A Basic Overview of Fidelity Bonds
A vital part of plan administration is making sure that you meet the requirements of the ERISA (Employee Retirement Income Security Act). At its core, an ERISA bond’s purpose is to protect the assets of your retirement plan against losses caused by fraud. Basically, an ERISA or fidelity bond is a kind of insurance to protect retirement plan participants against shady dealings so they aren’t left with nothing. No one wants to believe they could be fooled by a smooth talker, but it does happen occasionally.
It’s sound practice to review the adequacy of your retirement plan’s fidelity bond coverage annually. Yes, every year. Why? For starters, proper fidelity bond coverage is required by the Department of Labor (DOL). Trust me, you don’t want to run afoul of the DOL.
Since this housekeeping item is so important, let’s do a short Q & A to make sure you’re up to speed.
What is ERISA
ERISA stands for Employee Retirement Income Security Act of 1974. It’s the legislation that governs the operations of retirement plans.
What is the Bonding Requirement?
ERISA bonds must cover a minimum of 10% of the total plan assets during the preceding year. If no plan funds were handled in the preceding year, the bond should cover 10% of the estimated amount to be handled for the current year. The minimum required bond is $1,000 and the maximum required bond is $500,000.
For easy math, let’s say you had a million dollars in plan assets, your minimum fidelity bond amount would be $100,000. Generally speaking, these bonds are inexpensive, so you can always buy more than you need to cover increases in plan assets.
You can use the Annual Report (IRS Form 5500 Schedule H or I) from the prior year to determine the amount handled and multiply that number by 10% to figure out your required bond amount. Or, you can call your TPA and they should be happy to lend a hand. If they aren’t, call me.
Small plans (under 100 participants) must meet special bonding requirements in order to avoid an independent audit. At least 95% of plan assets must be “qualifying plan assets” and the amount of the bond cannot be less than the value of the non qualifying assets. Assets held at a bank, financial institution, insurance company, or brokerdealer, mutual funds, employer securities, and loans are examples of qualifying assets. A limited partnership and Japanese Block Art are examples of nonqualifying assets.
How Do I Know If A Bond Is In Place?
You can contact your insurance agent or legal advisor to find out if you have a bond in place that covers your retirement plan. Your friendly neighborhood TPA will be happy to help you as well.
You may obtain a bond through a surety company approved by the Treasury Department. Each July, the Federal Register publishes a list of approved companies.
Are There Penalties For Not Having A Bond?
There is no prescribed penalty for not purchasing a bond. However, there is a general penalty the DOL can impose on a plan that does not comply with ERISA. This penalty is $5,000 and/or up to one year in jail.
The first step will likely be a letter asking you to provide proof of your bond. ERISA violations aren’t usually high on the government’s list of things to enforce, but it is the law so you should comply. If you don’t have a fidelity bond, you must reflect that on your tax form. Of all the things you can get in trouble over, do you really want not complying with ERISA requirements to be it?
I say, nope.
When you think of all the things you are responsible for as a plan administrator, this is one of the easier things to take care of. Your TPA is a great resource for help with ensuring your ERISA bond info is correct and up-to-date.
Remember it’ retirement we’re talking about. The more you know and understand, the better off you will be.
MBA, QKA, CBC