Credit unions: Trustees and custodians of pension plans; shared insurance and appendix,

[Federal Register: October 15, 1999 (Volume 64, Number 199)]

[Proposed Rules]

[Page 55871-55873]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr15oc99-30]

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 724 and 745

Trustees and Custodians of Pension Plans; Share Insurance and Appendix

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

SUMMARY: The National Credit Union Administration (NCUA) proposes to revise its rules regarding a federal credit union's authority to act as trustee or custodian of pension plans. The proposal permits federal credit unions in a territory, including the trust territories, or a possession of the United States, or the Commonwealth of Puerto Rico, to offer trustee or custodian services for Individual Retirement Accounts (IRAs), where otherwise permitted.

DATES: Comments must be received on or before December 14, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail or hand-deliver comments to: National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703) 518-6319. E-mail comments to boardmail@ncua.gov. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Dianne M. Salva, Staff Attorney, Division of Operations, Office of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: NCUA has received many inquiries concerning the permissibility of federal credit unions (FCUs) in Puerto Rico offering IRA services to members. In the past, the agency has responded that FCUs in Puerto Rico cannot provide the trustee services attendant to an IRA account. Part 724 of NCUA's regulations permits FCUs to serve as trustees for IRA accounts only if the IRA accounts qualify for specific tax treatment under the Internal Revenue Code (IRC), and if they are created or organized in the United States. Part 724 has its roots in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA amended the IRC so that federally-insured credit unions were recognized

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as permissible trustees or custodians of Keogh plans and IRAs. ERISA, Pub. L. 93-406, Sec. 1022(f) (1974). However, unlike banks and savings and loans, credit unions did not have other statutory authority to act as trustees; yet there was significant interest among credit unions in providing these trust services. NCUA reasoned that the incidental powers clause of the Federal Credit Union Act (FCUA), together with the IRC, made it possible for credit unions to perform the trustee and custodial function recognized by the IRC. But this finding was narrowly drawn; credit unions would not be authorized to provide general discretionary trustee services and they were not to act as trustees in cases other than pension plans. Further, NCUA determined that funds held in trust would be limited to share and share certificate accounts.

In 1985, NCUA published Interpretive Ruling and Policy Statement 85-1 (IRPS 85-1) in which it clarified its position that FCUs were permitted to act as trustees or custodians of IRA or Keogh plans established under the IRC, as long as the initial contribution to the plan was made to a share or share certificate account and the FCU would engage only in custodial duties with no exercise of investment discretion or advice. After the initial contribution was made to a share account, the IRA or Keogh was ``self-directed'' so that members could order subsequent transfers at their own risk. The preamble to IRPS 85-1 briefly retraced the history of FCU authority to serve as trustees of IRA and Keogh plans. It cites the ERISA amendment to the IRC recognizing FCUs as permissible trustees as the catalyst for the NCUA Board's finding that FCUs were authorized to act as trustees. However, it credits a 1978 amendment to the FCUA, which added a section covering share insurance of IRA and Keogh plans, as providing the statutory authority for FCUs to serve as trustees. 50 FR 48,176, Nov. 22, 1985.

In 1990, NCUA amended its pension trustee regulation, now redesignated 12 CFR part 724, to incorporate IRPS 85-1. In 1997, IRPS 85-1 was rescinded. Because of the strict limitations imposed on the trustee services FCUs offer members in connection with these types of accounts, NCUA has not encountered significant safety and soundness concerns related to IRA or Keogh accounts.

Today, the policy, as stated in 12 CFR part 724, still permits FCUs to offer IRAs and Keogh accounts created in accordance with the IRS Code. It is the IRC that requires such trust accounts be created in the United States. 26 U.S.C. 408(a). IRS regulations provide a definition of the United States limited to the States and the District of Columbia. 26 U.S.C. 7701(a)(9). The internal revenue laws of the United States are generally inapplicable in Puerto Rico. 48 U.S.C. 734. This effectively excludes IRAs created in the Commonwealth of Puerto Rico from the application of these provisions of the IRC and, therefore, excludes federal credit unions in Puerto Rico from benefiting from the authority granted by 12 CFR part 724. For some U.S. territories, such as Guam, the United States Code specifically extends the income tax laws of the United States to the territory, with the modification that ``Guam'' be substituted for the term ``United States'' in the territorial version of the law. 48 U.S.C. 1421i. The Northern Mariana Islands are the beneficiary of a similar arrangement. 48 U.S.C. 1681. The net effect of this is that IRAs can be established in these territories. The Virgin Islands, on the other hand, are subject to the IRC, but without the modification that ``Virgin Islands'' be substituted for the term ``United States.'' 48 U.S.C. 1397. This operates to prevent credit unions in the Virgin Islands from offering IRAs, because they cannot meet the IRC requirement that an IRA trust be created or organized in the United States.

The Puerto Rico Internal Revenue Code of 1994 (PRITA) is similar to the IRC. Like the IRC, the PRITA provides for a tax-deferred, individual retirement account for its citizens and, like the IRC, recognizes insured FCUs as permissible trustees for PRITA-IRAs established under Puerto Rican law. P.R. Laws Ann. Tit. 13, Sec. 8569 (1995). However, because NCUA's regulation tracks the language of the IRC, which requires such trusts to be created in the United States, FCUs in Puerto Rico have been unable to meet their members' demands for PRITA-IRA trustee services.

The NCUA Board believes that FCUs in Puerto Rico should also be permitted to offer PRITA-IRAs to their members. While the FCUA does not grant FCUs plenary trust powers, it does permit them to exercise such incidental powers as are necessary to carry on their business. 17 U.S.C. 1757(17). When an FCU serves as a trustee for a member's IRA share or share certificate account, it does not exercise the powers normally associated with a trust account. Given that the discretion exercised by an FCU as trustee for this type of account is so limited, the function of the FCU as trustee is not significantly different from its function as the issuer of share accounts and share certificates. Based on the foregoing, the Board finds that the authority to offer these accounts is incidental to the FCU's authority to issue share accounts and share certificates. 12 U.S.C. 1757(6). Therefore, FCUs in Puerto Rico are authorized by the incidental powers clause of the FCUA to offer IRAs created under PRITA. But, the authority must be equally narrow as that granted to FCUs offering IRA trust services in the United States. That is, the initial contribution to the plan must be made to a share or share certificate account, and the FCU may engage only in custodial duties with no exercise of investment discretion or advice. After the initial contribution is made to a share account, members must direct any subsequent transfer of the funds at their own risk.

The NCUA Board has further found that, for insurance purposes, PRITA-IRAs will be treated like IRAs created in the United States. The present vested ascertainable interest of the participant will be insured up to $100,000 separately from other accounts of the participant or designated beneficiary.

Medical Savings Accounts

In the future, the NCUA Board may consider a further amendment of part 724 to authorize FCUs to serve as trustees for medical savings accounts (MSAs). An MSA is another type of tax-deferred product which requires limited trustee services, similar to those required for an IRA. The Internal Revenue Service (IRS) is currently conducting a pilot program to permit financial institutions, including credit unions, to offer MSAs. On February 20, 1998, NCUA issued Letter to Credit Unions No. 98-CU-5, which stated that NCUA considered MSAs to be insured member accounts, but that FCUs could not act as an MSA custodian or trustee. The IRS pilot program will be completed in 2000, and it is possible in the near future legislation authorizing it on a permanent basis may be adopted. If and when the full contours of a permanent MSA program are announced, the NCUA Board will determine whether it will make any additional amendments to the regulations.

Regulatory Procedures

Paperwork Reduction Act

This regulation, if adopted, will impose no additional information collection, reporting or record keeping requirements.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) (5 U.S.C. 605(b)), NCUA certifies that this

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proposed rule will not have a significant economic impact on a substantial number of small entities. NCUA expects that this proposal will not: (1) have significant secondary or incidental effects on a substantial number of small entities; or (2) create any additional burden on small entities. These conclusions are based on the fact that the proposed regulations merely extend the authority to offer a service to members. Accordingly, a regulatory flexibility analysis is not required.

Executive Order 12612

This regulation, if adopted, will only apply to federal credit unions.

Agency Regulatory Goal

NCUA's goal is to promulgate clear and understandable regulations that impose minimal regulatory burden. We request your comments on whether the proposed amendment is understandable and minimally intrusive if implemented as proposed.

List of Subjects

12 CFR Part 724

Credit unions, Pensions, Trusts and trustees.

12 CFR Part 745

Credit unions, Pensions, Share insurance, Trusts and trustees.

By the National Credit Union Administration Board on October 6, 1999. Becky Baker, Secretary of the Board.

For the reasons set out in the preamble, the NCUA proposes to amend 12 CFR chapter VII to read as follows:

PART 724--TRUSTEES AND CUSTODIANS OF PENSION PLANS

1. The authority citation for part 724 continues to read as follows:

   Authority: 12 U.S.C. 1757, 1765, 1766 and 1787.

2. In Sec. 724.1, remove the first sentence and add two sentences in its place to read as follows:

   Sec. 724.1 Federal credit unions acting as trustees and custodians of pension and retirement plans.

   A federal credit union is authorized to act as trustee or custodian, and may receive reasonable compensation for so acting, under any written trust instrument or custodial agreement created or organized in the United States and forming part of a pension or retirement plan which qualifies or qualified for specific tax treatment under sections 401(d), 408, 408A and 530 of the Internal Revenue Code (26 U.S.C. 401(d), 408, 408A and 530), for its members or groups of members, provided the funds of such plans are invested in share accounts or share certificate accounts of the federal credit union. Federal credit unions located in a territory, including the trust territories, or a possession of the United States, or the Commonwealth of Puerto Rico, are also authorized to act as trustee or custodian for such plans, if authorized under sections 401(d), 408, 408A and 530 of the Internal Revenue Code as applied to the territory or possession or under similar provisions of territorial law. * * *

   PART 745--SHARE INSURANCE AND APPENDIX

3. The authority citation for part 745 continues to read as follows:

   Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 1787, 1789.

4. Amend Sec. 745.9-2 by revising the first sentence of paragraph (a) to read as follows:

   Sec. 745.9-2 IRA/Keogh accounts.

   (a) The present vested ascertainable interest of a participant or designated beneficiary in a trust or custodial account maintained pursuant to a pension or profit-sharing plan described under section 401(d) (Keogh account) or sections 408(a), 408A or 530 (IRA) of the Internal Revenue Code or similar provisions of law applicable to a U.S. territory or possession, will be insured up to $100,000 separately from other accounts of the participant or designated beneficiary. * * * * * * * *

   [FR Doc. 99-26754Filed10-14-99; 8:45 am]

   BILLING CODE 7535-01-P