Fidelity Bond required?

[Guest m.n.ouellette]

Hi. I am a DC administrator, and have a question about a SEP to help a colleague out. Is a SEP plan required to have a Fidelity Bond?

Thanks.

[Guest Sieve]

As an employer-sponsored plan (even though comprised of IRAs), an SEP is subject to ERISA and a bond is required just as for any other ERISA-covered plan.

[Belgarath]

Are you sure about this? I don't know the answer, but it seems to me that in a SEP, the funds aren't "plan" assets, if you will, until they are actually deposited to the individual IRA's. An at that point, the employer has no discretion or ability to withdraw funds, "handle" them, etc., etc...

See attached reg. What do you think?

http://www.dol.gov/dol/allcfr/ebsa/Title_2...R2580.412-6.htm

[Guest Stuartt]

The DOL says a Simple IRA must have a bond (see 3rd paragraph)

http://www.dol.gov/ebsa/newsroom/pr042507.html

[Belgarath]

Right, but a SIMPLE-IRA involves employee deferrals. And I suppose if you had one of the old SAR-SEPS, that could apply equally. But for a garden variety SEP, I wonder. I'd be interested to hear what people think on this subject.

[Bird]

I doubt it. I would have assumed one of those "this chapter" or "this section" things that meant SEPs weren't covered, but if not, then the question is - how much? Certainly the sponsor is not "handling" plan assets once they are in the IRAs. Is the sponsor even a fiduciary if there are no employee contributions?

I have no doubt the practical answer is "no." Even in the case cited, they didn't prosecute for failure to obtain the bond, as far as I could tell.

[Guest Sieve]

I don't think they ever prosecute for failure to have a bond--they just mention it in news releases as another shortcoming of the employer. In my experience, on audit, the DOL jsut says "get a retroactive bond", which is easy to do.

I think a bond is necessary for an SEP. How about this line of thought? . . . An ERISA bond is required for those who "handle" funds (& it has been suggested above that a SEP's plan sponsor does not "handle" plan funds--except, perhaps, in a left-over SAR-SEP--since the employer contributions are not plan funds until they are out of the employer's hands, and therefore a bond would not be required.) But, pursuant to the statute (ERISA Sectin 412(a)), "[e]very fiduciary" must also be bonded, whether or not that fiduciary actually handles funds. So, since an SEP clearly is an employer plan, and it has an "administrator" (ERISA Section 3(16)(A)), that administrator (probably the plan sponsor) would be a fiduciary and must be bonded--not because the sponsor handles funds, but because the plan sponsor, as administrator, is also a fiduciary. The amount of the bond then may be only the minimum required.

[Belgarath]

Good points!!

[Lori Friedman]

Here's an excerpt from the PPC 5500 Deskbook:

SEPs and SIMPLE IRA Plans. These plans are apparently not subject to the bonding requirements as assets are held in participant-directed IRAs; thus, there are no plan assets subject to risk of loss (DOL Regs. 2580.412-4, -5, and -6). However, bonding may be required with respect to fiduciary controlled IRAs and SIMPLE IRAs until the participant is deemed under ERISA Sec. 404©(2) to exercise control over the assets.

If you agree with PPC's analyis and position, the answer is "well, it depends".

[Guest mjb]

As an employer-sponsored plan (even though comprised of IRAs), an SEP is subject to ERISA and a bond is required just as for any other ERISA-covered plan.

Under ERISA 412 the plan official must handle funds or property of the plan. In a SEP the employer contributes funds from its general assets directly to the participants' IRAs which are not assets of the plan because the employees own/control the IRAs. Where is the property of the plan? The statuatory requirement for bonding of fiducariares was based on their authority to direct the distribution or investment of plan assets which cannot happen in a SEP. It is illogical to require that a SEP fiduciary must bonded for the minimum amount and pay for the premium when there are no plan assets that can be misused by the fiduciary for which a claim would be payable under the terms of the bond.

A SIMPLE plan is subject to bonding because employee contributions are considered to be plan assets on the earliest date they are segregated from the employer's general assets.

[Guest Sieve]

Whether or not it would be illogical to require a bond for an SEP fiduciary who has no control over plan "assets"--but who may have other ERISA fiduciary obligations as the ERISA-defined adminstrator--the only place I see an exemption from the bonding requirements for a fiduciary is in ERISA Section 412(a)(3), and a general exemption for an SEP fiduciary is not among those listed (although the institution holding the SEP funds would be exempted).

That being said, on a practical level--and that's probably all that really matters--it looks like the DOL interprets the bonding requirement as mjb does. At a minimum, the bonding requirements appear not to be treated as subject to enforcement with respect to an SEP based on the Q&As in Figure 3 (Bonding Checklist) in the EBSA's enforcement manual (scroll down about 1/3 of the way to find Figure 3): http://www.dol.gov/ebsa/oemanual/cha48.html

[Gary Lesser]

TREATISE, SIMPLE-SEP-SARSEP-ANSWER-BOOK

Q 4:66 Are SEP IRA and SIMPLE IRA plans subject to the ERISA bonding requirements?

Maybe. In most cases, an employer that handles funds or other property belonging to an ERISA plan (see Qs 4:1, 4:26) is required to be bonded. The basic standard is determined by the possibility of risk of loss in each situation; thus, it is based on the facts and circumstances in each situation. The amount of a bond is determined at the beginning of each year. It may not be less than 10 percent of the amount of funds handled, and the minimum bond is $1,000. Contributions made by withholding from an employee's salary are not considered funds or other property of a SEP IRA or SIMPLE IRA plan for purposes of the bonding provisions as long as they are retained in, and not segregated in any way from, the general assets of the withholding employer. Because employer contributions are made into traditional or SIMPLE IRAs established by each employee (which are outside the control of an employer once made), bonding would not generally apply. [ERISA §§404©, 412; DOL Reg. §§2510.3-3, 2550.412-5] A payroll deduction IRA is not subject to the bonding rules, provided the arrangement is not treated as a pension plan (see Q 4:26).

Bonding exception: An exception to the bonding requirement generally applies for a fiduciary (or a director, officer, or employee of the fiduciary) that is a corporation authorized to exercise trust powers or conduct an insurance business if the corporation is subject to supervision or examination by federal or state regulators and meets certain financial requirements. The PPA provides an exception to the ERISA bonding requirement for an entity registered as a broker or a dealer under the Securities Exchange Act of 1934 if the broker or dealer is subject to the fidelity bond requirements of a self-regulatory organization (within the meaning of the Securities Exchange Act of 1934).

Effective date: The bonding exception provision is effective for plan years beginning on or after 2007. [PPA §611(c); ERISA §412(a)(2), as amended by PPA §611(b)]

In addition, the PPA raises the maximum bond amount from $500,000 to $1 million in the case of a plan that holds employer securities. A plan would not be considered to hold employer securities within the meaning of this section where the only securities held by the plan are part of a broadly diversified fund of assets, such as mutual or index funds.

Effective date: The bonding provisions relating to employer securities is effective for plan years beginning on or after January 1, 2008. [PPA §622(b), ERISA §412(i), as amended by PPA §412(a)]

The taxpayer's obligation under the bond must be secured by a surety, and the company acting as surety on the bond must hold a Certificate of Authority from the Department of the Treasury, Financial Management Service. These companies are listed in Treasury Department Circular 570, Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies. [Circular 570 is available at www.fms.treas.gov/c570/c570.html#certified; see also DOL Adv. Op. 2004-07A (July 1, 2004), addressing technical bonding issues and exceptions for certain corporations]