Benefit and Retirement Plans Must Comply With ERISA Bonding Rules
Although the
Employee Retirement Income Security Act of 1974 (ERISA) bonding regulations are not new, plan sponsors are often confused about them. This year’s increased reporting obligations for organizations with 403(b) plans have prompted questions regarding bonding rules. Some organizations don’t have coverage at all, while others don’t have the right amount of coverage.
“Fidelity bonding covers fraud,” says Karen Thomas, a benefits principal with LarsonAllen. “Most people think that insurance for fiduciary responsibility includes fidelity bonding—it does not.”
For plans to be in compliance, you must know what kind of insurance coverage satisfies the rules, and what is the appropriate amount of coverage.
Coverage requirements
Every fiduciary and anyone who handles plan funds must be bonded (i.e., insured). “Handling” not only means physical contact with plan funds, but also includes people with the power to transfer money, and direct or authorize payment of benefits and other disbursements.
Fidelity bonding protects the plan against loss of funds through fraud. Many bonds sold by insurance companies use a different standard of coverage and, therefore, may not be ERISA compliant. Specifically, ERISA does not allow for a deductible, and the plan name should be included within the policy. Fidelity bonding differs from fiduciary liability insurance, which covers personal liability for the act or omission of a fiduciary.
Any organization with bonded employees who handle company money or with an existing liability insurance policy (e.g., fiduciary liability, crime coverage) should contact their insurance representative to see if the bond could be added as a rider to existing policies.
Bond amount
For most plans, the amount of the bond should not be less than 10 percent of the plan funds handled during the preceding plan year. For example, if total plan assets on December 31, 2009, were $2.5 million, the minimum bond amount for 2010 would be $250,000. The necessary bond amount is $1,000 with a maximum of $500,000. For plans that hold employer-issued securities, the maximum amount for the bond is $1,000,000.
Additional rules for small plans
Small plans (less than 100 participants) that do not have at least 95 percent of their assets in qualifying securities are subject to additional bonding requirements to remain exempt from the annual audit. They must be bonded for 100 percent of the non-qualifying securities.
Qualifying securities include:
- Securities held by regulated financial institutions (banks, insurance companies, broker-dealers, trustees)
- Securities issued by a registered investment company
- Investment and annuity contracts issued by a qualified insurance company
- Assets in individual accounts over which the participant has control and receives a statement at least annually from a regulated financial institution,
- Qualifying employer securities
- Participant loans
To make sure you fully understand the rules and are not subject to additional bonding obligations, discuss your Form 5500 filing with your benefits consultant and/or your attorney.
Reducing risk
Fraud is almost an ever-present story in the local, national, and international news. Not having the correct coverage is a major organizational risk.
“Although it is unlikely that you will be penalized by the IRS or the Department of Labor for not complying with bonding rules, it raises a red flag on your Form 5500 [the reporting form for benefit plans],” Thomas says. “And the more flags raised, the more likely an organization will be selected for an audit.”
How we can help
LarsonAllen can help organizations determine the appropriate amount of coverage for their situation, evaluate qualified versus unqualified coverage, and clarify issues that arise when filing Form 5500.
Karen Thomas, Benefits Principal
kthomas@larsonallen.com or 1-888-529-2648
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