Organization and Operation of Federal Credit Unions; Trustees and Custodians of Pension Plans

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 724

Organization and Operation of Federal Credit Unions; Trustees and

Custodians of Pension Plans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: On February 20, 1998, NCUA issued a letter to federally

insured credit unions regarding share insurance coverage on member

accounts established as Education IRAs, Roth IRAs, Savings Incentive

Match Plan for Employees and Medical Savings Accounts. Although these

accounts can be established in federal credit unions, the letter noted

that federal credit unions cannot act as trustees or custodians for

these types of accounts. The basis for that statement was the current

wording of NCUA regulations, which references specific provisions of

the Internal Revenue Code. This interim rule corrects that part by

including additional specific references to Internal Revenue Code

provisions for certain of these accounts. It also makes a conforming

amendment to the rule regarding retirement benefits for federal credit

union employees.

DATES: Effective March 24, 1998. Comments must be received on or before

May 20, 1998.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, VA 22314-3428. Fax

comments to (703) 518-6319. E-mail comments to [email protected].

Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: James J. Engel, Deputy General

Counsel, at the above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

NCUA recently issued a Letter to Credit Unions (Letter No. 98-CU-5,

February 20, 1998) to advise all federally insured credit unions of

share insurance coverage on several new types of member accounts:

Education IRAs, Roth IRAs, Savings Incentive Match Plan for Employees

(SIMPLE) accounts and Medical Savings Accounts (MSAs). While these

accounts could be established in federal credit unions, the letter

noted that federal credit unions could not act as trustees or

custodians of such accounts. This has caused considerable confusion

because federal credit unions have been serving as traditional IRA

trustees or custodians since 1975. (12 CFR Part 721--Incidental Powers,

Sec. 721.4. 40 FR 25582, June 17, 1975.) Currently, however, because

part 724 specifically references only Internal Revenue Code (IRC)

sections 401(d) and 408, it unintentionally limits federal credit union

involvement in the newer accounts established under different IRC

provisions. The purpose of this interim rule is to correct this problem

immediately with respect to Roth IRAs and Education IRAs and to request

comment on additional changes that may be needed for these accounts as

well as for MSAs and similar accounts.

The Letter to Credit Unions was issued in response to recent

amendments to the IRC whereby Congress created new types of accounts

that receive special tax treatment. Congress specified the types of

organizations that could serve as fiduciaries for these accounts.

Congress included federally insured credit unions in the list of

qualified organizations by including them in a special definition of

``bank'' contained in the current IRC section 408(n). This definition

has been used in IRC section 401(f)(2)--for 401(d) plans (Keogh

Accounts)--and in IRC section 408(a)(2) for traditional IRAs

established under IRC section 408. Part 724 references both 401(d) and

408 plans. Congress has now used this same definition for MSAs, IRC

section 220(d)(1)(B), and Education IRAs, IRC section 530(b)(1)(B). For

a Roth IRA, Congress provided in IRC section 408A(a) that such an

account is to be treated as an individual retirement plan, unless

otherwise noted. An individual retirement plan includes an IRA under

408. IRC section 7701(a)(37). Thus, federal credit unions, being

federally insured, are qualified to be fiduciaries of all of these

types of accounts.

A fiduciary, either a trustee or custodian, of these newer types of

accounts performs essentially the same types of duties as a fiduciary

of a traditional Keogh or IRA. In the case of a federal credit union,

the funds are invested in insured share accounts. As a fiduciary, a

federal credit union maintains accounting records similar to those for

any savings account and sends the member and the IRS tax information.

In the case of self-directed plans, a federal credit union follows a

member's instructions and facilitates the transfer to other investments

in accordance with Sec. 724.2. For some types of accounts, a federal

credit union would also withhold income tax and compute periodic

payment amounts. In general, the highest administrative burden is on

fiduciaries of traditional IRAs and Keogh accounts because these

accounts are subject to complex distribution requirements.

Federal credit unions have been providing IRA trustee and custodial

services for almost 23 years. In its examination and supervision of

federal credit unions during this period of time, NCUA has seen no

indication of regulatory problems arising from this activity. This

historical performance provides ample evidence that federal credit

unions can provide the same services for the new types of accounts.

However, this interim rule will only address the Roth and Education

IRAs. The provisions regarding these accounts became effective January

1, 1998, and it is the Board's understanding that these are the types

of accounts that federal credit union members are now most interested

in establishing. There is no public interest served by delaying

immediate action on these accounts.

Amendments

1. Part 701

Federal credit unions are authorized to provide reasonable

retirement benefits for their employees under Sec. 701.19. If a federal

credit union is to be a trustee or custodian, the retirement plan must

be an IRA maintained in accordance with part 724. To conform to the

changes in part 724, this section is being amended by deleting the

phrase ``an individual retirement account.'' Section 701.19 will now

require that the plan be ``authorized and'' maintained in accordance

with part 724.

2. Part 724

Part 724 is being amended only with regard to Roth IRAs and

Education IRAs. This is accomplished by adding references to IRC

sections 408A, for Roth IRAs, and 530, for Education IRAs, in

Sec. 724.1. There is no need for a specific amendment to cover SIMPLE

Retirement Accounts (SRAs) because those accounts are already covered

under IRC section 408, specifically section 408(p), and thus already

covered by Sec. 724.1.

Request for Comments

The Board is requesting comments on the changes made by this

interim final rule concerning Roth IRAs and Education IRAs. As noted

above, the Board is not amending or proposing any specific amendments

regarding MSAs. To do so now would require more extensive modification

to part 724, or

[[Page 14026]]

possibly a completely new rule, and would only delay the much needed

IRA revisions.

Further, MSAs are a pilot program and the Board is not aware of any

particular urgency to address these types of accounts immediately.

The Board expects to issue shortly a request for comments or

advanced notice of proposed rulemaking to solicit comments on MSAs and

will evaluate the need for regulatory changes after receipt of

comments. That notice will likely solicit comments as well regarding

whether other regulatory changes are needed to address IRC section

401(k) plans, including SIMPLE 401(k) plans, and Simplified Employee

Pension (SEP) plans.

Regulatory Procedures

Regulatory Flexibility Act

This interim final rule conforms the current regulation to recent

changes in the federal tax law and does not expand upon the nature of

the activity authorized for a federal credit union. The Board has

determined and certifies that this rule will not have a significant

economic impact on a substantial number of small credit unions.

Accordingly, the NCUA Board has determined that a Regulatory

Flexibility Analysis is not required.

Paperwork Reduction Act

This interim rule does not impose any paperwork requirements.

Executive Order 12612

This interim rule only applies to federal credit unions. It has no

affect on the regulation of state-chartered credit unions.

List of Subjects

12 CFR Part 701

Credit unions.

12 CFR Part 724

Credit unions, Pensions, Reporting and recordkeeping requirements,

Trusts and trustees.

By the National Credit Union Administration Board, this 13th day

of March, 1998.

Becky Baker,

Secretary, NCUA Board.

For the reasons stated in the preamble, NCUA amends 12 CFR chapter

VII as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority citation for part 701 continues to read as

follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,

1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also

authorized by 15 U.S.C. 3717. Section 701. 31 is also authorized by

15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35

is also authorized by 42 U.S.C. 4311 -4312.

2. Revise the second sentence of Sec. 701.19(a) to read as follows:

Sec. 701.19 Retirement benefits for employees of Federal credit

unions.

(a) * * * In those cases where a Federal credit union is to be a

plan trustee or custodian, the plan must be authorized and maintained

in accordance with the provisions of part 724 of this chapter. * * *

* * * * *

PART 724--TRUSTEES AND CUSTODIANS OF PENSION PLANS

3. The authority citation for part 724 is revised to read as

follows:

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

4. In Sec. 724.1, revise the section heading and first sentence 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 its

members, provided the funds of such plans are invested in share

accounts or share certificate accounts of the Federal credit union. * *

*

[FR Doc. 98-7346 Filed 3-23-98; 8:45 am]

BILLING CODE 7535-01-p