The Department of Labor is launching an initiative to contact plan sponsors who appear to have no fidelity bond or an insufficient amount of bonding as reported on the Form 5500. The DOL will contact the plan sponsor and allow 15 days for them to obtain sufficient bonding. Proof of the bonding must be sent back to the DOL, or risk a citation from the DOL. An amended Form 5500 may also be required if the amount of fidelity bond reported on the Form 5500 was incorrect.
ERISA requires plans to have a fidelity bond covering “every person who handles funds or other property of such plan.” The purpose of ERISA’s bonding requirement is to protect the plan against loss due to fraud or dishonesty by plan fiduciaries and others who handle plan funds, whether directly or through cooperation with others. A plan fiduciary or other person is considered to “handle” plan funds if the person has physical contact with cash, checks, or other similar property; is able to secure physical possession of plan funds; or has the potential ability to transfer plan funds to themselves or third parties. The fidelity bond needs to cover all fiduciaries and anyone who has actual authority over plan assets. The responsibility for calculating contributions or working on the payroll does not rise to the level of “handling” plan assets unless the person has the authority to cut the check and remit it to the trust.
The bond amount is required to be reported on the annual Form 5500 series the plan sponsor files. The amount of the bond coverage is determined by plan assets at the beginning of the year. With an important exception discussed below, the plan is required to have a bond for at least 10 percent of plan assets but generally no less than $1,000 and no more than $500,000 (unless the plan holds company stock).
Small Plan Audits and Fidelity Bonding
Small retirement plans (generally under 121 participants) need to consider another aspect of the bonding requirements. A small plan is not required to obtain an independent plan audit as long as at least 95 percent of plan assets (at the beginning of the plan year) are invested in “qualifying” assets. Qualifying assets include qualifying employer securities, participant loans, assets held by a regulated financial institution or insurance company (including registered broker-dealers), mutual fund shares (whether held at a financial institution or not), annuity contracts, and participant-directed assets.
If the small plan has less than 95 percent qualifying assets, it can avoid the plan audit by increasing the fidelity bond to cover both the regular fidelity bond and the full value of non-qualifying assets. Disclosures in the Summary Annual Report are required if this approach is taken.
Fidelity bonding is usually easy to obtain from an approved surety company, and can even be obtained retroactively. If you have questions regarding obtaining fidelity bond or the amount of required coverage, please contact us.