The IRS recently announced the results of two special audit programs it conducted. The first program involved audits of approximately 50 Form 5500 filings for defined contribution plans with asset values greater than $100,000 but less than $250,000. The second program audited 50 401(k) plans covering three to eight participants. Surprisingly (maybe not, given our experience), the most common error revealed by both projects was the failure to have the plan adequately bonded as required by ERISA section 412.
The amount of bond required by ERISA is 10% of the assets in the plan but not less than $1,000 and but not more than $500,000 ($1,000,000 for plans that hold employer securities). The bond must cover all persons, including fiduciaries, who handle funds or other property of an employee benefit plan. The purpose of the bond is to protect the employee benefit plan from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds. The United States Department of Labor’s Field Assistance Bulletin No. 2008-04 discusses the bonding requirements in an FAQ format.
Note that an ERISA fidelity bond, which is required, is not the same as fiduciary liability insurance, which is not required. Fiduciary liability insurance covers the fiduciaries of the employee benefit plan in the event of a breach their fiduciary duties, which may involve imprudence but may not rise to the level of fraud or dishonesty. If there is no bond available when a defalcation occurs, those responsible for obtaining the bond could be liable to the plan for its losses. An ERISA bond can usually be obtained through your property and casualty insurance broker.
*This post was written by guest blogger, Timothy J. Snyder, Esq. Tim is the Chair of Young Conaway’s Tax, Trusts and Estates, and Employee Benefits Sections. His primary area of practice is employee benefits, which involves both the benefit provisions of provisions of the Internal Revenue Service and ERISA. He represents business and professionals in establishing, monitoring, and administering employee-benefit plans, new comparability retirement plans, non-qualified deferred-compensation plans, health, disability and life benefits, COBRA, HIPAA, ADA and ADEA.