Does Your Plan Sponsor Fidelity Bond Coverage Still Leave You Vulnerable?

by LifeInc Retirement Life,Inc.Retirement Services

Generally, anytime an employee or contractor is hired to a position that handles any aspect of a company’s finances – from cashiers to CFOs – are required to be bonded by their employer. In such cases bonds are purchased as protection against fraud, theft, or other instances of dishonesty that result in financial loss to the company. Such is the case for fiduciaries of employee benefit plans who handle the plan funds. In fact, it is an ERISA requirement that plan sponsors acquire a fidelity bond with minimum.

Although most employer-sponsors adhere to this requirement, some may not realize that their fidelity bond protection is not nearly sufficient to cover losses and/or expenses associated with recovering losses. Then there are those employer-sponsors who simply aren’t aware of the requirement, at least until the Department of Labor comes snooping around and decides to put their entire 401k Plan Administrator under close scrutiny (you want to avoid that like the plague).

A thorough review of your potential fiduciary liabilities and the protections in place should be conducted at least every three years as part of your regular plan review.

What is the ERISA Fidelity Bond Requirement?

The Department of Labor has mandated that all Small Business 401k Plan officials with fiduciary responsibilities for employee benefits be bonded. This includes anyone who has physical contact with cash, checks or other plan property. It also includes officials who have the authority to negotiate fees, disburse funds, sign checks, or has the ultimate authority for make decisions on any of the above.

At a minimum, a fidelity bond must be purchased to cover at least 10 percent of the plan’s assets, for no less than $1,000 up to a maximum of $500,000. If your plan primarily holds employer stock, the maximum is increased to $1 million. Plans in which employer stock represents only a portion of a broadly diversified portfolio of investments are not subject to the higher requirement.

For plans that hold “non-qualifying assets,” such as limited partnerships, mortgages, real estate of securities of closely-held companies, the bond amount must cover 100 percent of the value of the assets, or the plan sponsor must allow for an annual audit by a third-party to attest to the existence and value of these assets.

Generally, employee benefit plans of small businesses comprised only of family members or “common law” employees are exempt.