Fidelity Bond Requirement

[Guest James Osterhaus]

Are Profit Sharing Plans exempt from aquiring fidelity bonds their first year? I allways thought so, but I didn't see anything in ERISA 412 stating that.

Also

If a bond is required the 1st year, what about a Profit Sharing Plan where the Profit Sharing contribution is a receivable. Would one be required then? Would if make a difference if the 5500 was done on a cash or accrual basis.

[Guest UKH]

We tell our clients to obtain a fidelity bond for their retirement plan irrespective whether it is a profit sharing plan or a 401(k) plan. We strongly encourage the bond especially since DOL came out on October 19, 2000 with final regulations on the small plan audit requirement.

Up to now plans with less than 100 participants ("small plans") were automatically exempt from the accountant's audit requirement. Under this new regulation most small plans will still be exempt from an audit provided they meet certain requirements. If these requirements are not met an accountant’s audit will be required.

The new audit waiver conditions are effective for plan years, which begin after April 17, 2001.

Example - If a plan year ends April 30, 2001, the new audit waiver requirements will apply for plan year beginning May 1, 2001 and ending April 30, 2002. All off-calendar year plans will be subject to this new regulation before calendar year plans, as they have there first plan year beginning after April 17, 2001.

Calendar year plans will not be subject to these new requirements until January 1, 2002, since that will be the first plan year after April 17, 2001.

These regulations do not pertain to welfare benefit plans or 403(B) plans.

Conditions To Obtain Exemption From Audit Requirement

In order to be exempt from the audit requirement, a small plan must satisfy both requirements mentioned below:

1) Investment/Bonding Requirement

At least 95% of the plan's assets must be invested in "Qualifying Plan Assets" (see below) OR, if the 95% requirement is not satisfied, the assets that are not qualifying plan assets must be covered by a bond which meets the requirements of ERISA §412 and which is not less than the value of such assets.

The determination of the percentage of qualifying plan assets is made at the beginning of the plan year, based on the information as of the last day of the preceding plan year.

All qualified plans are required to have a surety bond in the amount of at least 10% of plan assets. The bond provides protection against fraud or dishonesty on the part of the plan administrator, officer or employee.

2) Disclosure Requirement - Summary Annual Report

Each year the plan administrator has to file an annual report called Form 5500. A summary of Form 5500, called the Summary Annual Report, must be provided to each plan participant and beneficiary.

Small plans will have to include the following additional information in the Summary Annual Report in order to be exempt from the audit rules:

 Information about the name of each financial institution holding qualifying plan assets and the amount of such assets held by such institution as of the end of the plan year.

 Information about the surety company issuing the bond.

 A notice indicating that participants and beneficiaries may, upon request and without charge, examine or receive copies of:

a) Evidence of the required bond.

b) Statements received from the financial institutions describing the qualifying plan assets.

 A notice stating that the participants and beneficiaries should contact Department of Labor's Pension and Welfare Benefits Administration if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond.