Bonding Requirements

[Guest Max Power]

Does a DB plan funded with group annuity contracts need to be bonded?

[Belgarath]

I would say yes. See attached:

29 CFR 2580.412-6 - Determining when ``funds or other property'' are ``handled'' so as to require bonding.

Section Number: 2580.412-6

Section Name: Determining when ``funds or other property'' are ``handled'' so as to require bonding.

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(a) General scope of term. (1) A plan administrator, officer, or

employee shall be deemed to be ``handling'' funds or other property of a

plan, so as to require bonding under section 13, whenever his duties or

activities with respect to given funds or other property are such that

there is a risk that such funds or other property could be lost in the

event of fraud or dishonesty on the part of such person, acting either

alone or in collusion with others. While ordinarily, those plan

administrators, officers and employees who ``handle'' within the meaning

of section 13 will be those persons with duties related to the receipt,

safekeeping and disbursement of funds, the scope of the term ``handles''

and the prohibitions of paragraph (b) of section 13 shall be deemed to

encompass any relationship of an administrator, officer or employee with

respect to funds or other property which can give rise to a risk of loss

through fraud or dishonesty. This shall include relationships such as

those which involve access to funds or other property or decisionmaking

powers with respect to funds or property which can give rise to such

risk of loss.

(2) Section 13 contains no exemptions based on the amount or value

of funds or other property ``handled'', nor is the determination of the

existence of risk of loss based on the amount involved. However,

regardless of the amount involved, a given duty or relationship to funds

or other property shall not be considered ``handling'', and bonding is

not required, where it occurs under conditions and circumstances in

which the risk that a loss will occur through fraud or dishonesty is

negligible. This may be the case where the risk of mishandling is

precluded by the nature of the funds or other property (e.g., checks,

securities or title papers which can not be negotiated by the persons

performing duties with respect to them). It may also be the case where

significant risk of mishandling in the performance of duties of an

essentially clerical character is precluded by fiscal controls.

(b) General criteria for determining ``handling''. Subject to the

application of the basic standard of risk of loss to each situation,

general criteria for determining whether there is ``handling'' so as to

require bonding are:

(1) Physical contact. Physical contact with cash, checks or similar

property generally constitutes ``handling''. However, persons who from

time to time perform counting, packaging, tabulating, messenger or

similar duties of an essentially clerical character involving physical

contact with funds or other property would not be ``handling'' when they

perform these duties under conditions and circumstances where risk of

loss is negligible because of factors such as close supervision and

control or the nature of the property.

(2) Power to exercise physical contact or control. Whether or not

physical contact actually takes place, the power to secure physical

possession of cash, checks or similar property through factors such as

access to a safe deposit box or similar depository, access to cash or

negotiable assets, powers of custody or safekeeping, power to withdraw

funds from a bank or other account generally constitutes ``handling'',

regardless of whether the person in question has specific duties in

these matters and regardless of whether the power or access is

authorized.

(3) Power to transfer to oneself or a third party or to negotiate

for value. With respect to property such as mortgages, title to land and

buildings, or securities, while physical contact or the possibility of

physical contact may not, of itself, give rise to risk of loss so as to

constitute ``handling'', a person shall be regarded as ``handling'' such

items where he, through actual or apparent authority, can cause those

items to be transferred to himself or to a third party or to be

negotiated for value.

(4) Disbursement. Persons who actually disburse funds or other

property, such as officers or trustees authorized to sign checks or

other negotiable instruments, or persons who make cash disbursements,

shall be considered to be ``handling'' such funds or property. Whether

other persons who may influence, authorize or direct disbursements or

the signing or endorsing of checks or similar instruments will be

considered to be ``handling'' funds or other property shall be

determined by reference to the particular duties or responsibilities of

such persons as applied to the basic criteria of risk of loss.

(5) Signing or endorsing checks or other negotiable instruments. In

connection with disbursements or otherwise, any persons with the power

to sign or endorse checks or similar instruments or otherwise render

them transferable, whether individually or as co-signers with one or

more persons, shall each be considered to be ``handling'' such funds or

other property.

(6) Supervisory or decision making responsibility. To the extent a

person's supervisory or decision making responsibility involves factors

in relationship to funds discussed in paragraph (b)(1), (2), (3), (4),

or (5) of this section, such persons shall be considered to be

``handling'' in the same manner as any person to whom the criteria of

those paragraphs apply. To the extent that only general responsibility

for the conduct of the business affairs of the plan is involved,

including such functions as approval of contracts, authorization of

disbursements, auditing of accounts, investment decisions, determination

of benefit claims and similar responsibilities, such persons shall be

considered to be ``handling'' whenever the facts of the particular case

raise the possibility that funds or other property of the plan are

likely to be lost in the event of their fraud or dishonesty. The mere

fact of general supervision would not necessarily, in and of itself,

mean that such persons are ``handling.'' Factors to be accorded weight

are the system of fiscal controls, the closeness and continuity of

supervision, who is in fact charged with, or actually exercising final

responsibility for determining whether specific disbursements,

investments, contracts, or benefit claims are bona fide, regular and

made in accordance with the applicable trust instrument or other plan

documents.

(i) For example, persons having supervisory or decisionmaking

responsibility would be ``handling'' to the extent they:

(a) Act in the capacity of plan ``administrator'' and have ultimate

responsibility for the plan within the meaning of the definition of

``administrator'' (except to the extent that it can be shown that such

persons could not, in fact, cause a loss to the plan to occur through

fraud or dishonesty);

(b) Exercise close supervision over corporate trustees or other

parties charged with dealing with plan funds or other property; exercise

such close control over investment policy that they, in effect,

determine all specific investments;

© Conduct, in effect, a continuing daily audit of the persons who

``handle'' funds;

(d) Regularly review and have veto power over the actions of a

disbursing officer whose duties are essentially ministerial.

(ii) On the other hand, persons having supervisory or decisionmaking

responsibility would not be ``handling'' to the extent:

(a) They merely conduct a periodic or sporadic audit of the persons

who ``handle'' funds;

(b) Their duties with respect to investment policy are essentially

advisory;

© They make a broad general allocation of funds or general

authorization of disbursements intended to permit expenditures by a

disbursing officer who has final responsibility for determining the

propriety of any specific expenditure and making the actual

disbursement;

(d) A bank or corporate trustee has all the day to day functions of

administering the plan;

(e) They are in the nature of a Board of Directors of a corporation

or similar authority acting for the corporation rather than for the plan

and do not perform specific functions with respect to the operations of

the plan.

(7) Insured plan arrangements. In many cases, plan contributions

made

by employers or employee organizations or by withholding from employee's

salaries are not segregated from the general assets of the employer or

employee organization until payment for purchase of benefits from an

insurance carrier or service or other organization. No bonding is

required with respect to the payment of premiums or other payments made

to purchase such benefits directly from general assests, nor with

respect to the bare existence of the contract obligation to pay

benefits. Such arrangements would not normally be subject to bonding

except to the extent that monies returned by way of benefit payments,

cash surrender, dividends, credits or otherwise, and which by the terms

of the plan belonged to the plan (rather than to the employer, employee

organization, insurance carrier or service or other organization) were

subject to ``handling'' by plan administrators, officers or employees.

[Guest Max Power]

Thanks Belgarath, I wasn't sure if the term "handling" (of funds) extended to this matter.