Penalty for not having fidelity bond?

[BG5150]

What are the penalties for a plan not being covered by a fidelity bond, if any?

We have a bunch of clients (some with a few $MM) and no bond.

[Tom Poje]

the answer may surprise you - there actually is no penalty.

of course, you may want to show such clients the following

http://www.dol.gov/ebsa/newsroom/pr032901.html

nothing like having the DOL sue you. and everything else they made the plan do. not recomended to go this route.

and in the case of a small plan with enough nonqualifying assets I believe you have to have an independent audit as well.

[Bird]

My recollection of that case is that the DOL told him to get a bond and he refused, so they took him to court.

My experience with IRS audits and what I've heard from others is that they simply tell you to get a bond. Of course it's not an IRS issue.

The non-qualifying assets/audit issue is where there really is, effectively, a penalty.

[Kirk Maldonado]

I never cease to be amazed at the incredibly arcane, but extremely useful, postings that we get here on the Message Boards. The post by Tom Poje is a perfect example.

[Tom Poje]

while looking for something else, tripped across Q and A 2003 ASPPA conference #57

same question was asked.

answer- there is no penalty, but DOL could remove the trustee.

then it was added, as a result, if plan was subject to small plan audit then normal penalty rules would apply.

[Peter Gulia]

Is serving as a plan fiduciary or handling plan assets while not bonded a Federal crime? 29 U.S.C. 1112(b) [ERISA 412(b)] describes it as "unlawful", a word that in other U.S. statutes often means punishable as a crime, which Black's Law Dictionary (8th) gives as the word's second meaning.

More immediately, unless a plan fiduciary himself or herself intends to steal plan assets, why wouldn't one want to get the fidelity 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.

What's nutty about not buying the insurance is that the fiduciary need not pay for it personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. While the addressee of the famous Maldonado letter might have further information for us, it seems that it ought to be a "reasonable expense[] of administering the plan" to do a specific thing that the statute expressly commands.

Peter Gulia

Fiduciary Guidance Counsel

[Bird]

More immediately, unless a plan fiduciary himself or herself intends to steal plan assets, why wouldn't one want to get the fidelity insurance?

That's an interesting question. My clients (generally small business owners who are also the trustees and have most of the assets in the plan) might ask "Why would I want to get this fidelity bond? I'm not going to steal my own money!"

Yes, I make them get it.

[BG5150]

Plus, the bonds aren't that expensive, are they?

[Kirk Maldonado]

Peter Gulia:

Thanks for the plug.

The answer is that the use of plan assets to purchase the fidelity bond was approved in DOL Reg. § 2509.75-5, which provides, in relevant part, as follows:

Q. FR-9 May an employee benefit plan purchase a bond covering plan officials?

A. Yes. The bonding requirement, which applies, with certain exceptions, to every plan official under section 412(a) of the Act, is for the protection of the plan and does not benefit any plan official or relieve any plan official of any obligation to the plan. The purchase of such bond by a plan will not, therefore, be considered to be in contravention of sections 406(a) or (b) of the Act.

[TPApril]

Why is it that so few plans that do have fidelity bonds report coverage amounts that are less than 10%, often it's not even close to 10% of the assets, yet the have the coverage.

[K2retire]

Don't know the answer to your question, but I have heard that enforcing the fidelity bond requirements is one of the initiatives that prompted the hiring of additional DOL investigators recently.

[TPApril]

Currently putting together dfvc for small plan that didn't file 5500 for the past 5 years. Company did not have fidelity bond for most of that period and just reinstated in 2013.Would we use that current coverage on prior 5500's too? or check off No.

[Belgarath]

I would check off "no." If they didn't have the coverage, don't say they did.

As a personal observation related to the general subject, I never understood where the 10% amount came from. If the fiduciary embezzles the plan funds, 10% ain't going to cover the balances for the NHC except in the very smallest plans. Probably there was some sort of reason for the 10% standard when established, but it escapes me...

[david rigby]

As a personal observation related to the general subject, I never understood where the 10% amount came from. If the fiduciary embezzles the plan funds, 10% ain't going to cover the balances for the NHC except in the very smallest plans. Probably there was some sort of reason for the 10% standard when established, but it escapes me...

Original ERISA section 412 states "...not less than 10 per centum of the amount of funds handled." Committee reports notes that this "...provision is generally identical to present section 13 of the Welfare and Pension Plans Disclosure Act..."

Thus, while it may be an arbitrary percent, it was a continuation of a previous standard.