Small Plan Audit Exemption

[Guest Giovanni]

I have a calendar year 401(k) Plan with only 3 remaining participants for which no contributions have been made for several years. The participants are husband, wife and son. The husband owns 100%. All 3 are trustees of the Plan. 35% of the assets are invested in real estate. Since all 3 are trustees, I assume a fidelity bond is not needed. Therefore, I'm wondering if the Plan would be exempt from the new small plan audit requirement which would be effective for their 2002 Form 5500.

[Mike Preston]

I would be very surprised if the plan didn't need a bond to begin with. Hence, an audit looks required, as far as I can see.

What form has been filed? EZ or 5500? Why?

May want to consider amending to zero percent money purchase plan to avoid qualification requirement of substantial and recurring contributions.

Maybe you can split the plan into two? One with the non-qualifying assets, where the only participant is the 100% owner. Then neither plan would need an audit.

[JohnCheek]

If it were just the H and W, you could file an EZ and avoid the audit that way, but the inclusion of the son seems to require a 5500.

Trustees or not, I think you need a fidelity bond, unless you could argue that none of the trustees "handle funds".

I think the 35% real estate-- a nonqualifying asset-- triggers an audit requirement, unless you buy the extra fidelity coverage. The coverage shoul be very cheap, so I would not be elooking to restructrure the plan just to avoid an audit.

An audit, even with almost no activity and only 3 participants, still requires some CPA time, and therefore would still cost more than the extra fidelity bonding.

[Mike Preston]

John, have you identified anywhere that bonds over $500,000 can actually be obtained. I haven't been able to, although since I don't have a client that needs this at the moment, I admit to not having tried very hard.

In fact, one bond broker out here is so out to lunch that he sent me an email in response to my inquiry as to the availability of bonds in excess of $500,000 stating:

> We do have a market but they require an annual audit on

> ERISA bonds $250,000.00 and over on the new ERISA

> requirements.  

I kid you not!

[Guest Giovanni]

I have not filed an EZ because of the son.

If an audit is not required if the only participant is the 100% owner, would an audit be required if the only other paritcipants are the wife and son? Wouldn't stock attribution be relevant?

In any case, getting the bond to cover the nonqualifying assets seems to be a good answer. It would be the cheapest way to go, unless no audit is required at all.

[JohnCheek]

Mike, I've seen many bonds over $500k, but they were for multiemployer plans, where each plan needed at least $500k of coverage, and a single bond covered several plans.

I have not yet seen the extra coverage actually obtained in order to preserve the small plan exemption from audit.

Whe DOL announced the new requirement, it discussed the issues with bonding industry reps, who suggested a type of adverse selection might make extra coverage a bit more expensive than the basic coverage, but no one suggested that the extra coverage could not be obtained.

Maybe you could fire the son and pay out his benefit to a rollover IRA. Then you have an EZ, and no audit.

[Blinky the 3-eyed Fish]

We had a client obtain their own bond for about $650,000. If anyone's interested, I can see where they got it from. Of course, I need to have that interest shown before I actually get up and get the file.

[Mike Preston]

I have yet to find anybody willing to issue such a bond. I'd be interested in knowing where it came from. But, don't leave your comfy seat for me, as I don't have anybody chomping at the bit for it. ;-)

[Blinky the 3-eyed Fish]

Mike, actually, I had switched to doing squat thrusts at my desk, so it was a nice change to merely walk to the file room.

It turns out I was incorrect. The bond was for $1,500,000 and obtained through State Farm Insurance. Like a good neighbor, State Farm is there. (This slogan is a registered trademark of State Farm Insurance and their subsidiaries. Any use of this slogan is prohibited).

[Lynn Campbell]

One of my clients is in the process of obtaining a $1.6 million bond from Travelers. I would be interested in hearing from other TPA's as to their experience with bond carriers and these new rules...