When I review Forms 5500 of micro and small 401(k) plan sponsors, one mistake that I am frequently seeing is insufficient fidelity bond coverage. While administrative and monetary consequences of this red flag are not that severe, it is to a 401(k) plan sponsor’s best interest to have it fixed as soon as possible. But before we get into the matter of fixing it, let’s see what a fidelity bond is and why your company needs to have it.
What is a Fidelity Bond?
The fidelity bond is a basic type of insurance that protects the plan and participants against losses due to the fraudulent activity or dishonesty of a fiduciary. Under ERISA, fidelity bond is required for every fiduciary of an employee benefit plan and every person who handles plan funds or other property (some exceptions apply).
ERISA Section 412 requires the plan official who handles the assets of the plan to be bonded for at least 10% of the amount of plan funds handled in the preceding year. The minimum and maximum limits for bond amounts are $1,000 and $500,000, or $1,000,000 for plans that offer company stock. For example, let’s assume that your plan’s assets are $2,500,000 and there are two officials that have control over the plan’s assets, the plan trustee and administrator. According to ERISA, both officials must be bonded for $250,000 each (10% of total plan assets).
The above limits apply to employee benefit plans with qualifying assets only (assets held by a financial institution which may include stocks, bonds, and mutual and exchange-traded funds). Employee benefit plans with more than 5% of non-qualifying assets (such as limited partnerships, artworks, collectibles, real-estate, and mortgages that are not held by a financial institution), must do one of the following two things:
Have the bond coverage equal to 100% of the value of these non-qualifying assets
Perform an annual full-scale audit
Unfortunately, many 401(k) plan sponsors are simply not aware of these fidelity bond requirements. It is common to see 401(k) plan sponsors with a fidelity bond coverage of just 3-5% of total assets, when it should be at least 10%. While there are no penalties for insufficient fidelity bond coverage, the enforcement of the fidelity bond requirements is among the DOL’s priorities. Thus, if your plan has insufficient fidelity bond coverage, you can inadvertently increase the risk of your plan being audited.
Plan of Action
To avoid any potential audits, you need to do things the right way and be in compliance with all laws and regulations. Review the plan’s existing coverage and make sure it is at least 10% of the amount of plan funds handled in the preceding year. If you find that it is less than 10%, all you need to do is purchase more coverage. It’s as simple as that. If you want to have more coverage, you can certainly do that. But, the DOL can’t demand more than 10%.
Who to Get an ERISA Bond From?
Unfortunately, you can’t buy an ERISA fidelity bond from any insurance company out there on the market. All bonds must be obtained from a surety or reinsurer that is named on the Department of the Treasury’s Listing of Approved Sureties. However, there are plenty of insurers to choose from and additional coverage is not as expensive as you may think. Moreover, an ERISA fidelity bond can be paid with plan assets.