Specific Limits on Insurance Coverage by Account Ownership

Individual accounts

All accounts owned by an individual in his/her own name at the same institution are added together and insured up to $250,000 in total. [12 CFR 330.6(a); 12 CFR 745.2(a)(1)] This is true even if the funds in the account are the community property of the named individual and his/her spouse. [12 CFR 330.6(c)] An account that allows withdrawals by more than one natural person is ordinarily treated as a joint account for insurance purposes. However, if the financial institution records clearly show that the account is owned by just one individual, and the others are merely authorized to make withdrawals, the account will be treated as an individual account. Also, if the account owner has signed a Power of Attorney authorizing another person to make withdrawals, the account will be treated as an individual account. [12 CFR 330.6(a)]

Sole-proprietorship accounts

A “sole proprietorship” is a form of business in which one person owns all the assets of the business. Partnerships and corporations are different forms of business. A sole-proprietorship account is treated as the individual account of the owner of the sole proprietorship. So, all of the sole-proprietorship accounts and all other accounts treated as individual accounts of the owner at the same institution are added together and insured up to $250,000 in total. [12 CFR 330.6(b)]

Decedent’s accounts and accounts held by the administrator or executor of a decedent’s estate

A “decedent” is a person who has died. All accounts in the name of the decedent or in the name of an administrator or executor of the decedent’s estate are added together and insured up to $250,000 in total. These funds are insured separately from any individual accounts of the administrator, executor, other personal representative, or any beneficiaries of the decedent’s estate. [12 CFR 330.6(d) 12 CFR 745.5]

Agency or nominee accounts

Agency or nominee accounts are those held in the name of one person as agent or nominee for another person. The agent or nominee manages the account on behalf of the other person who is the legal owner of the funds. Such accounts are generally titled something like “John Doe, as agent for Mary Doe.” These accounts are treated as if they were individual accounts of the actual owner of the funds. So, if the account is titled “John Doe, as agent for Mary Doe,” the account is treated, for insurance purposes, as an individual account of Mary Doe. Its balance is added to the balances of all other accounts treated as individual accounts of Mary Doe and the total is insured up to $250,000. [12 CFR 330.7(a); 12 CFR 745.3(a)(2)] If there are two or more persons who are legal owners of the funds, the account is treated as a joint account of the legal owners.

[12 CFR 330.7(c)]

The FDIC regulations (but not the NCUA regulations) say this rule does not apply when the funds are deposited by an insured depository institution acting as a trustee of an irrevocable trust. Instead, the provisions of Section 13 of the FDIC regulations apply. [12 CFR 330.7(a)] The provisions of Section 13 are described later in the chapter under the heading “Funds held by financial institution as trustee.”

Guardian, custodian, and conservator accounts

These are accounts held in the name of one person for the benefit of his/her ward. A “ward” is someone who, for one reason or another (such as age), is incapable of handling his/her own affairs. Included within this type of account, for insurance purposes, are accounts established under the Uniform Gifts to Minors Act. Under FDIC regulations, these accounts are treated as agency or nominee accounts. [12 CFR 330.7(b)] This means that, like agency and nominee accounts, they are treated as individual accounts of the actual owner of the funds. So, the account balances of all guardian, custodian, and conservator accounts established for the benefit of any one person are added to the balances of all other accounts treated as individual accounts of that person and are insured up to $250,000 in total. However, under NCUA regulations, such an account is insured up to $250,000 separately from any other accounts of the guardian, custodian, conservator, ward, or minor. [12 CFR 745.3(b)]

If there are two or more persons who are legal owners of the funds, the account is treated as joint account of the legal owners. [12 CFR 330.7(c)]

Mortgage servicing accounts

These are accounts into which a mortgage borrower makes payments in accordance with his/her mortgage loan agreement. Sometimes the payments are made up of principal and interest on the loan. In such a case, the institution at which the account is maintained forwards the payments to either the holder of the mortgage or to an investor in securities backed by the mortgage. Other times, the payments are made up of taxes and insurance. The account-holding institution forwards the payments to the insurance company, or the taxing authority, when the insurance payment or taxes are due.

Under FDIC rules, insurance coverage varies depending on whether the account contains principal and interest payments or taxes and insurance payments. The FDIC considers principal and interest accounts as owned by the person or entity to which the payments of principal and interest are eventually going (such as the holder of the mortgage or the investor in a mortgage-backed security). Each such owner is insured up to $250,000 multiplied by the number of mortgagors for the total of all the owner’s interests in this type of account at a particular institution provided the FDIC’s record-keeping requirements are satisfied. This insurance is aggregated with accounts treated as individual accounts at the same institution if the owner is an individual and with any corporate accounts at the institution if the owner is a corporation. [12 CFR 330.7(d)]

The FDIC considers tax and insurance accounts as owned by the borrower, or the borrowers making the payment. Each borrower’s interest in this type of account at a particular institution are insured up to a total of $250,000—provided the FDIC’s record-keeping requirements are satisfied. This insurance is aggregated with accounts that are treated as individual accounts of the borrower at the same institution. [12 CFR 330.7(d)]

Under NCUA rules, any loan payments received by a federal credit union prior to remittance to other parties are considered to be funds owned by the borrowers and are added to individual accounts of the borrowers and insured up to a total of $250,000. NCUA regulations do not deal with loan-payment accounts held by state-chartered, insured credit unions. [12 CFR 745.3(a)(3)]

Custodial accounts for Native Americans

FDIC regulations provide separate insurance for custodial accounts for Native Americans. We are referring to accounts containing funds deposited by the Bureau of Indian Affairs on behalf of a Native American, pursuant to Section 162(a) of Title 25 of the United States Code. This also includes accounts containing funds deposited by any other disbursing agent of the U.S. on behalf of a Native American pursuant to similar statutory authority. [12 CFR 330.7(e)]

Unlike other custodial accounts, these accounts are insured separately from any other accounts maintained by the Native American in the same financial institution. The interests of each Native American in these sorts of accounts at a single financial institution are insured up to a total of $250,000 separately from any other accounts maintained by that Native American at the same financial institution. [12 CFR 330.7(e)]

NCUA regulations do not specifically address this type of account. Presumably, this sort of account would be treated as a custodial account described above and insured up to $250,000 separately from the individual accounts of the Native American at the credit union.

Insurance annuity contract accounts

FDIC regulations also provide separate coverage for insurance annuity contract accounts. These are accounts into which insurance companies or other corporations make deposits for the purpose of funding life insurance or annuity contracts. The account must meet certain conditions before it will be treated as an insurance annuity contract account for deposit insurance purposes. The conditions are: (1) the corporation establishes a separate account for such funds; (2) the account is immune from any other business claims against the corporation; and (3) the account is immune from other creditors of the corporation if the corporation becomes insolvent and its assets are liquidated. [12 CFR 330.8(a)] The interests of each annuitant (person receiving payments under the annuity) in this type of account are insured up to $250,000 separately from any other type of account held by the annuitant, the insurance company, or corporation in the same financial institution. [12 CFR 330.8(b)]

Since NCUA regulations do not address coverage of this sort of account, it is unclear how such accounts would be insured at a credit union. Arguably, since the funds could be said to be owned by the insurance company, the balance might be added to other accounts of the company and insured up to $250,000 under the corporate account rules described later.

Joint accounts

A joint account is one in which more than one individual has a current (as opposed to future) ownership interest. A joint account can take the form of a joint account with right of survivorship or an account held by the owners as Tenants in Common or as tenants by the entirety. The co-owners must meet certain requirements in order for the account to “qualify” as a joint account for insurance purposes.

First, all the co-owners must be natural persons or human beings. [12 CFR 330.9(c)(1)(i)] If any co-owner is a corporation or partnership, the account does not qualify.

Third, each co-owner must have withdrawal rights equal to that of the other co-owner(s). [12 CFR 330.9(c)(1)(iii); 12 CFR 745.8(b)]

If any of these conditions is not met, the account is insured as an individual, corporation, partnership, or association account owned by each co-owner in proportion to that co-owner’s actual ownership interest in the account. These amounts are added to the co-owner’s single ownership accounts for insurance purposes. [12 CFR 330.9(d); 12 CFR 745.8(c)]

Qualifying joint accounts are insured separately from the individual accounts (and accounts insured as individual accounts) of the co-owners held at the same financial institution. [12 CFR 330.9(a); 12 CFR 745.8(a)] For example, suppose John Doe has an individual account with a balance of $160,000. John and Mary Doe have a qualifying joint account with a balance of $175,000. Both accounts are held at Last National Bank. Both accounts are insured in full since qualifying joint accounts are insured separately from the individual accounts of the co-owners. Furthermore, qualifying joint accounts in the names of both a husband and wife that are comprised of community property funds are added together and insured up to $500,000, separately from any funds deposited into accounts bearing their individual names. [12 CFR 330.9(a)]

Though qualifying joint accounts are insured separately, there is a limit to the coverage. Any one person can have his/her own interest in various joint accounts at a particular financial institution insured only up to a total of $250,000. [12 CFR 330.9(b); 12 CFR 745.8(a)] For purposes of this rule, the interests of co-owners are deemed to be equal; different ownership interests can be specified in the account records if the co-owners hold the account as Tenants in Common. [12 CFR 330.9(e)]

For example, suppose John and Mary Doe have a joint account with a balance of $150,000. John and Suzie Doe have a joint account with a balance of $200,000. John and Frankie Doe have a joint account with a balance of $225,000. All of the accounts are held at Last National Bank. John’s interests in these three accounts are added together and insured up to $250,000 in total. Unless the account records specify otherwise, John is deemed to have a one-half interest in each of these accounts. This means that his interest is $75,000 in the John and Mary account, $100,000 in the John and Suzie account, and $112,500 in the John and Frankie account. John’s total interest in joint accounts at Last National, therefore, is $287,500. $250,000 of the interest is insured and $37,500 is uninsured.

Revocable trust accounts

These are accounts set up so that upon the death of the last surviving owner, the funds in the account will belong to one or more beneficiaries previously named by the owner or owners. Until the death of the last surviving owner, the beneficiaries have no interest in the account. The owner(s) can do anything he/she likes with the account, including withdrawing the entire balance and closing the account or changing beneficiaries. These accounts can also be known as “tentative,” “Totten” trust accounts, or “pay-on-death” accounts.

The insurance of these accounts varies depending on whether the beneficiaries “qualify.” To qualify, a beneficiary must be a natural person, a charitable organization, or a tax-exempt entity. [12 CFR 330.10(c); 12 CFR 745.4(c)] If the beneficiaries qualify, then the interest of each owner is insured up to $250,000, multiplied by the number of qualifying beneficiaries on the account. This insurance is separate from the insurance of any other accounts of the beneficiary and the owner. [12 CFR 330.10(a); 12 CFR 745.4(b)] The owners’ interests are deemed equal—unless otherwise stated in the financial institution’s records. [12 CFR 330.10(f)(1); 12 CFR 745.4(f)(1)]

For example, suppose John and Mary Doe open a revocable trust account naming their daughter, Suzie, as the beneficiary. Since Suzie is a qualified beneficiary, up to $500,000 in the account will be insured separately from any other accounts at the same financial institution owned by John, Mary, or Suzie. This is because both John’s and Mary’s interests in the account will be insured up to $250,000 each times the number of beneficiaries. If they add their son, Frankie, as a beneficiary, up to $1,000,000 in the account will be insured separately.

If a beneficiary does not qualify, then the funds in the account that correspond to that beneficiary are treated as if they were an individual account of the owner. If there is more than one owner, the funds corresponding to the nonqualifying beneficiary are divided equally between the owners and treated as each owner’s individual account. This is added to other individual accounts (and accounts insured as individual accounts) held by the owner at the same financial institution and insured up to $250,000 in total. [12 CFR 330.10(d); 12 CFR 745.4(d)]

For example, suppose John and Mary Doe open a revocable trust account naming their daughter, Suzie, and John’s company, ABC, Inc., as equal beneficiaries. Since Suzie and ABC, Inc., are equal beneficiaries and only Suzie is a qualified beneficiary, then only half the funds in the account are treated as being in a revocable trust account for insurance purposes. The other half are treated as individual accounts of John and Mary. John’s and Mary’s interests are deemed equal unless otherwise stated in the financial institution’s records. So if the account balance is $300,000, then $150,000 is treated as a revocable trust established by John and Mary for the benefit of Suzie. This $150,000 is fully insured since John’s and Mary’s interests, $75,000 each, are insured up to $250,000 each. The remaining $150,000 is treated as the individually owned funds of John and Mary, $75,000 each.

If two people own a revocable trust account and name only themselves as beneficiaries, the account is treated as a joint account of the two people rather than a revocable trust account. [12 CFR 330.10(f)(2) and 12 CFR 745.4(f)(2)] The rationale is that such an account is the functional equivalent of a joint account with survivorship.

Under the FDIC rules, the title of a revocable trust account must refer to the owner’s intention that the funds pass to the beneficiary on the owner’s death. The title must use a commonly accepted term such as “in trust for,” “as trustee for,” “payable-on-death,” or “POD” to describe the owner’s intention. [12 CFR 330.10(b)] According to a staff interpretation, a title that suggests that a trust is involved is probably sufficient—such as “Jones Family Trust” or “Jones Family Revocable Trust.” The names of the beneficiaries must be in the deposit account records. It is not sufficient to merely list “my children” as beneficiaries. The beneficiaries must be named. [FDIC-91-1, November 30, 1990]

[12 CFR 330.10(e); 12 CFR 745.4(e)]

Remember that the account must have both features; it must have more than five beneficiaries and have a balance that exceeds $1.25 million. If both of those are true, then the special coverage rule applies. Here’s an example:

A has a living trust account with a balance of $1,500,000.

Under the terms of the trust, upon A’s death, A’s three children are each entitled to $125,000, A’s friend is entitled to $12,500 and a designated charity is entitled to $175,000. The trust also provides that the remainder of the trust assets shall belong to A’s spouse.

In this case, because the balance of the account is over $1,250,000 and there are more than five different beneficiaries named in the trust, the maximum coverage available to A would be the greater of: $1,250,000 or the aggregate of each different beneficiary’s interest to a limit of $250,000 per beneficiary. The beneficial interests in the trust considered for purposes of determining coverage are: $125,000 for each of the children (totaling $375,000), $12,500 for the friend, $175,000 for the charity, and $250,000 for the spouse ($937,500, subject to the $250,000 limit per beneficiary). The aggregate beneficial interests, thus, are $812,500. Hence, the maximum coverage afforded to the account owner would be $1,250,000, the greater of $1,250,000 or $812,500.

Finally, for deposit accounts held in connection with a living trust that provides for a life-estate interest for designated beneficiaries, the value of each such life-estate interest is $250,000 for purposes of determining the insurance coverage available to the account owner. [12 CFR 330.10(g); 12 CFR 745.4(g)]

Corporate, partnership, and unincorporated association accounts

All accounts owned by a corporation, a partnership, or an unincorporated association at a particular financial institution are added together and insured up to $250,000 in total. [12 CFR 330.11(a)(1), 12 CFR 330.11(b), and 12 CFR 330.11(c); 12 CFR 745.6] The entity must, however, be engaged in an “independent activity,” which means, under FDIC rules, that the entity must be operated primarily for some purpose other than to increase deposit insurance. [12 CFR 330.1(g)] (NCUA regulations define “independent activity” as “an activity other than one directed solely at increasing insurance coverage.” [12 CFR 745.6] Note the slight difference between the NCUA definition and the FDIC definition.) If the corporation, partnership, or unincorporated association is not engaged in an independent activity, then the funds in the account are deemed to be owned by the owners of the corporation, or the partners in the partnership, or the persons making up the unincorporated association. The interest of each of these persons is added to the individual accounts (and accounts treated as individual accounts) of that person at the same financial institution and the total is insured up to $250,000. [12 CFR 330.11(d); 12 CFR 745.6]

The FDIC regulations provide a few additional rules for these sorts of accounts. First, accounts held by divisions or units of a corporation are not insured separately from other accounts of the corporation. The division or unit must itself be separately incorporated before separate insurance will be provided. [12 CFR 330.11(a)(1)] Secondly, accounts that the corporation holds in a representative or fiduciary capacity are insured as if they were held in the name of the true owner. [12 CFR 330.11(a)(1)] Third, the term “partnership” is defined as any association of two or more persons or entities formed to carry on, as co-owners, an unincorporated business for profit. [12 CFR 330.11(b)] Third, the term “unincorporated association” is defined as an association of two or more persons formed for some religious, educational, charitable, social, or other noncommercial purpose. [12 CFR 330.11(c)] And finally, trusts and other business arrangements that register with the SEC are treated as corporations under this rule, with the exception of “Section 529 plans.” These are state-sponsored qualified tuition savings programs, and, as of June 9, 2005, these plans have “pass-through” coverage as long as the funds in the account can be traced to particular investors or participants and the existence of the trust relationships are disclosed as the insurance rules otherwise require other trust relationships to be disclosed. [12 CFR 330.11(a)(2)] “Pass-through” coverage means that each participant’s interest is insured up to $250,000 instead of $250,000 for the entire plan.

Irrevocable trust accounts

An irrevocable trust account is an account that contains funds held by a trustee for the benefit of one or more beneficiaries under a trust agreement created by a “settlor” or “grantor.” Once created, the trust is irrevocable, which means that the settlor or grantor cannot do away with the interests of the beneficiaries. This is different from the revocable trust accounts already described. The owner of a revocable trust account can do what he/she likes with the balance of the account as long as he/she is alive. The beneficiary of a revocable trust account has an interest in the account only upon the death of the owner. The beneficiary of an irrevocable trust, on the other hand, has an interest in the funds of the trust as soon as the trust is created.

The insurance of irrevocable trust accounts varies depending on whether the beneficiary’s interest is “contingent” or not. The beneficiary’s interest is contingent if it is uncertain, or if it depends on something happening in the future. However, the interest will still be considered noncontingent if the only contingencies on which the beneficiary’s interest rests are those covered by the present-worth tables set forth in Section 20.2031-7 of the Federal Estate Tax Regulations or any similar present-worth or life expectancy tables which may be adopted by the Internal Revenue Service. [12 CFR 330.1(l); 12 CFR 745.2(d)(1)] The sorts of contingencies covered by these tables basically have to do with the life expectancy of individuals.

Where the interests are noncontingent, the interests of each beneficiary in one or more irrevocable trust accounts, deriving from the same settlor or grantor, are added together and insured up to $250,000 in total. This insurance is separate from the insurance provided for other accounts at the financial institution maintained by the beneficiary, the settlor or grantor, or the trustee. Where the trust is established by more than one settlor or grantor, the interest of a beneficiary derived from any one of the settlors or grantors is pro rata to the settlor’s or grantor’s contribution to the trust. [12 CFR 330.13(a); 12 CFR 745.9-1(a)]

For example, suppose Mary is a beneficiary with noncontingent interests under two separate trust accounts at First National Bank. Frank is the settlor on trust number one. Frank and John are co-settlors on trust number two. Mary’s interest under trust number one is added to the portion of Mary’s interest in trust number two that is derived from Frank, and the total is insured up to $250,000. Her interest derived from Frank in trust number two is the percentage of her total interest in trust number two that equals the percentage of Frank’s contributions to trust number two over total contributions to the trust. If Frank contributed 40 percent of trust number two, then 40 percent of Mary’s interest in trust two would be added to her interest in trust number one and the total would be insured up to $250,000. Mary’s interest in trust number two derived from John would be insured up to $250,000. This insurance would be separate from insurance provided for any other types of accounts maintained at the institution by Mary, Frank, or John.

Suppose that Frank establishes a trust naming Mary and Bill as beneficiaries. The trustee deposits the trust funds in an account at Last National Bank. Under the terms of the trust, Mary is to receive the interest earned by the trust funds until her death. Bill is then to receive the remaining trust funds. Since the proportionate values of Mary’s and Bill’s interests can be determined by using the present-worth tables found at 26 CFR 20.2031-7, the interests are noncontingent and are insured up to $250,000 each, as previously described.

Under the NCUA regulation, trust interests created in Coverdell Education Savings Accounts (formerly known as Education IRAs) established in connection with Section 530 of the Internal Revenue Code [26 USC 530] are insured as an irrevocable trust under these rules. [12 CFR 745.9-1(c)] The FDIC position is apparently the same. [See Your Insured Deposit—Q&A, questions and answers about your insured deposit from the Federal Deposit Insurance Corporation, Q&A 36.]

As we said earlier, insurance is different if the beneficiary’s interest is contingent. All funds in a trust account that represent contingent interests are added together and insured up to $250,000 in total. This insurance is separate from the insurance provided for noncontingent interests in the trust. [12 CFR 330.13(b); 12 CFR 745.2(d)(2)]

For example, suppose Frank establishes a trust naming Mary and Bill as beneficiaries. The trustee deposits the trust funds in an account at Last National Bank. Under the terms of the trust, Mary is to receive the interest earned by the trust funds until her death or until she marries. Bill is then to receive the remaining trust funds. In this case, the value of Mary’s and Bill’s interests are contingent upon whether and/or when Mary gets married. The value of the interests cannot be determined by using the present- worth tables. Therefore, the trust funds are insured up to $250,000 in total.

Credit unions should also note that in order for a trust to qualify for separate insurance, the account records must disclose the names of both the settlor (grantor) and the trustee of the trust, and must contain an account signature card executed by the trustee. [12 CFR 745.2(c)(3)]

You might be interested to know that the FDIC views an account composed of commingled bankruptcy estates established by a Chapter 13 trustee as an irrevocable trust account under this section. In an Advisory Opinion, the FDIC says that such accounts are “ … separately insured up to $100,000 [now $250,000] as to the interest of each debtor’s estate and up to an additional $100,000 [now $250,000] as to any funds in the account that cannot be allocated to a particular debtor’s estate. Thus, such an account would be fully insured so long as the total funds of any one bankrupt debtor’s estate at the same insured institution do not exceed $100,000 [now $250,000] and the total unallocable funds held at any on insured institution by any one person acting as a Chapter 13 trustee do not exceed $100,000 [now $250,000]. Any nonbankruptcy funds deposited at the same institution by the trustee or by any bankruptcy debtor, creditor or other person would be separately insured and would not be aggregated with Chapter 13 trust funds in applying these limits…. In order to qualify for the ’pass-through’ coverage of $100,000 [now $250,000] per bankrupt debtor’s estate, the deposit account records of the insured depository must expressly and specifically disclose the existence of a fiduciary relationship (such as by using the word ‘trust’ or ‘trustee’ and records maintained by or on behalf of the Chapter 13 trustee must detail the extent of each debtor estate’s interest in the commingled funds on deposit.”

In February 1995 (after the issuance of the Advisory Opinion), the FDIC amended its regulations to say substantially what the Advisory Opinion says: “Whenever a bankruptcy trustee…commingles the funds of various bankruptcy estates in the same account at an insured depository institution, the funds of each Title 11 bankruptcy estate will be added together and insured for up to $100,000, [now $250,000] separately from the funds of any other such estate.” [12 CFR 330.13(c)]

Finally, in January of 2008, the FDIC issued a publication that went into great depth on the coverage of trust accounts, both revocable and irrevocable. If you have any questions about trust account coverage, you might find the answer in that publication: FDIC Guide to Calculating Deposit Insurance Coverage for Revocable and Irrevocable Trusts.

Employee benefit plans

“Employee benefit plan” defined. The term “employee benefit plan” in the FDIC regulations includes all employee pension benefit plans, all employee welfare benefit plans, and plans which are both employee pension benefit plans and employee welfare benefit plans. [29 USC 1002(3)] The term also includes Keogh plans and “457 plans,” which, again, are deferred compensation plans for employees of state and local governments and not-for-profit organizations. (Technically, the definition of “employee benefit plan” in the FDIC regulations does not include 457 plans. But the regulation provides the same coverage rules for 457 plans as for other employee benefit plans, so, for our purposes, we will include them within the generic term “employee benefit plan.”)

NCUA regulations give the term employee benefit plan “the meaning given to such term in Section 3(3) of the Employee Retirement Income Security Act of 1974…” and the term “… includes any plan described in section 401(d) of the Internal Revenue Code of 1986…” and “…any eligible deferred compensation plan described in section 457 of the Internal Revenue Code of 1986.” [12 CFR 745.9-2(a)]

If you do not have a clear understanding of this rule, welcome to the club. As the FDIC put it: “Apparently, there are many different versions of BIC-type instruments currently being utilized by employee benefit plans and insured depository institutions and thus it would be very difficult for the FDIC to adopt a definition which encompasses all such instruments but is, at the same time, not over-inclusive.” [Federal Register, May 25, 1993, p. 29961]

Leaving “BICs,” let’s look at the coverage rules for employee benefit plans.

General rule. The general rule is that the interest of each participant in an employee benefit plan will be insured up to $250,000, assuming record-keeping requirements are met and the participant’s interest is “noncontingent.” [12 CFR 330.14(a), 12 CFR 745.9-2(a)] This is called “pass-through” coverage; the $250,000 insurance coverage is “passed through” the plan and extended to the individual participants. Let’s look at these rules in more detail.

“Noncontingent” interest. What does it mean to say the participant’s interest must be “noncontingent?” An employee’s interest is contingent if its value is in doubt or depends on the occurrence of some event in the future. So a “noncontingent” interest would be one whose value can be calculated now, without evaluations of contingencies. [12 CFR 330.14(f)(4)] As we said above, the regulations extend pass-through coverage to noncontingent interests. If the plan includes contingent interests, those interests will be insured, but only to $250,000 in total for all the contingent interests plus any amounts included for future participants. [12 CFR 330.14(e), 12 CFR 745.9-2(b)] (Incidentally, if the value of a person’s interest is in doubt only because it depends on the person’s life expectancy, the interest will still be considered noncontingent. [12 CFR 330.14(f)(4)] We should also point out that the FDIC has stated that an employee’s interest in a 457 plan will receive pass-through coverage—even if the interest is deemed to be contingent. However, the FDIC’s regulation itself says nothing of this exception for 457 plans.)

The value of an individual employee’s noncontingent interest depends on whether the plan is a defined-contribution plan or a defined-benefit plan. For defined-contribution plans, the value is the employee’s account balance on the day the financial institution defaults. This is true whether the account balance was derived from contributions from the employee, the employer, or a combination of the two. [12 CFR 330.14(c)(1)] For defined-benefit plans, the value is the present value of the employee’s interest in the plan, evaluated according to the method of calculation ordinarily used under such plan, as of the date the financial institution defaults. [12 CFR 330.14(c)(2)]

Aggregation rule. The final aspect of employee benefit plan coverage is what we refer to as the “aggregation rule.” The aggregation rule has two components.

First, an employee’s noncontingent interest in a plan is aggregated with any other noncontingent interest of the same person in any other employee benefit plan at the institution established by the same employer or employee organization. [12 CFR 330.14(b)(1), 12 CFR 745.9-2(c)(1)] So, for example, suppose Acme Company has a pension plan and a profit-sharing plan, and the funds of both plans are deposited at Last National Bank. Employee John Doe has a noncontingent interest valued at $212,500 in the pension plan and a noncontingent interest valued at $137,500 in the profit-sharing plan. The two interests are added together ($350,000) and insured up to $250,000, leaving $100,000 uninsured.

[12 CFR 330.14(b)(2)]

“Self-directed,” in this context, means the employee has the right to direct funds into a specific insured institution. It does not include plans where the participant can merely choose from two or more “funds.”

[12 CFR 745.9-2(c)(1)]

Individual Retirement Accounts (IRAs) and Keogh plan accounts

[12 CFR 330.14(b)(2)]

Keoghs and individual account plans that are not self-directed, are probably insured under the “employee benefit plans” rules described in the previous section. Assuming they qualify for pass-through coverage under those rules, the interests of an individual in Keoghs or individual account plans which are not self-directed would be aggregated only with that individual’s interests in other employee benefit plans established at the same institution by the same employer or employee organization. They would not be aggregated with that individual’s interest in IRAs.

Roth IRAs are treated the same as traditional IRAs for deposit insurance purposes. Education IRAs, however, are treated as irrevocable trust accounts—described earlier—for deposit insurance purposes. [See Your Insured Deposit—Q&A, questions and answers about your insured deposit from the Federal Deposit Insurance Corporation, Q&A 36.]

[12 CFR 745.9-2(c)(1)]

Accounts held by government depositors

These are accounts held by some governmental entity, such as the federal government, a state or local government, or a governmental agency. The FDIC and the NCUA treat such accounts, also known as “public unit accounts,” somewhat differently. Let’s look at FDIC insurance first.

FDIC insurance of accounts held by government depositors

These rules refer several times to “political subdivision.” A political subdivision is a subdivision or principal department of a public unit: (1) the creation of which subdivision or department has been expressly authorized by state statute, (2) to which some functions of government have been delegated by state statute, and (3) to which funds have been allocated by statute or ordinance for its exclusive use and control. The term also includes drainage, irrigation, navigation, improvement, levee, sanitary, school or power districts, and bridge or port authorities, and other special districts created by state statute or compacts between the states. The term does not include subordinate or nonautonomous divisions, agencies, or boards within principal departments. [12 CFR 330.15(d)]

Some examples will help you understand how these rules work.

Suppose John Doe has control over Minnesota Department of Transportation (DOT) funds devoted to a new highway project. He deposits $95,000 of the funds in an account at Last National Bank in Minneapolis, Minnesota. Frank L. Wright has control over Minnesota DOT funds devoted to the building of a new maintenance shed for DOT vehicles. Frank deposits $85,000 of the funds into an account at Last National Bank. Both accounts are fully insured. Even though the same public unit owns all the funds, they are deposited by different “official custodians” and are, therefore, insured separately.

Next, suppose John Doe has control over Minnesota Department of Transportation funds. He deposits $250,000 of the funds in a time deposit and $85,000 of the funds in a demand deposit at Last National Bank in Minneapolis. Both accounts are fully insured. Since the financial institution is located in the same state as the public unit, the official custodian can have $250,000 in savings or time deposits and $250,000 in demand deposits and be fully insured.

A final sort of public unit account is called a public bond issue account. This is an account that contains public unit funds that are required to be set aside to pay holders of notes or bonds issued by the public unit. For insurance purposes, this sort of account is treated like a trust account. Each note holder or bondholder is like a beneficiary of a trust. Each beneficiary’s interest (which is a pro rata share of the account balance based on the amount of notes or bonds the individual holds) is insured up to $250,000. This insurance is separate from the insurance on any other account at the financial institution. [12 CFR 330.15(c)]

Funds held by a financial institution as trustee of an irrevocable trust

The FDIC regulations give separate insurance coverage for funds held by an insured institution as trustee of an irrevocable trust established by statute or written agreement. The funds in such an account are insured up to $250,000 for each beneficiary. This insurance is separate from and in addition to the insurance provided for any other deposits of the beneficiaries. The special treatment for these funds applies whether the insured institution deposits the funds in its own trust department, in some other department of its own, or in another insured depository institution altogether. [12 CFR 330.12(a)]

(You should be aware that the effective date of this rule is December 19, 1993. Prior to that date, separate insurance was available for deposits held by the institution in any agency or fiduciary capacity; e.g., as executor of an estate. The narrowing of coverage was mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991. The coverage of time deposits is generally determined by the rules in effect when the time deposit was made, renewed, or rolled over.)

A beneficiary’s insured interest in one of these accounts is measured in one of two ways depending on whether the funds in the account are “allocated” or not. Funds are “allocated” if the trustee financial institution has designated the amounts that are from particular trust estates.

The measurement for allocated funds is done by ascertaining the amount of the trust estate funds allocated, deposited, and remaining to the credit of the trustee financial institution. [12 CFR 330.12(b)(1)]

The measurement in the case of unallocated funds is done by the following formula: the percentage interest of a particular trust estate in the unallocated deposits in any institution in default is the same as that trust estate’s percentage interest in the entire commingled investment pool. [12 CFR 330.12(b)(2)]