Important revisions to the Federal Deposit Insurance Corp.'s insurance rules were among the many changes to federal banking law made by the FDIC Improvement Act of 1991.

Some of those changes will be come effective on Sunday, the second anniversary of its enactment.

The amendments to the insurance provisions of the Federal Deposit Insurance Act affect mainly retirement accounts and others related to employee benefit plans.

Significant changes in the deposit insurance coverage of such accounts became effective a year ago. Other revisions affecting retirement accounts (and some nonretirement accounts will take effect on Sunday.

Basic Coverage Unchanged

Though the revisions to the FDIC insurance rules are significant, more basic areas of deposit insurance coverage were not altered by the 1991 law.

Thus, for example, the separate coverage available for individual accounts, joint accounts, and payable-upon-death accounts remains unchanged.

The change that is likely to affect the greatest number of depositors is the new rule limiting to $100,000 the insurance coverage on a depositor's interest in certain retirement-type accounts held at the same insured bank or thrift.

The Magic $100,000

IRAs and Keogh plan accounts, for example, are now insured separately for each depositor up to $100,000.

Thus a depositor could be insured up to $200,000 relative to his or her interests in such accounts per insured institution.

But starting next Sunday, a depositor's interests in IRAs and self-directed Keogh plans will be aggregated and insured to a limit of $100,000.

Also, any interest a depositor may have in so-called "section 457 plan accounts" -- a type of deferred compensation plan account for employees of state and local governments and nonprofit organizations -- will be aggregated with his or her interests in any IRAs and self-directed Keoghs held at the same insured institution -- and insured to a limit of $100,000.

The same will be the case for self-directed defined contribution plan accounts, such as 401(k) plans.

In essence, a depositor with an interest in these four types of accounts at any one insured institution is currently insured to a maximum of $400,000. From Sunday on, the limit will be $100,000.

Grandfather Provision

However, the new rule applies only to deposits made, renewed, or rolled over on or after Dec. 19, 1993. Earlier deposits come under a grandfather provision.

Another insurance rule change required by the 1991 law and now in effect for a year concerns the insurance coverage of employee benefit type accounts, such as retirement accounts, with multiple participants.

The insurance coverage for such deposits, in essence, is based upon the capital level of the insured bank or thrift where the deposits are made.

Complex Legislation

The law here is somewhat complicated. Even a year after its effective date, the FDIC recieved many questions about this rule change.

The FDIC Improvement Act requires, and FDIC insurance regulations provide, that deposits of retirement and employee benefit plans (including section 457 plans) are insured per-participant in the plan, so long as each such participant has a determinable (noncontingent) interest in the deposits and the FDIC record-keeping requirements are satisfied.

The shorthand expression is that the insurance "passes through" to each participant who has an interest in the plan deposits.

Brokered Deposits

In order for his pass-through coverage to be provided, however, the insured institution must be able to accept "brokered deposits" under section 29 of the Federal Deposit Insurance Act.

That, in turn, means that the institution must meet certain capital requirements at the time the employee benefit plan deposits are accepted.

In particular, the institution must be "well capitalized" or "adequately capitalized" and have a waiver from the FDIC to accept brokered deposits.

This is the first time Congress has keyed deposit insurance to the capital level of an insured institution.

The 1991 law and the FDIC rules provide for an exception to the exception.

This applies when an institution that is not permitted to accept brokered deposits meets the applicable capital requirements and the depositor obtains a writen notice from the institution that the deposits in question are eligible for pass-through insurance coverage.

In that situation, an employee benefit plan deposit would be entitled to per-participant insurance coverage.

The FDIC is seeking comment on a proposal to require insured banks and thrifts to disclose certain capital information to existing and prospective employee benefit plan depositors.

The purpose of the requirement would be to reduce the uncertainty about whether employee benefit plan deposits are eligible for per-participant insurance coverage and to require insured institutions to provide timely disclosure to employee benefit plan depositors when such coverage is no longer available.

Fiduciary Role

Another revision that will become effective next week concerns the insurance of deposits maintained by an insured bank or thrift as fiduciary -- for example, an agent, custodian, or trustee -- for the owner of the funds.

Currently, section 7(i) of the Federal Deposit Insurance Act provides, generally, that deposits held by an insured bank or thrift in any type of fiduciary capacity -- whether held in the institution's trust department, on its banking side, or in other insured institutions -- are insured up to $100,000 per principal or beneficiary.

This coverage is separate from the insurance coverage afforded in connection with other deposits held in the same bank or thrift by the principal or beneficiaries in other rights or capacities.

Because of the broad scope of the statutory language, this separate insurance coverage has applied in virtually all situations where a bank or thrift acts as agent or trustee.

Section 7(i) coverage is provided despite the general rule under the insurance regulations that funds owned by a principal and deposited by an agent for the principal at a particular institution are insured as the funds of the principal, thereby requiring aggregation with any other funds held by or for the principal at the same institution and insured to a limit of $100,000.

Reduction in Coverage

Starting next Sunday, however, separate insurance coverage under section 7(i) of the Federal Deposit Insurance Act will be limited to situations where a bank or thrift is serving as the trustee of an irrevocable trust.

The trust must be established pursuant to a statute or writeen trust agreement and, as noted, must be irrevocable.

This represents a significant reduction in the insurance coverage available under section 7(i) of the Federal Deposit Insurance Act.

Bank Investment Contracts

The preamble to the FDIC's revised insurance rules describes a "bank investment contract" as a separately negotiated deposit agreement between an employee benefit plan and an insured bank or thrift with terms that differ materially from those offered by the institution on deposits available to its individual retail customers.

These contracts currently are insured as any other type of deposit.

Starting next week, however, bank investment contracts that expressly permit "benefit-responsive withdrawals or transfers" will not be considered insured deposits -- and thus will not be entitled to deposit insurance.

"Benefit-responsive" withdrawals or transfers are defined those made when a guaranteed rate is in effect and without "substantial penalty" (as defined in the revised regulations) to pay benefits provided by the employee benefit plan or to permit a participant or beneficiary to redirect the investment of his or her funds.

Last Chance

Time deposits made at an insured bank or thrift before Dec. 19 will be subject to the insurance rules in effect when the deposits were made.

Deposits made next week or thereafter, including any rolled-over and renewed time deposits, will be subject to the new rules.

Mr. DiNuzzo is a counsel in the regulation and legislation section of the legal division of the Federal Deposit Insurance Corp.

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