The Bank of America Overdraft Settlement:

Action May be Advisable for Your ERISA Trust

         Bank of America last week settled a prominent consumer class action against the bank’s standard overdraft procedures. The plaintiff consumers had alleged that (1) the bank failed to disclose key information regarding the bank’s overdraft procedures, and (2) the procedures were designed to maximize the bank’s fees, for example, by reordering debits from highest to lowest during given periods of time.

Example: A customer has a balance of $50. On a single day, the customer incurs transactions of $10, $10, $10, $10 and then $100. The bank orders the transactions by amount so that $100 is withdrawn first, causing five overdraft fees instead of just one.

         Overdraft coverage is common in ERISA trusts, and the Labor Department has blessed it subject to safeguards. In Advisory Opinion Letter 2003-02A, the Labor Department states that trustee overdraft protection is covered by two prohibited transaction exemptions (ERISA Sections 408(b)(2) and 408(b)(6), exempting necessary and bank ancillary services respectively), but only if the service is provided under “specific guidelines” issued by the financial institution. Under these guidelines the institution must (1) ensure timely notice to the appropriate fiduciary of an overdraft and resulting charges, (2) monitor and limit the duration of overdraft services, (3) limit the ability of the fiduciary to utilize overdraft protection services as a routine means of settling financial market transactions, and (4) limit any overdraft fee to a “reasonable” level.

         Review of your trust documents may be advisable to avoid a prohibited transaction. Many pension trust documents were adopted before the Labor Department issued Advisory Opinion Letter 2003-02A and fail to include overdraft guidelines. Trustee policies and procedures may also fail to reflect the best practices set forth in the Federal Deposit Insurance Corporation’s (FDIC) final overdraft guidance issued in late 2010. And, some may not safeguard against the abusive fee-maximizing practices alleged in Bank of America.

         Lastly, fiduciaries should be concerned that overdrafts will raise income tax issues for a trust. These transactions may give rise to unrelated business taxable income (UBTI) because the overdraft may constitute “acquisition indebtedness” even if the overdraft involves short term debt.

         The Bank of America settlement highlights the need for plan sponsors to revisit this topic. We would be happy to assist you in reviewing trust agreements and trustee procedures involving overdraft coverage and the overdraft fees charged by a plan trustee.