Listen to Lawrence – FDIC: Employee Benefit Plan Accounts

August 19, 2020
Dear clients and friends,
This LISTEN TO LAWRENCE installment introduces the sixth category of separate FDIC insurance, EMPLOYEE BENEFIT ACCOUNTS, at an insured bank. Remember, this insurance is in addition to the insurance you get from each of the other categories, including the CERTAIN RETIREMENT ACCOUNT category (IRAs, etc.) discussed in my previous email which can be found on our website Click the Media & Resources tab and then choose Articles or just Click Here.
Employee Benefit Plan Accounts
An Employee Benefit Plan Account is a deposit of a pension plan, defined benefit plan, or other employee benefit plan that is not self-directed. This includes your typical 401k and 403b accounts that are controlled by a plan administrator, with the coverage passing through to the employee. It is not the plan itself that is insured but rather the deposit accounts owned by the plan.
This category of insurance provides up to $250,000 for each plan participant/employee. It is not to say that the plan gives $250,000 of coverage for each participant, but it can reach that amount. This is because plan participants most likely have different interests in the plan.
To determine the maximum amount a plan can insure at a particular bank, we have to make a calculation similar to what we did for a revocable trust with more than five beneficiaries with unequal amounts. We must first identify the participant who has the largest share of the plan assets and calculate the participant’s share as a percentage of overall plan assets. Then we must divide $250,000 by that percentage to arrive at the maximum fully insured amount that a plan can have on deposit at one bank.
The Mike Brady Architect Firm has a 401k with $900,000 on deposit in one bank.
Account Title Balance: Mike Brady Architect Firm $900,000
Plan Participant: Mike Plan Share: 49.5% Share of Deposit: $445,000
Amount Insured: $250,000 Amount Uninsured: $195,000
Plan Participant: Greg Plan Share: 23.5% Share of Deposit: $210,000
Amount Insured: $119,000 Amount Uninsured: $91,000
Plan Participant: Peter Plan Share: 15.5% Share of Deposit: $140,000
Amount Insured: $78,025 Amount Uninsured: $61,975
Plan Participant: Bobby Plan Share: 11.5% Share of Deposit: $105,000
Amount Insured: $58,025 Amount Uninsured: $46,975
Plan Total: 100% Total Plan Share: $900,000
Amount Insured: $505,050 Amount Uninsured: $394,950
This employee benefit plan’s $900,000 deposit is not fully insured. To get to the maximum insured number, $250,000 should be divided by the percentage share of the plan participant with the largest interest in the plan which is Mike’s percentage of 49.5%: $250,000 divided by 49.5% or 0.495 = $505,050. Mike’s share will have $250,000 of insurance and the others will have proportional amounts but all capped at $505,050.
I hope this helps.
Please forward this information to your friends and relatives.
As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.
Let’s stay connected.
Stay safe!