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What happens if not covered by ERISA bond?


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14 replies to this topic

#1 BG5150

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Posted 16 January 2009 - 10:10 AM

What are the ramifications if plan fiducuiares are not covered by an ERISA fidelity bond? We have clients who have been putting zero on the Schedue I for years.

What could happen if they ever get audited, what are the penalties?

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Two wrongs don't make a right, but three rights make a left.


#2 rcline46

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Posted 16 January 2009 - 10:25 AM

Research the DOL cases - fines, jail, and cannot serve as a fiduciary come to mind.

#3 Below Ground

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Posted 16 January 2009 - 10:42 AM

Another concern is that you may create a situation where the Schedule I needs a "CPA Audit". Check out the rules for waiving this requirement and you will find that a bond that covers the nonqualified assets is required. Bonds are cheap, audits are not. I note that a "good audit" takes a lot of work; meaning the fee is justified. Of course, getting an audit done when not needed could be said to be a waste of BIG money! :o
Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

#4 Kevin C

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Posted 16 January 2009 - 03:16 PM

rcline46,

Can you name a case where someone was fined or jailed for not having a fidelity bond? I tried a search on our reference service. All I could find were some where the new court appointed fiduciary was instructed to purchase a fidelity bond.

It's been a few years, but I have been told by a couple of different ERISA attorneys that there is no provision for a penalty if a fiduciary does not have the required bond. Has that changed recently?

#5 PensionPro

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Posted 16 January 2009 - 04:04 PM

It seems that it is rare for the DOL to file a lawsuit simply because of a lack of fidelity bond, but there is a case from about 8 years ago:

PWBA Field Office Press Release

PENSION AND WELFARE BENEFITS ADMINISTRATION V-301
Issued By The Chicago Office Of Public Affairs


CONTACT:
OFFICE: Sharon Morrissey
(202) 219-8921 FOR RELEASE: IMMEDIATE
December 4, 2000

LACK OF FIDELITY BOND PRECIPITATES LABOR DEPARTMENT LAWSUIT WITH
SNYDER FARM SUPPLY AND PENSION PLAN TRUSTEE

The U.S. Department of Labor has sued Alto, Mich.-based Snyder Farm Supply and its majority owner Thomas E. Snyder, who also administered the Snyder Farm Supply 401(k) pension plan, for their failure to bond the pension plan offered to the company’s employees.

The lawsuit, filed today in federal district court in Grand Rapids, cites the defendants’ continuing fiduciary violation of the Employee Retirement Income Security Act of 1974 (ERISA) for failing to maintaining a fidelity bond. ERISA Section 412 requires that fiduciaries of private sector pension plans obtain a bond in the minimum amount of 10 percent of the amount of plan funds handled, to protect employee benefit plans against loss caused by acts of fraud or dishonesty.

The department is seeking to have the federal court (1) order to defendants to obtain and maintain a fidelity bond to meet the requirements of ERISA Section 412; and (2) remove Thomas Snyder as the plan administrator and be replaced by an independent trustee, who will subsequently administer and/or terminate the plan.

At various times during the plan’s five-year existence, there have been as many as 44 plan participants and assets of $241,651. Most recently, the plan had 14 plan participants and $44,535 in assets as of Nov. 28, 2000.

The complaint is a result of an investigation by the Cincinnati Regional Office of the department’s Pension and Welfare Benefits Administration, which oversees federal pension law.

# # #

(Herman v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan
Civil Action # 1:00CV 887
PensionPro, CPC, TGPC

#6 Belgarath

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Posted 16 January 2009 - 04:17 PM

It seems to me that as most plans specifically direct the Fiduciary to obtain any bonding required by ERISA 412, there's an operational violation for not following the terms of the plan. It seems as though the IRS could, theoretically, impose sanctions/penalties, etc. for this. Additionally, couldn't this be considered a breach of fiduciary duty, for which the fiduciary could be PERSONALLY liable under ERISA 409? If the funds are invested badly, embezzled, etc., and there's no bonding, this seems like a risky position for a fiduciary to be in. I'll leave it to the ERISA attorneys as to whether these thoughts are off the wall or not - but I simply can't imagine that they can get off unscathed. But maybe they can...

#7 Fiduciary Guidance Counsel

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Posted 16 January 2009 - 04:23 PM

Why wouldn’t one want to get the fidelity-bond insurance?

Imagine a theft. Imagine it’s a theft that the insurance contract, if the plan held it, would respond to. Now imagine the participants’ claim. You were a fiduciary. Even without expert testimony about what would be “the care, skill, prudence, and diligence” of an expert retirement plan fiduciary, it must be a per-se breach to fail to do that which the statute expressly commands. Had you caused the plan to get the fidelity insurance, the plan would have been covered. Therefore, you are personally liable to make good the plan’s loss. While there’s a logic gap in that plaintiff-style argument, I’d hate to be a defendant who needs to hope that the judge is a strict constructionist.

A fiduciary need not pay for the insurance personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. It must be a “reasonable expense[] of administering the plan” to do a specific thing that the statute expressly commands.
Peter Gulia PC
Fiduciary Guidance Counsel
Philadelphia, Pennsylvania
215-732-1552
Peter@FiduciaryGuidanceCounsel.com

#8 pmacduff

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Posted 16 January 2009 - 05:10 PM

We have had clients without fidelity bonds under IRS audit and the auditor did just make them obtain one asap and show proof. We also had another client who had not kept the coverage amount updated who was required to update the bond immediately and show the auditor the proof.

These plans were both with major 401(k) vendors, however, so who knows if that made a difference. For many years it seemed that no one new whether the fidelity bond really was REQUIRED. Then I remember that once the DOL got more involved in 401(k) plans and compliance, it seems that they are stating that it is absolutely a requirement and not optional. For those of you who are ASPPA members a recent ASPPA ASAP addresses this very issue and (as I mentioned) the DOL position on bonding that it is required for all plans.

#9 Lou S.

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Posted 16 January 2009 - 07:40 PM

We have had clients without fidelity bonds under IRS audit and the auditor did just make them obtain one asap and show proof. We also had another client who had not kept the coverage amount updated who was required to update the bond immediately and show the auditor the proof.

These plans were both with major 401(k) vendors, however, so who knows if that made a difference. For many years it seemed that no one new whether the fidelity bond really was REQUIRED. Then I remember that once the DOL got more involved in 401(k) plans and compliance, it seems that they are stating that it is absolutely a requirement and not optional. For those of you who are ASPPA members a recent ASPPA ASAP addresses this very issue and (as I mentioned) the DOL position on bonding that it is required for all plans.


We had pretty much the same experience with both IRS and DOL audits of plans without them. That is they said, get one and show proof. But no penalty was issued to either plan, though each was at least 5 years ago so the kinder gentler IRS/DOL may not be so kind going forward. I think it probably all depends on the particular auditor you draw and if that is the only problem with the Plan.

Both were routine random audits and other than the missing fidelity bond there were no other issues with either plan. If there were other problems uncovered maybe the results would have been different.

#10 K2retire

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Posted 16 January 2009 - 07:46 PM

I asked about this at the DOL Speaks conference last spring. The DOL person with whom I spoke was "shocked" when I asked why nothing was being done to follow up on 5500s that are filed showing no fidelity bond. I believe that the recent ASAP holds the answer -- if the only enforcement is a lawsuit the probably don't have the resources to pursue the issue.

#11 Bird

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Posted 19 January 2009 - 12:26 PM

Our experience with the IRS has been the same as noted - IRS just says to get one (it's not their job to enforce it). I can't recall any DOL audits or other interaction where one didn't exist so no direct experience there.

I'm quite sure that in the case cited, the guy was told to get a bond, several times, and refused.

#12 Guest_named_Sieve_*

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Posted 19 January 2009 - 01:34 PM

I'm not sure why, but ERISA bonds can readily be purchased with retroactive coverage. I suspect that's one reason why the DOL permits such an easy out for those with coverage gaps.

#13 Below Ground

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Posted 19 January 2009 - 06:41 PM

Just went through an IRS and DOL Audit on a plan where coverage was "improper". For both audits the auditor simply said correct coverage and show proof. Both audits closed favorably.
Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

#14 Kevin C

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Posted 20 January 2009 - 10:11 AM

Our experience with audits has been the same. If they don't have sufficient bonding coverage, they are told to get it.

A company selling fidelity bonds sent e-mails back in 2003 claiming the Snyder Farm Supply plan was forced to terminate because the company did not get a fidelity bond. I did an internet search at the time and found an article with more information on the case. I didn’t save the article, but did make notes about it in an e-mail. The company went out of business sometime before the DOL sued in Dec. 2000. The original DOL complaint did not seek plan termination. It sought removal of the Trustee/Plan Administrator and the naming of an independent Trustee. The plan was audited in 1998 and asked about their “no” response to the bond question on their 95-97 5500’s. The DOL gave them a chance to take care of it, but apparently they refused.

#15 Lori H

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Posted 27 January 2009 - 10:47 AM

This happened once with a plan that got audited by the DOL. They just required proof that a bond was obtained. No fines or sanctions.