By Jenny Kiffmeyer, J.D – The Retirement Learning Center

Retirement Plans and FDIC Coverage

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to retirement plan assets. The advisor asked: “Are retirement plan assets covered by the Federal Deposit Insurance Corporation (FDIC) and, if so, is there a limit to the coverage?”

Highlights of the Discussion

The following is general guidance based on publicly available information and is not tax or legal advice. Retirement plan participants and IRA owners should seek definitive guidance from a tax and/or legal professional regarding their specific circumstances.

FDIC deposit insurance protects bank customers if an FDIC-insured depository institution fails. To determine if a bank is FDIC-insured, ask a bank representative, look for the FDIC sign at the bank, or use the FDIC’s BankFind tool.

Generally, if retirement plan assets are held at an FDIC-insured institution, they are covered if they are invested in deposit products like checking accounts, savings accounts, money market deposit accounts or certificates of deposit (CD). The FDIC does not cover investments in stocks, bonds, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes or U.S. Treasury bills, bonds or notes.[1]

The coverage limit for retirement plan assets held in depository products depends on whether the retirement plan assets are self-directed or not.

Self-directed retirement accounts include

• All types of IRAs [i.e., Traditional, Roth, Simplified Employee Pension (“SEP”) and Savings Incentive Match Plans for Employees (“SIMPLE”) IRAs];
• All IRC Sec. 457 deferred compensation plans, such as eligible deferred compensation plans provided by state and local governments, regardless of whether they are self-directed; and
• All self-directed defined contribution (DC) plans.[2]

Deposits in all self-directed retirement accounts owned by the same depositor and held at the same insured depository institution (IDI) are added together and the total is insured for up to $250,000.

In contrast, there is a separate category of coverage for “employee benefit plans,” which include defined benefit (DB) plans and DC plans where the plan administrators (or other plan fiduciaries) make investment decisions for the plan participants.

With respect to coverage limits, the deposits of plan administrator-directed plans are insured on a “pass-through” basis. That means that the deposits are insured up to $250,000 for the “noncontingent interest” of each plan participant. For a DC plan, the noncontingent interest is the amount of the employee’s account balance as of the date of the bank failure. For a DB plan, that amount is the present value of the employee’s interest in the plan according to its terms as of the date of the bank default. To the extent that any deposits represent contingent interests, the deposits are separately insured up to $250,000 in the aggregate. Finally, to the extent that any deposits represent an “overfunding” of the plan, the deposits are separately insured up to $250,000 in the aggregate.[1]

Before opening an employee benefit plan account at a bank, the plan administrator should know how much can be deposited and be fully insured.

Conclusion

Retirement plan assets held at an FDIC-insured institution are covered if they are invested in deposit products like checking accounts, savings accounts, money market deposit accounts or certificates of deposit (CDs). The level of coverage depends on whether the retirement assets are self-directed or plan administrator-directed, and classified as contingent, noncontingent or overfunded amounts.

[1] 12 C.F.R. § 330.14(c)(1) and (2)

[1] FDIC, Deposit Insurance at a Glance

[2] 12 C.F.R. § 330.14(b)(2)