Bonding or Other Escrow Vehicles for Restricted Employees

[Guest David M]

Our plan allows lump sum payouts for top 25 employees, even when funding of current liabilities is at a less-than-110% level. However, we are finding that bonding companies are not eager to write a bond for the purpose of satisfying the restriction for an individual. Some few surety companies remember writing these bonds a decade ago, but they seem to be only half-heartedly attempting to resurrect products to meet this need.

Likewise, IRA custodians seem wholly unfamiliar with the notion of a "restricted IRA."

Does anyone know of any surety company that will issue bonds for this purpose?

In addition, has anyone found an IRA custodian who will accept a restricted IRA?

[mbozek]

I dont know of any IRA custodian who will agree to the terms you suggest because all IRAs are approved by the IRS to provide benefits without restriction at the request of the owner. Therefore an IRA custodian would have to get IRS approval for any change in the agreement that would restrict the right of the owner to recieve the money and pay for the cost of the revisions to the custodial account. I dont think there is much call for this type of IRA. Further the custodian does not want to be reliant on another person to notify it when the restriction is lifted.

[AndyH]

Sorry to say, but I asked a similar question here several months ago but got no affirmative answers.

[Blinky the 3-eyed Fish]

I am in the same boat with many plans.

Me: Sorry, Joe Blow cannot receive his lump sum distribution.

Client: Why?

Me: Because...

Client: Do you know of any reputable insurance companies that will issue an unsecured bond or letter of credit.

Me: No.

Client: Why not you imbecile?

Where's pax; he should know of someone?

[Guest jgroves]

Ok, lots of post on this, however, I see no answers so I will come right out and ask. Does anyone know a Bonding company who is familiar with this sort of thing? If so, please email me directly. Also, any ERISA Attorneys out there who have actually handled (not just familiar) with these types of 1.401(a)(4) questions?

Thanks!

[Kirk Maldonado]

I'm pretty sure that there are some private letter rulings approving rollovers of the restricted amounts into IRAs, but I haven't seen any of them for a number of years.

[Guest Victoria Pelletiere]

We too have encountered these situations recently - especially with the downturn in the market. We've had plans that were well funded and now must restrict an HCE from receiving a LSD. It's not easy to explain, especially when an HCE received his full LSD a couple of years ago. We have searched for an insurance company to issue a bond and have not found one. We mention this option to the client and inform him that we have not had success in finding a source for a bond but give him the choice to do his own search. The options our clients have used are 1. elect a LSD but only receive annual payments equal to what they would receive as a SLA - once the plan is funded enough, they can take the balance of their LSD; 2. defer until there are sufficient assets; 3. Have 125% of the restricted amount in an IRA and sign the required agreement.

[Blinky the 3-eyed Fish]

Has anyone been able to find an insurance company that will issue this type of bond? I surely haven't and have made about 20 phone calls. Uncle!

One other note, where does it say the IRA will need to be specially operated by the custodian? I understand that the employee is restricted from taking out certain funds, but I am not reading that the responsibility is one of the IRA custodian's, but rather the employee's.