Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 95-39 (SUP)
July 7, 1995

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Examination Procedures for the New "Pass-Through" Deposit Insurance Disclosure Rules Concerning Employee Benefit Plan Deposits

                        The FDIC has issued a final rule specifying the new disclosure requirements of the "pass-through" deposit insurance coverage for employee benefit plan deposits.  Attached for your information are: (1) a copy of FDIC's letter to insured depository institutions announcing the new disclosure rules; (2) a copy of a memorandum recently issued by the FDIC to its field examiners summarizing the new requirements and describing the examination procedures to be implemented when conducting on-site safety and soundness examinations; and (3) a copy of the FDIC's final rule regarding the disclosure of "pass-through" insurance coverage to employee benefit plans.

                        The new disclosure requirements, which are effective for all insured depository institutions on July 1, 1995, were issued pursuant to Section 311 of the Federal Deposit Insurance Corporation Improvement Act of 1991 for "pass-through" insurance coverage.  Under the FDI Act, "pass-through" insurance for employee benefit plan deposits is dependent, in part, on the capital status of an insured depository institution "at the time that a deposit is accepted." Although the disclosure requirements are not effective until July 1995, there is a "catch-up" provision for deposits accepted between December 19, 1992, and July 1, 1995, that requires insured depository institutions to disclose to employee benefit plan depositors if the institution did not qualify for pass-through insurance coverage at the time the deposits were received.

                        The FDIC has already implemented its examination procedures for ensuring compliance with the new disclosure requirements.  Given the applicability of the requirements to all insured banks, the Federal Reserve will be adopting similar examination procedures, which will be included in the Commercial Bank Examination Manual.  Until these procedures are issued, the examination staff at each Reserve Bank should follow the FDIC's examination procedures outlined in the attached memorandum to ensure that state member banks are in compliance with the disclosure requirements.

                         If you have any questions regarding the attached FDIC memorandum or disclosure rules, please contact Arleen Lustig at (202)452-2987.

Richard Spillenkothen
Director

ATTACHMENTS TRANSMITTED ELECTRONICALLY BELOW

Cross Reference: Commercial Bank Examination Manual Section - 3000.1


Attachment 1

FDIC
Federal Deposit Insurance Corporation
Washington, DC  20429
Office of the Director
Division of Supervision

FIL-14-95
February 13, 1995

DEPOSIT INSURANCE COVERAGE

TO:               CHIEF EXECUTIVE OFFICER

SUBJECT:    New "Pass-Through" Deposit Insurance Disclosure Rules

On January 31, 1995, the FDIC Board of Directors adopted final revisions to its deposit insurance regulations (Part 330).  The most significant change requires institutions to provide timely disclosures to administrators of certain retirement and other employee benefit plan accounts about whether their funds qualify for "pass-through" insurance coverage.  Among the types of accounts affected by the new disclosure rules are 401(k) retirement accounts, Keogh plan accounts, and corporate pension plan and profit-sharing plan accounts.  As part of the same action, the FDIC adopted certain technical amendments to Part 330.  A copy of the final rules is attached.  The "pass-through" revisions are effective July 1, 1995, while the technical revisions are effective March 13, 1995.

In general, "pass-through" insurance means that each participant in the account, rather than the total account balance, is individually insured up to $100,000. For example, if there are 25 participants in the account, the funds would be insured by the FDIC to $2.5 million if the insured depository institution were to fail (providing each participant has a $100,000 interest in the account).  Without "pass-through" insurance, the entire $2.5 million account would qualify for only $100,000 of insurance coverage.

Section 311 of the Federal Deposit Insurance Corporation Improvement Act of 1991 includes a requirement that, effective December 19, 1992, depositors in certain retirement and other employee benefit accounts are entitled to "pass-through" deposit insurance coverage based in part on whether the insured institution satisfies certain capital standards.  The FDIC issued proposed rules on November 30, 1993 (see FIL-84-93, dated December 10, 1993) in response to numerous comments about the difficulty of obtaining public information about an institution's capital status and, thus, knowledge of whether these types of deposits would be eligible for "pass-through" insurance.

The final "pass through" disclosure rules contain a number of revisions from the proposal, designed to reduce the uncertainty for depositors, primarily employee benefit plan administrators, while at the same time minimizing the regulatory requirements for institutions.  The new rules require that:

  • Upon request from an administrator or manager of an existing account, an insured depository institution must disclose in writing its current "prompt corrective action" (PCA) capital category (ranging from "well capitalized" to "critically undercapitalized"), various capital ratios, and a statement whether, in the institution's judgment, the deposits would be eligible for "pass-through" insurance;
     
  • When an affected account is opened, the institution must disclose in writing its PCA capital category, a description of the requirements for "pass-through" insurance coverage, and a statement whether, in the institution's judgment, the deposits are eligible for such coverage; and
     
  • When an existing account is believed to be no longer eligible for "pass-through" insurance coverage, the institution will have 10 business days to disclose in writing to all affected depositors the institution's PCA capital category and a notice that new, rolled-over or renewed deposits will not be eligible for "pass-through" insurance (existing time deposits would continue to receive "pass-through" insurance until they mature).

The effective date of the new "pass-through" disclosure rules is delayed until July 1, 1995, to provide insured institutions the time needed to establish policies and procedures to comply with the new requirements.  However, there also is a "catch-up" requirement that insured institutions provide certain disclosures to affected employee benefit plan depositors if, at the time their deposits were accepted, the institution did not qualify for "pass-through" insurance coverage.  This covers deposits made between December 19, 1992, and July 1, 1995.

The attached Federal Register document also explains the technical amendments to Part 330 involving joint accounts, accounts where an insured institution is acting in a fiduciary capacity, and commingled funds of a bankruptcy estate.

Questions about the final revisions to the insurance rules can be directed to Joseph A. DiNuzzo, a counsel in the Legal Division at (202) 898-7349, or Daniel M. Gautsch, an Examination Specialist in the Division of Supervision at (202) 898-6912.

Stanley J. Poling
Director

Attachment
Distribution: All Insured Banks and Savings Associations


Attachment 2

Division of Supervision
Classification Number
Date: June 1, 1995

MEMORANDUM SYSTEM

MEMORANDUM TO: Regional Directors

FROM:    Stanley J. Poling
                 Director

SUBJECT:Examination Procedures for New "Pass-Through" Deposit Insurance Disclosure Rules Concerning Employee Benefit Plan Deposits Part 330.12

1.    Purpose.  To summarize the new "pass-through" deposit insurance disclosure requirements for employee benefit plan deposits, and to describe the examination procedures to be implemented when conducting on-site safety and soundness examinations of insured institutions for which the FDIC is the primary Federal regulator.

2.    Background.  Section 311 of FDICIA amended section 11(a) of Federal Deposit Insurance Act (FDI Act) concerning "pass-through" deposit insurance coverage.  In May 1993, section 330.12 (a) to (g) of the FDIC's regulations was revised to incorporate the new statutory limitation on "pass-through" deposit insurance coverage for employee benefit plan accounts.

The FDIC proposed disclosure rules on the new deposit insurance statute on November 30, 1993 (see FIL-84-93, dated December 10, 1993). This was in response to numerous comments about the difficulty of obtaining information on an insured institution's capital levels and its prompt corrective action (PCA) capital category, information critical to employee benefit plan depositors wishing to determine whether "pass-through" insurance coverage is available.  On January 31, 1995, the FDIC adopted section 330.12(h) of its regulations (see FIL-14-95, dated February 13, 1995).

        a.    Statutory Requirements.  Section 11 (a) of the FDI Act applies to all FDIC-insured institutions.  Under this statute, whether an employee benefit plan deposit is entitled to.  "pass-through" deposit insurance coverage is based, in part, upon the capital status of an insured depository institution "at the time that a deposit is accepted."

                (1)    "Pass-through" insurance coverage means that the insurance coverage passes through to each owner/beneficiary of the applicable deposit.  Insurance coverage under this rule is based on the institution's condition as of each deposit date.

                (2)    "Pass-through" insurance coverage is provided for employee benefit plan deposits placed with all "well capitalized insured institutions and for adequately capitalized institutions when:

                        (a)    the institution has obtained a brokered deposit waiver from the FDIC; or

                        (b)     the institution meets each applicable capital standard and provides a specific written statement (each time that a deposit is accepted) to an employee benefit plan depositor that such deposits are eligible for "pass-through" insurance coverage.

                (3)    Employee benefit plan deposits are not entitled to "pass-through" insurance coverage when placed with:

                        (a)    insured institutions that are "adequately capitalized," and have NOT obtained a brokered deposit waiver from the FDIC or have elected NOT to provide a written statement under the statutory exception (see above); or

                        (b)     "undercapitalized" institutions.

        b.    Types of Deposit Accounts Affected.  Among the types of accounts affected by the new "pass-through" insurance rule are:

       -    401(k) retirement accounts,

       -    deferred compensation plans under section 457 of the Internal Revenue Code of 1986,

       -    Keogh plan accounts,

       -    Simplified Employee Pension plan accounts (SEPS)

       -    corporate pension plans and,

       -    profit-sharing plan accounts.

        c.    Summary of New Section 330.12(h). The new "Pass-through" insurance disclosure rules are effective July 1, 1995.  The five-month delayed effective date was designed to provide insured institutions the time needed to establish policies and procedures in order to comply with the new requirements.  Section 330.12 (h) of the FDIC's regulations contains the following requirements:

                (1)    Disclosure Upon Request.  Within five business days of a request, at any time by a depositor of employee benefit plan deposits, an institution must provide in writing:

                        (a)    the three capital ratios (total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio),

                        (b)    the PCA capital category of the institution, and

                        (c)    whether, in the institution's judgement, employee benefit plan deposits would be eligible for "pass-through" insurance protection.

                (2)    Disclosure Upon Opening an Account.  When a new employee benefit plan account is opened, the institution must provide in writing:

                        (a)    an accurate description of the requirements for "pass-through" insurance coverage, the current PCA capital category of the institution, and

                        (b)    whether, in the institution's judgement, at that time, the employee benefit plan deposits are eligible for "pass-through" insurance coverage.

                        This required disclosure applies only to new accounts. While existing, renewed or rolled-over accounts are not subject to the upon-opening-an-account disclosure requirements, institutions have the discretion to make such disclosures.  A sample disclosure is included in the Federal Register preamble to the final regulation and a copy is attached.

                (3)    Disclosures When "Pass-Through" is No Longer Available. Whenever new, rolled-over, or renewed employee benefit plan deposits are no longer eligible for "pass-through" insurance coverage, the institution has 10 business days to disclose in writing to all affected employee benefit plan depositors:

                        (a)    the institution's new PCA capital category, and

                        (b)    that new, rolled-over or renewed employee benefit plan deposits will not be eligible for "pass-through" insurance coverage.

                        Previously obtained employee benefit deposits continue to receive "pass-through" insurance coverage unless or until they are renewed, rolled-over or redeposited at a time when "pass-through" insurance coverage is not available.  A sample disclosure is included in the Federal Register preamble to the final regulation and a copy is attached.

                (4)    "Catch-Up Disclosure Provision." If an institution has, as of July 1, 1995, employee benefit plan deposits that, at the time such deposits were placed with the institution, were not eligible for "pass-through" deposit insurance coverage (i.e., deposits made between December 19, 1992, the effective date of section 311 of FDICIA, and July 1, 1995, the effective date of the final rule, and the institution did not satisfy the criteria of 2(a)(2) of this memorandum) then the institution must provide the upon-opening-an-account disclosures to the affected employee benefit plan depositors.  The disclosure must be made within 10 business days of July 10, 1995 (i.e., by July 17, 1995).

                (5)    Definition of "Employee Benefit Plan Depositor." The term "employee benefit plan depositor" means the person(s) administrating or managing an employee benefit plan and not each plan participant that would receive "pass-through" insurance coverage.

        d.    Form of Disclosure.  The final rule does not establish any specific procedures for the required disclosures except for a general requirement that they be "clear and conspicuous." Additional information may be provided with the required disclosure as long as it continues to meet the "clear and conspicuous" standard.  For example, an institution that is opening an employee benefit plan account may provide a separate written disclosure statement to the employee benefit plan depositor or clearly reference the specific section in the deposit agreement that contains the disclosure information.

The two sample disclosures attached are included in the preamble to the final rule. One applies when a bank is opening an account and the other applies when "pass-through" insurance coverage would no longer be available for new, rolled-over or redeposited funds.  These sample disclosures are intended to ease the compliance burden and to provide a "safe harbor" for banks.  However, institutions do not have to use the sample disclosures and modification of the sample disclosures is permissible.  For example, institutions may combine the upon-request and the upon-opening-an-account disclosures.

3.    Examination Procedures.  The following examination procedures should be implemented when conducting on-site safety and soundness examinations:

        a.    Quickly determine whether the bank has any employee benefit plan deposits or intends to accept any employee benefit plan deposits.

        b.    If so, briefly review the procedures developed by the bank to ensure compliance with section 330.12 of the FDIC's regulations. This would include:

                (1)    a determination that sample disclosures have been developed and shared with the appropriate bank personnel, and

                (2)    that procedures have been developed to provide the appropriate disclosures to employee benefit plan depositors when opening a new account and when an existing employee benefit plan depositor (administrator or manager) makes a request for information.

        c.    Determine if the bank was less than "well capitalized" between December 19, 1992 and July 1, 1995 and is therefore subject to the one time, required "catch-up" disclosure requirements.  If so, determine if the required disclosures have been made.  Examiners only need to perform this procedure at the first examination conducted after July 1, 1995.

        d.    Determine if the institution may become less than "well capitalized" in the near future.  If so, advise institution management of the required disclosures under section 330.12(h)(3) when "pass-through" insurance coverage is no longer available and remind them to have procedures ready to quickly notify front-line deposit services persons.

No institution is required to maintain any list of employee benefit plan depositors.  A list can be made when needed.  However, if an institution is unable to identify which deposit accounts are employee benefit plan deposits, a blanket disclosure to all depositors may be necessary to comply with this section.  Institutions can avoid this situation by identifying employee benefit plan deposits on their books.

4.    Responsibility and Action.  Please distribute a copy of this memorandum to all examiners.  Although the final rule is not effective until July 1, 1995, the above-described examination procedures should be implemented immediately to assist effected institutions in complying with this new rule.  Copies of this memorandum will be provided to the other federal regulators for distribution to their examiners.

5.    Effective Date.  This memorandum is effective upon receipt and is outstanding until cancelled.

Attachment


Sample disclosures  1

    1.    A sample disclosure that an insured depository institution may use when a depositor opens an account consisting of employee benefit plan deposits is as follows:-

      Under federal law, whether an employee benefit plan deposit is entitled to per-participant (or "pass-through") deposit insurance coverage is based, in part, upon the capital status of the insured institution at the time each deposit is made. Specifically, "pass-through" coverage is not provided if, at the time an employee benefit plan deposit is accepted by an FDIC-insured bank or savings association, the institution may not accept brokered deposits under the applicable provisions of the Federal Deposit Insurance Act.  Whether an institution may accept brokered deposits depends, in turn, upon the institution's capital level.  If an institution's capital category is either "well capitalized," or is "adequately capitalized" and the institution has received the necessary broker deposit waiver from the FDIC, then the institution may accept brokered deposits.  If an institution is either "adequately capitalized" without a waiver from the FDIC or is in a capital category below "adequately capitalized," then the institution may not accept brokered deposits.  The FDI Act and FDIC regulations provide an exception from this general rule on the availability of "pass-through" insurance coverage for employee benefit plan deposits when, although an institution is not permitted to accept brokered deposits, the institution is "adequately capitalized" and the depositor receives a written statement from the institution indicating that such deposits are eligible for insurance coverage on a "pass-through" basis.  The availability of "pass-through" insurance coverage for employee benefit plan deposits also is dependent upon the institutions compliance with FDIC recordkeeping requirements.

      [Name of institution]'s capital category currently is [insert prompt corrective action capital category].  Thus, in our best judgement, employee benefit plan deposits are currently eligible for "pass-through" insurance coverage under the applicable federal law and FDIC insurance regulations.

      Under the FDIC's insurance regulations on employee benefit plan deposits, an insured bank or savings association must notify employee benefit plan depositors if new, rolled-over or renewed employee benefit plan deposits would be ineligible for "pass-through" insurance and must provide certain ratios on the institution's capital condition to employee benefit plan depositors who request such information.  If you would like additional information on [name of institution]'s capital condition, please make a request [describe procedures for obtaining the additional capital information].

    2.    A sample disclosure that an insured depository institution may use when new, renewed or rolled-over employee benefit plan deposits will not be eligible for "Pass-through"insurance coverage is as follows:

      On [date] [name of institution]'s capital category changed from [previous PCA category] to [current PCA category].  Because of this change in [name of institution]'s capital category and the institution's inability otherwise to satisfy the applicable FDIC requirements in this regard, any employee benefit plan funds deposited, rolled-over or renewed with [name of institution] after [date] will NOT be eligible for "pass-through" (or per-participant) deposit insurance coverage under §330.12 of the FDIC's regulations.  Accordingly, plan deposits made, rolled-over or renewed after (date) will be aggregated and insured only up to $100,000.  This unavailability of "pass-through" insurance coverage on new, rolled-over or renewed deposits will continue until the institution's capital category improves and/or other applicable requirements are satisfied.  Deposits made over the period of time when "pass-through" insurance coverage is unavailable will not be eligible for "pass-through" coverage unless and until these deposits are rolled-over or renewed at a time when "pass-through" insurance coverage is again available. "Pass-through" insurance coverage on deposits made before [insert date when "pass-through" coverage no longer is available] is not affected.


Footnotes

1.  Federal Register, Vol. 60, No. 27, February 9, 1995, at 7706.  Return to text


SR letters | 1995