The Employee Retirement Income Security Act (ERISA) provides that each plan official who “handles” plan funds or other property be bonded by an approved surety company for acts of fraud or dishonesty. In addition to the mere physical control or ability to exercise control of the funds, “handling” includes disbursement authority, signatory authority with regard to checks and other negotiable instruments, the authority to supervise or make final decisions with regard to these activities or the power to transfer funds. The fidelity bond must be fixed at the start of each plan year in an amount equal to at least 10% of the amount of plan funds as of the last day of the preceding year. The bond cannot be less than $1,000 and is not required to exceed $500,000 (increased to $1,000,000 if the plan holds employer securities). The bond must provide for a discovery period of one year after the contract ends and it must provide that any proceeds owed must be paid directly to, or paid over to, the plan. A blanket bond, individual schedule, named schedule, or position schedule are acceptable structures. In addition, either multiple-penalty or aggregate penalty provisions are permissible. A bond may cover a single plan or multiple plans, but in the case of multiple plans, it must adequately cover each of the plans at least up to the statutory minimum requirements. Plans covering only an owner and spouse or partnership partners are exempt from the requirements.
A plan is required to engage an independent qualified public accountant to audit the assets, or you may have to increase your bonding amount, if at least 95% of your plan assets are not “qualifying plan assets.” “Qualifying plan assets” are insurance and annuity contracts, participant loans, assets held by a regulated financial institution, mutual fund shares, or individually-directed participant accounts over which the participant exercises control and receives, at least annually, a statement from the regulated financial institution describing the assets held by such institution. Limited Partnerships, collectibles, real property, non-publicly-traded securities and the like (which are not in participant-directed accounts with a regulated financial institution) are not “qualifying plan assets” and may give rise to additional bonding requirements or an audit.
The coverage amount is reported on the Form 5500 filed with the Employee Benefits Security Administration (EBSA) each year. Although not all-inclusive, a list of the DOL approved insurance companies can be found at http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570_a-z.htm. Diligent insurance agents monitor the bonding requirements and an existing business fidelity bond can be endorsed to cover these bonding requirements at little or no extra cost. You might want to consider coverage above the minimum amount to cover two or three years’ future contributions and earnings. The cost is minimal and you can avoid the paperwork of increasing coverage each year. Alternatively, you may be able to select a bond that automatically increases each year to the required 10% coverage level.