Fidelity Bond

[jkdoll2]

Is a fidelity bond required for a 412(e) plan if the have employees, Even though they are only invested in guaranteed insurance contracts and annuities? Thanks

[Belgarath]

Yes.

[jkdoll2]

Here is what I got from TAG (techincal answer group) They said no they are exempt from a fideility bond. So now Im not sure again.

ANSWER

412(i) plans that have no investment fund are exempt from the bonding requirements under ERISA. See below.

Please let us know if you have additional questions.

Bill Joyner

Technical Answer Group, Inc.

Wolters Kluwer Law & Business

http://subscribers.tagdata.com

§2580.412-6. Determining when “funds or other property” are “handled” so as to require bonding.

(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 decision making 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:

(7) Insured plan arrangements. In many cases, plan contributions made by employers or employee organizations or by withholding from employees'

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 assets, 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.

DOL Opinion 76-69

ERISA Sec. 412

Dear *** :

Thank you for your recent letter in which you request an exemption from the bonding requirements of the Employee Retirement Income Security Act of 1974

(ERISA) as they may be applicable to the above plan.

You state that you have a pension plan which is fully insured. It is your view that it is an unnecessary expense to purchase a fiduciary bond and that Congress did not intend to burden very small businesses with such an item.

The Secretary has issued a temporary regulation (29 CFR 2550.412-1) which, pending issuance of a permanent bonding regulation implementing section 412 of ERISA, incorporates by reference most of the bonding regulations issued under the Welfare and Pension Plans Disclosure Act and makes them applicable to plan officials under ERISA.

Pending the issuance of permanent regulations with respect to section 412, a fiduciary is not required to be bonded unless he handles funds or other property of an employee benefit plan. “Handling” occurs whenever the duties or activities of a plan official 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.

Your letter does not disclose any details with respect to the manner in which employer or employee plan contributions are made. However, assuming that such contributions are made out of the general assets of the employer for purchase of benefits from an insurance carrier, no bonding would be required with respect to such payment 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 were subject to “handling” by plan officials.

Assuming further that annuity payments are made payable to the participant, then bonding would not be required with respect to such payments.

If the foregoing assumptions are correct and bonding is not required, there is no basis for consideration of your request for an exemption.

Accordingly, in the absence of further word from you, no action will be taken in connection with your request.

Sincerely,

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QUESTION

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Background Info:

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412(e) plan with 1 owner and 2 participants.

Fully insured with ins contracts and annuities

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Specific Questions:

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Does a 412(e) plan need a fidelity bond?

[Belgarath]

I respectfully disagree. I'd also ask them to consider 2580.412-2. Furthermore, the TAG referenced reg and opinion letter also give the following, which is apparently being ignored by TAG. Emphasis is mine.

"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 were subject to “handling” by plan officials."

But, everyone must make up their own minds, as always. I'd love to hear what some other TPA's or attorneys might have to say on the subject.

[mwyatt]

I wouldn't see why there would be an exemption; premium checks can end up in someone's pocket (theft). From a practical standpoint, don't see any basis for a pure insurance plan to not have a bond.