts
eligible to be insured by the National Credit Union Share Insurance
Fund (NCUSIF). These accounts include Education and Roth IRAs,
Medical Savings Accounts (MSAs), and Savings
Incentive Match Plan for Employees (SIMPLE) accounts. As
of January 1, 1998, federally-insured credit unions are permitted
to establish and maintain these accounts; however, credit unions
are not required to offer them. To date, the Internal Revenue
Service (IRS) has not issued comprehensive implementing rules
or guidance on all of these accounts. Therefore, credit unions
should contact the IRS and/or their own legal counsel or tax advisor
if more information is needed.
Education and Roth IRAs
Two new IRA options are Education IRAs and Roth IRAs. The objective
of the Education IRA is to provide a means for parents to save
for the future costs of their children's higher education through
nondeductible, after-tax contributions. The objective of the
Roth IRA is to provide an IRA funded with nondeductible, after-tax
contributions that permits tax-free withdrawals of interest and
principal under certain conditions.
NCUA considers both Education and Roth IRAs to be insured member
accounts. For insurance purposes, Education IRAs are insured
as irrevocable trust accounts under 12 C.F.R. §745.9-1 and
will be added to other irrevocable trust accounts for insurance
purposes. Roth IRAs are insured as traditional IRAs under 12
C.F.R. §745.9-2. A Roth IRA and a traditional IRA of a member
will be added together for insurance purposes.
Savings Incentive Match Plan for Employees
A SIMPLE plan is a retirement plan for small employers. It can
be offered as a SIMPLE Retirement Account (SRA) or a SIMPLE 401(k)
plan without having to comply with all of the current IRS rules
for qualified plans. SIMPLE plans will be available to most employers
that do not simultaneously maintain a qualified retirement plan
or Simplified Employee Pension Plan, and that employ 100 or fewer
employees who earn $5,000 or more per year. To be eligible, an
employee must earn at least $5,000 per year for the two prior
years and the current year.
NCUA considers member accounts established as either SRAs or SIMPLE
401(k)s to be insured member accounts. For insurance purposes,
SRAs will be added to other traditional IRAs and insured under
12 C.F.R. §745.9-2. SIMPLE 401(k)s will be added to other
deferred compensation accounts and insured under 12 C.F.R. §745.9-3.
Medical Savings Accounts
Federal MSAs are tax-exempt trust or custodial accounts into which
either employers or employees of small companies and the self-employed,
but not both, may deposit funds to pay for non-catastrophic health
care. Instead of using traditional health insurance, a person
with an MSA must purchase a catastrophic health insurance policy
with a high deductible and pay for routine medical care out of
the MSA non-catastrophic health care account. MSA contributions
by an eligible individual are deductible in computing adjusted
gross income. Unused MSA funds can be carried over to cover future
medical expenses. Distributions from an MSA are excludable from
gross income if used for medical expenses. Other kinds of MSA
withdrawals are generally taxable and subject to an early withdrawal
penalty. However, MSA distributions made after the accountholder
turns age 65, becomes disabled, or dies are not subject to the
penalty.
Initially, MSAs are a pilot program made available to a limited
population of 750,000 taxpayers over 4 years (1997-2000). This
trial population includes self-employed workers and workers at
companies with 50 or fewer employees. NCUA is aware that sixteen
states have legislation authorizing state MSAs: Arizona, Colorado,
Idaho, Illinois, Indiana, Louisiana, Michigan, Mississippi, Missouri,
Montana, New Mexico, Oklahoma, Utah, Virginia, Washington and
West Virginia.
NCUA considers federal and state MSAs to be insured member accounts.
The particular account classification for an MSA will depend
upon the circumstances of how it is established and maintained.
An individual MSA may be insured as either a Single Ownership
Account under 12 C.F.R. §745.3 or Deferred Compensation Account
under 12 C.F.R. §745.9-3. A family or joint MSAs may be
insured either as Joint Accounts under 12 C.F.R. §745.8 or
Deferred Compensation Accounts under 12 C.F.R. §745.9-3.
Depending on the account classification, the funds in an MSA
will be added to other similarly classified accounts for insurance
purposes.
Currently, a FCU can not act as a trustee or custodian of an Education
or Roth IRA, an SRA or SIMPLE 401(k), or either a federal or state
MSA.
If you have any questions on interpretations of the laws affecting
Roth and Education IRAs, SIMPLE accounts, or Medical Savings accounts,
please contact the IRS or your tax or legal advisor. If you have
any questions regarding FCU trust powers or the NCUSIF insurability
of credit union member accounts, please call your regional office.
For the National Credit Union Administration Board,
/S/
Norman E. D'Amours
Chairman