By Jerry Kalish, President, National Benefit Services, Inc. National Benefit Services is a Chicago-based retirement plan consulting, actuarial, and administration firm. The firm's clients include U.S. employers and multi-national employers with U.S. operations. You can contact Jerry at firstname.lastname@example.org.
One of those annual retirement plan housekeeping matters is for plan sponsors to review the adequacy of the plan's fidelity bond required by Department of Labor (DOL) regulations. Here is a summary of the fidelity bond rules.
ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded. The purpose is, of course, to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who "handle" plan funds or other property. These individuals are called "plan officials" and include anyone who has:
- Physical contact with cash, checks or other Plan property.
- Power to transfer or negotiate Plan property for a price.
- Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
- Decision making authority over any individual described above.
The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. Here are two:
- Maximum Amount. The new Pension Protection Act of 2006 increases the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. The new bonding provision is effective for plan years beginning on and after January 1, 2007.
- Non-Qualifying Assets. If more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code Section 408, the plan sponsors need to do one of two things: a) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or b) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.
Consequences of Not Maintaining the Fidelity Bond
There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond.
- It can be a red flag to the DOL that they need to take a closer look at the plan.
- In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.
This article is for general informational purposes and should not be considered tax or legal advice. Employers should always consult with their tax or legal advisors for the application of the ERISA rules to their specific situation.