FDIC email concerning the Wellfund HSA

This is the reply to a query I submitted related to the Wellfund Health Savings Account. See wellfund-hsa-bankruptcy.myown1.com for the story behind it.

I manually converted the text to html for this page; "XXXX" indicates personal information that has been deleted.

Subject: FDIC Reply [SCC2009W-016122-0]
Date: Thu, 31 Dec 2009 17:51:17 -0500
From: "FDIC STARSMail" <StarsMail@FDIC.gov>
December 31, 2009
Ref. No: SCC2009W-016122-0


Thank you for contacting the FDIC. In your email you asked the following:

"I have a Wellfund Health Savings Account with a balance of $XXXX, which was managed by Canopy Financial. I have been notified that Canopy filed for Chapter 11 bankruptcy on December 1, 2009, and I currently have no access to the funds in my account.

My monthly statements from the Wellfund HSA contain the statement 'DEPOSITS INSURED BY FDIC'.

So I would like to determine:
1) Are the Wellfund HSA accounts in fact insured by the FDIC?
2) If so, is the FDIC working to recover the funds in these accounts?

Note: The bankruptcy is Case Number 09-44943 in the United States Bankruptcy Court, Northern District of Illinois."

1) "Are the Wellfund HSA accounts in fact insured by the FDIC?"

Health Savings Accounts ("HSAs") were authorized as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Pursuant to that Act, HSAs must be in the form of a trust established on behalf of the "account beneficiary," defined as the individual on whose behalf the HSA is established. The Act requires that the trustee be a bank, an insurance company or other "person" specifically approved by the Internal Revenue Service.

The FDIC has different rules for insuring different types of trust accounts. One set of rules applies to irrevocable trusts and another applies to revocable trusts. The Act clearly contemplates that an HSA trust is revocable. This is evidenced primarily in the "distribution" provisions in the Act on the tax treatment and penalties for HSA "inclusions" "not used for 'qualified medical expenses.'" The implication is that an account owner may use HSA funds for purposes other than those described in the Act (and in the trust), but he or she would incur adverse tax consequences for doing so. This implicit retained authority to use trust assets for purposes other than those indicated in the trust, in effect, renders the trust revocable. Hence, the FDIC's insurance rules on insuring revocable trust accounts would apply to HSAs.

Important: Although the Act specifies that an HSA must be in the form of a trust, IRS guidelines on HSAs (IRS Notice 2004-2) indicate that HSAs may be in the form of a trust or "custodial" account. Given the characteristics of an HSA, however, the FDIC has determined that the deposit insurance coverage would be the same whether the account is held as a trust or pursuant to a custodial agreement.

The insurance coverage available to the owner of a revocable trust deposit is based on the nature and number of beneficiaries. Because HSAs are established to accumulate funds to pay for qualifying medical expenses for the participant, an HSA is not testamentary by nature-an individual who establishes an HSA is not doing so to provide a bequest to named beneficiaries on the owner's death. The Act does, however, allow an HSA owner to designate beneficiaries who will receive any remaining funds in the HSA after his or her death. In particular, it has a special provision for the treatment of HSAs after the death of the account owner relative to rights of designated beneficiaries. For this reason, when eligible beneficiaries are named, the HSA owner is insured up to $250,000 per beneficiary, per insured bank. For example, if an HSA is established on behalf of an individual and deposited into an FDIC-insured bank, and the HSA owner has designated her two children as beneficiaries within the agreement, the account would be insured up to $500,000. This assumes the HSA owner does not hold any other revocable trust deposits at the same bank.

It is important to note that when the HSA holder is the sole grantor and beneficiary, and no other beneficiaries are designated with the agreement, the deposit does NOT meet the FDIC requirements for revocable trust coverage described above. In this case, the deposit would be insured as the single ownership funds of the owner, up to a maximum of $250,000 per bank, along with any other single ownership deposits s/he holds at the bank. Even if state law specifies a 'default' beneficiary, such accounts would be insured as the single ownership deposits of the HSA holder.

The Act contemplates that HSAs may be established by employers for employees. Under the FDIC's deposit insurance rules, separate "pass-through" coverage is provided for employee benefit plan deposits (12 C.F.R. 330.14). That means coverage is available up to $250,000 for the non-contingent interest of each employee covered by the plan. The FDIC's regulations refer to the Employee Retirement Income Security Act of l974 for the definition of "Employee Benefit Plan." That definition, found in 29 U.S.C. 1002, would encompass HSAs established by employers. If so, each employee for whom an employer establishes an HSA with an FDIC-insured institution would be insured up to $250,000 under the employee benefit plan category of the FDIC's deposit insurance regulations. This coverage would be separate from the other categories of coverage to which the employee would be entitled, such as individual, joint and revocable trust accounts. Any other employee benefit accounts at the same institution established by the same employer for the same employee, however, would be added to the employee's HSA and insured to a limit of $250,000. Also, the depository institution would have to meet prescribed regulatory capital standards for this employee benefit plan "pass-through" coverage to be available. See 12 CFR 330.14.

2) "If so, is the FDIC working to recover the funds in these accounts?"

The FDIC insures deposits in most banks and savings associations located in the United States. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the U.S. Government.

Assuming that Canopy Financial is a deposit broker, the entity you have referenced is not an FDIC- insured financial institution. We can not verify FDIC insurance coverage without knowing the name of the institution where the funds were placed.

The only way such an entity can claim that your deposits are FDIC-insured is if the brokerage entity places funds on your behalf at an FDIC-insured institution. Assuming that the broker is acting in a fiduciary capacity, then your funds may be insured provided the funds remain on deposit at the insured bank and the funds are not in excess of the deposit insurance limit for all accounts that you maintains at that same bank. Please note that you have no deposit insurance coverage until your funds are placed in an FDIC-insured institution.

After reviewing your correspondence, it appears the FDIC will be unable to assist you in this situation as it appears to be a legal matter that is beyond the jurisdiction of this office to resolve. If you have additional questions regarding Canopy Financial you may wish to contact the U.S. Securities and Exchange Commission (SEC) at 1-888-SEC-6585 or visit their website at www.sec.gov.

We hope you found this information helpful.

In order to verify that your bank is FDIC insured, you can go online to the FDIC website and access the FDIC Bank Find Directory at http://www4.fdic.gov/idasp/main_bankfind.asp. However, not all internet banks are listed on the FDIC website as they are often not independent banks. Internet banks are often divisions of FDIC insured banks.

If you have additional questions about FDIC coverage limits and requirements, please visit EDIE the Estimator at <http://www.fdic.gov/edie>, call the FDIC toll-free at 1-877-ASK-FDIC or ask your bank representative. EDIE allows you to calculate the insurance coverage of your accounts and generate a printable report that clearly states if your deposits are fully insured or not.

Additional information regarding deposit insurance coverage, including printable brochures, can be found at: <http://www.fdic.gov/deposit/deposits>. In particular, we suggest you review "Your Insured Deposits" (Comprehensive Guide), which explains in detail all of the deposit insurance ownership categories.

As part of our ongoing efforts to improve our service to the public, we would appreciate it if you would complete a short consumer satisfaction survey on the level of service you received from this office. The survey can be accessed at: http://www2.fdic.gov/starsmail/customer.html.

Sincerely, Federal Deposit Insurance Corporation Division of Supervision and Consumer Protection 550 17th Street, N.W. Washington, DC 20429

The opinions expressed herein should only be considered advisory in nature. Such opinions are not binding upon the FDIC or its Board of Directors. In addition, the information provided is not meant to be all inclusive and the opinions expressed herein are based upon the facts presented in the request. Any changes in the facts or circumstances may result in different conclusions.