In reviewing retirement plans, getting ready for the 2010 administration season, I am coming across two types of plans. Plans that do not have adequate bond coverage (even no bond coverage) and plans that have bonds that are far greater than necessary. While a bond that is too big means that the plan sponsor is paying more in premiums than necessary, an inadequate bond is a violation of ERISA.
Section 412 of ERISA provides that persons that handle plan funds or other property generally must be covered by a fidelity bond in an amount no less than 10 percent of the amount of funds the person handles, and that in no case shall such bond be less than $1,000 nor is it required to be more than $500,000.
Small plans (generally less than 100 participants) may have to have bonds greater than 10% of assets, if the plan has Non-Qualifying Plan Assets. If a plan wishes to apply a “small plan audit” waiver and has more than 5% Non-Qualifying Plan Assets, it can obtain a bond equal to 100% of the value of the Non-Qualifying Plan Assets.
“Qualifying plan assets” are:
Any asset held by certain regulated financial institutions;
Shares issued by an investment company registered under the Investment Company Act of 1940 (e.g. mutual fund shares);
Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state;
In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution describing the plan assets held or issued by the institution and the amount of such assets;
Qualifying employer securities, as defined in ERISA section 407(d)(5); and
Participant loans meeting the requirements of ERISA section 408(b)(1), whether or not they have been deemed distributed.
All other plan assets are Non-Qualifying Plan Assets.
Bonds are easy to obtain, even online. One source that issues them is Colonial Surety. You can use the following link:
They also have a Bond Calculator to determine the correct amount of bond to purchase.