A bond would be required for individuals having the following functions:
1. Physical contact with cash, checks or similar properties
2. Power to exercise physical contact with cash, checks or other similar properties
3. Power to transfer or negotiate property for a price
4. Power to disburse funds, sign checks or other negotiable instruments
5. Decision-making authority over any individual described above
How much protection is required?
The coverage required is a minimum of $1,000 or 10% of total plan assets as of the beginning of each plan year up to a maximum of $50,000. If it is the first plan year, an estimate of the value that will be handled for the year is required.
Are there penalties for not having a Fidelity Bond?
No, there are no penalties stated in the regulations; however; if there is a loss and a fidelity bond is not in place, the plan fiduciaries are held personally responsible.
As you know, question #26a on Form 5500 asks if the plan is covered by a Fidelity Bond. What happens if you do not have a bond and answer "no"?
The Department of Labor (DOL) recently sued a small company and its majority owner in Michigan for failing to obtain a bond for their plan. The 401k plan had14 participants and less than $50,000 in assets. Their answer to question #26a was "no".
Exceptions to the Fidelity Bond requirement:
1. Un-funded plans
2. Financial institutions with trust powers
3. Insured pensions
4. Plans that are not subject to ERISA's reporting requirements
New Audit and Bonding Legislation for Small Plans!
Traditionally, only Plans with over 100 participants were required to submit an independent qualified public accountant's opinion or audit each plan year.
The Small Plan Security Regulations, recently issued by the Department of Labor, provides similar requirements for small Plans UNLESS their assets qualify. The audit requirements are waived if, either 95% of the assets must constitute "qualifying plan assets," or the Fidelity Bond requirement for the Plan is increased to 100% of the total non-qualifying plan assets.
Qualifying plan assets include:
1) Assets monitored by "regulated financial institutions," such as banks, insurance companies, and registered broker-dealers.
2) Participant loans meeting the criteria established in ERISA Section 408(b)(1).
3) Qualifying Employer securities, such as marketable securities, employer stock, or an interest in a publicly-traded partnership, each issued by the employer or by an affiliate of the employer.
4) Shares issued by an investment company registered under the Investment Company Act of 1940 (i.e. registered mutual funds).
5) Investment and Annuity contracts issued by an insurance company qualified to do business under the laws of any state.
6) Assets in a participant "directed investment" type of an account and is furnished, at least annually, a statement from a regulated financial institution.
The Summary Annual Report (SAR) must now include additional information with regard to: financial institutions, bonding, participant and beneficiaries right to statements, and a notification on how to contact the Pension Welfare Benefit Administration to obtain certain plan documents.
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