I. INTRODUCTION
The Federal Deposit Insurance Corporation (FDIC) issued an interim final rule that revises the deposit insurance rules for account of “qualified tuition programs” under § 529 of the Internal Revenue Code.
Section 529 qualified tuition programs allow contributions to be made into tax-advantaged accounts that are set up for the purpose of meeting qualified higher education expenses of a designated beneficiary of the account. Generally, a qualified tuition program will offer participants the opportunity to invest in securities products. The Securities and Exchange Commission (SEC) maintains the position that such programs are to be structured so that securities are sold through either a state instrumentality or investment trust. Section 2(b) of the Investment Company Act of 1940 provides that a state instrumentality or investment trust is exempt from SEC registration requirements.
II. PREVIOUS FDIC POSITION
Several states, including Nebraska, offer a bank deposit option to participants of qualified tuition plans. Since the securities or deposits of participants are owned by either a state instrumentality or investment trust for investment, the FDIC’s position has been that such accounts were to be treated in the same manner as corporations under FDIC’s deposit insurance rules [See, FDIC deposit insurance rule found at 12 C.F.R. § 330.1(a)]. In this regard, bank deposits held by qualified tuition program plans were ineligible for pass-through deposit insurance, which meant that the aggregation of deposits in one bank, held by a qualified tuition program, were only insured up to $100,000.
III. REVISED FDIC POSITION
Effective June 9, 2005, an FDIC interim rule amends 12 C.F.R. § 330.11(a) by adding a subparagraph 2 that treats deposit accounts held in connection with state-sponsored § 529 qualified tuition programs as plans are owned by the individual participants if:
Under the interim rule, the FDIC maintains that § 529 qualified tuition programs are designed in a fashion similar to brokered deposits, rather than as mutual funds [as previous § 330.1(a) originally stated]. The FDIC noted in its interim rule that § 529 program funds can be traced directly to the individual participants, which strongly suggests that pass-through insurance is appropriate. Therefore, such funds will be subject to deposit insurance up to $250,000 per participant in the plan.