Comment: New Disclosure Rules for Employee Benefit Plans

Starting this Saturday, all FDIC-insured banks and thrifts will have to comply with new disclosure requirements on employee benefit plan accounts. The requirements are intended to inform employee benefit depositors about the insurance available on their accounts.

The FDIC determined that the disclosure requirements were necessary because Congress pared back deposit insurance on employee benefit plan accounts in the FDIC Improvement Act of 1991.

The law made various changes to FDIC insurance rules. One of those revisions, which became effective on Dec. 19, 1992, affected the availability of so-called pass-through coverage for employee benefit plan deposits.

Pass-through coverage means that the insurance passes through the depositor of the funds (usually a plan administrator or trustee for an employee benefit plan) to each owner of the funds (the employee participants in the plan).

For example, if a plan administrator places a $1 million pension plan deposit with a bank and there are 10 employee participants of the plan, each of whom has a $100,000 interest in the deposit, the insurance of the account would be $100,000 per participant, or $1 million.

Employee benefit plan accounts that are not eligible for pass-through coverage are aggregated and insured to a limit of $100,000 per plan. This can be a significant limitation for plans with many employees.

In the FDIC Improvement Act, Congress limited the availability of pass- through coverage for employee benefit plan deposits to deposits made at banks and thrifts that meet certain capital requirements.

Pass-through insurance is available for employee benefit plan deposits only if such deposits are made at an insured bank or thrift that is well capitalized at the time the deposit is made.

Pass-through coverage is also available if the institution is adequately capitalized and has either obtained a brokered-deposit waiver from the FDIC or provides a specific written statement to an employee benefit plan depositor that such deposits are eligible for pass-through insurance coverage.

Employee benefit plan deposits are not entitled to pass-through insurance coverage when placed with insured institutions that are adequately capitalized but have not obtained a waiver from the FDIC; have elected not to provide a written statement under the statutory exception; or are undercapitalized. New Disclosure Rules

The disclosure rules that become effective Saturday apply only to employee benefit plan accounts. The most common of these are corporate pension and profit-sharing plans, 401(k) retirement accounts, Keogh plan accounts, deferred compensation plan accounts, and simplified employee pension (SEP) plan accounts.

The disclosure requirements trigger in three situations: when an employee benefit plan customer requests information on the account, when a new employee benefit plan account is opened, and when a bank's or thrift's capital status changes so that new employee benefit plan deposits would not be eligible for pass-through coverage.

The specific requirements are:

Upon request. Within five business days after an employee benefit plan depositor (the administrator or trustee) requests information on the insurance of the account, an institution must provide in writing: its three capital ratios; its prompt-corrective-action capital category; and whether, in the institution's judgment, employee benefit plan deposits would be eligible for pass-through insurance protection.

Upon opening an account. When a new employee benefit plan account is opened, the institution must provide in writing: an accurate description of the requirements for pass-through insurance coverage; the institution's capital category; and whether in the institution's judgment the employee benefit plan deposits are eligible at that time for pass-through insurance coverage.

When pass-through coverage is no longer available. Whenever new, rolled over, or renewed employee benefit plan deposits would not be eligible for pass-through insurance coverage, the institution has 10 business days to explain this in writing to all affected employee benefit plan depositors and disclose its new capital category to them.

The FDIC provided sample disclosures in the Feb. 13 Federal Register and in a Feb. 3 financial institution letter sent to all insured banks and thrifts. Catch-Up Provision

The new disclosure requirements also include a so-called catch-up provision for employee benefit plan deposits accepted between the Dec. 19, 1992, effective date of the FDIC Improvement Act's limitations on pass- through coverage and the effective date of the disclosure requirements.

The rule is: If as of July 1, 1995, an insured bank or thrift has employee benefit plan deposits that are not eligible for pass-through deposit insurance coverage, the institution must notify those depositors by July 17 and provide the prescribed disclosure information.

This requirement applies only to funds not entitled to pass-through coverage when deposited and still not eligible for pass-through coverage on July 1. Answers to Common Questions

The FDIC has received numerous questions on the coverage of employee benefit plan accounts and the new disclosure requirements. The answers to the most common ones are:

*The term "employee benefit plan depositor" means the person or people administrating or managing an employee benefit plan. The term does not mean each plan participant entitled to pass-through insurance coverage.

*Employee benefit plan deposits that qualify for pass-through coverage when they are made will continue to be eligible for such coverage unless or until they are renewed, rolled over, or redeposited when pass-through insurance coverage is not available.

*The reverse is also true. Employee benefit plan deposits that do not qualify for pass-through coverage when they are made will continue to be ineligible for such coverage unless or until they are renewed, rolled over, or redeposited when pass-through insurance coverage is available.

*The new disclosure rules apply only to employee benefit plan accounts. Other accounts to which the pass-through rules also apply, such as agency or allocated trust funds, are not affected.

*The upon-opening-an-account disclosures apply only to newly established accounts. Though existing, renewed, or rolled-over accounts are not subject to disclosure requirements, institutions have the discretion to make such disclosures.

*Institutions are not required to maintain a separate list of employee benefit plan accounts. However, if and when new, renewed, or rolled-over employee benefit plan deposits are no longer eligible for pass-through coverage, the institution may have to send the required disclosures to all of its depositors if a list of employee benefit plan accounts cannot be developed.

Nevertheless, in order to satisfy the record-keeping requirements for pass-through coverage, each employee benefit plan account must be properly labeled and identified as such.

*Banks that have trust departments acting as administrators or trustees of employee benefit plans must provide the required disclosure documents to the trust officers (who are acting as plan administrators or trustees) if and when those officers place employee benefit plan deposits with the bank. This includes the institution's own retirement plan. Legislative Alternative

Perhaps Congress should simply prohibit institutions that do not meet applicable capital requirements from accepting employee benefit plan deposits, instead of limiting the availability of pass-through coverage to banks and thrifts at those capital levels.

The current law is the only insurance-related statute that ties deposit insurance to an institution's capital. The statutory and regulatory rules surrounding and implementing this tie-in are somewhat difficult to follow, and may confuse the banking industry and the public.

Mr. Gautsch is an examination specialist with the FDIC's division of supervision. Mr. DiNuzzo is an acting senior counsel with the agency's legal division.

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