Failure to satisfy fidelity bond requirements

[Guest tm3333]

What guidance, if any, exists from the DOL/IRS or elsewhere on the consequences for failing to satisfy the bonding requirements under ERISA section 412?

[ESOP Guy]

I have always been amazed at how hard it is to find that answer.

So here are some material to look at.

http://www.cshco.com/News/Articles/Article...;cat=&view=

http://carpentermorse.com/pdfs/CMG_ASPPA_article.pdf

[K2retire]

FWIW the DOL has recently hire a bunch more enforcement folks and bonds are one of the things they're looking at. I've heard of fines being significant, but don't recall the details.

[Tom Poje]

consequences:

http://www.dol.gov/ebsa/media/press/Pr120410.htm

scare the heck out of them!

Fred Reish once wrote in an article concerning bonds titled " IRS Audits and Bonding for 401(k) Plans"

"While the failure to obtain an ERISA bond can be corrected prospectively by purchasing a bond, it cannot be corrected retroactively. However, since the purchase of a bond is not a disqualifying defect, retroactive corrections are not needed for tax purposes. For other purposes, though, the failure to obtain a bond could result in substantial penalties or liabilities."

....

so, for instance, if the plan was in audit state the sun might not shine in your general direction.

if the plan was small and you had enough non qualifying assets I imagine that means the 5500 needed an audit

other than that, since it is not a disqualifying event, and there are no 'late' fees, I'm not sure what happens - if no $ were ever stolen. I thought the whole idea is that it was something like insurance, its protection just in case.

[Peter Gulia]

Instead of looking to whether administrative agencies try to enforce a requirement for fidelity-bond insurance, a practitioner might advise a fiduciary about his or her exposure to personal liability.

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 (against the plan's trustee, administrator, or other fiduciary): 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.

And think about this from the TPA's, recordkeeper's, or other practitioner's perspective. Even if you can prove that you reminded the fiduciary to get the fidelity-bond insurance, are you ready for his or her rhetorical cry of "You know that I don't pay attention to most of the stuff you send me; why didn't you tell me that this one is important, and why didn't you explain why it matters?"

[Bird]

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 (against the plan's trustee, administrator, or other fiduciary): 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.

I'm not sure that I follow; are you saying that someone who is stealing money from a plan really cares about being personally liable to make good the losses?

As far as practical consequences to not having a bond, I don't think there are any, unless you are really obstinate about refusing to get one. This old thread covers it.

(I'm not saying it's ok to ignore the requirement and we always tell our clients to get one and assist them as needed.)

[Peter Gulia]

Bird, thank you for the opportunity to clarify my illustration.

No, I'm imagining a situation in which the person who handled and stole plan assets is someone other than the fiduciary who failed to cause the plan to get fidelity-bond insurance. Then, I'm imagining that participants - on behalf of the plan, for themselves, and as representatives of a class of all participants harmed by the theft - sue the fiduciary for his or her breach of the duty to cause the plan to get fidelity-bond insurance.

ERISA 409 makes a fiduciary personally liable to restore a loss that results from the fiduciary's breach. The lawsuit would ask the court to order the breaching fiduciary to restore the plan's assets that were stolen, up to the amount that would have been insured had the plan been covered by fidelity-bond insurance that met ERISA 412.

[Bird]

No, I'm imagining a situation in which the person who handled and stole plan assets is someone other than the fiduciary who failed to cause the plan to get fidelity-bond insurance. Then, I'm imagining that participants - on behalf of the plan, for themselves, and as representatives of a class of all participants harmed by the theft - sue the fiduciary for his or her breach of the duty to cause the plan to get fidelity-bond insurance.

OK. My small-plan mindset thinks of one person being everything. But in a Smith and Jones partnership, Smith would want to make sure that they're both bonded in case Jones runs off with the money.

[Peter Gulia]

Or even with a one-owner business, imagine that there is an employee who - even without authority to sign a check or initiate a bank wire - performs some bookkeeping services for the business. Recording false bookkeeping entries could be enough so that the owner might not detect (at least not promptly enough) that plan assets, especially a contribution taken from payroll but not yet paid into the plan investments, were diverted to uses other than for the retirement plan.