ERISA Fidelity Bond Reminder
As calendar year plan sponsors get closer to Form 5500 filing time, July 31st, it would be helpful to review the fidelity bonding rules.
All retirement plans under Department of Labor regulations are required to have a fidelity bond. A fidelity bond protects the assets in the Plan from misuse or misappropriation by the Plan fiduciaries. Plan fiduciaries include the Plan trustees and any person 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.
At the very least, the bond must equal 10% of the value of the total Plan assets, with a minimum bond value of $1,000. For the first year, the bond amount will be based on the estimated amount of assets that will be handled by the Plan for the year.
Plan assets that "qualify" for a 10% bond include employer securities; participant loans; assets held by financial institutions such as banks, insurance companies, broker-dealers, or other organization authorized to hold IRA assets; mutual funds; investment and annuity contracts issued by an insurance company; and self-directed individual account Plans in which the participant gets a statement of assets at least once a year. All other assets are considered non-qualifying Plan assets.
However, 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 ยง408, the Plan sponsors need to do one of two things - 1) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or 2) 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.
There are serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond. For one thing, it can be a red flag to the DOL that they need to take a closer look at the Plan. In addition, in cases where a 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.