Plan sponsors often overlook the importance of maintaining an ERISA fidelity bond for an employee benefit plan. However, ignoring this requirement could result in unwanted scrutiny from the Department of Labor (DOL). As a way to protect employee benefit plans from any losses caused by fraud or dishonesty, ERISA section 412 requires bonding for plan fiduciaries as well as every person who handles plan funds or property. A plan official considered to be handling the plan assets includes, but is not limited to, anyone who has the power to transfer or disburse plan funds, has physical contact with plan cash or checks, has the authority to sign checks, or is responsible for making decisions regarding any plan feature that would require bonding. Each plan official must have a bond policy covering at least 10% of the plan assets he or she handles, up to $500,000 (or $1,000,000 for plans with employer securities).
Plan coverage is based on the plan asset balance at the beginning of each plan year/valuation period and the coverage amount must be reported annually on Form 5500. If a bond is insufficient or the Form 5500 indicates that a plan does not have a fidelity bond in place, that plan may be red-flagged by the DOL, possibly increasing the likelihood that the plan will be selected for an audit. An annual bond review with a Third Party Administrator and an insurance agent is a simple measure that could prevent a plan from falling under the DOL microscope.
For additional information about ERISA fidelity bond requirements, please see Field Assistance Bulletin No. 2008-04 on the DOL website (http://www.dol.gov/ebsa/regs/fab2008-4.html) or contact your Watkins Ross administrator.
Blog authored by Sara Lewis, Retirement Plan Administrator.