Bonding Question

[mming]

There are 2 participants in a 401k plan, the owner and an nhce, and no other employees. Although the nhce has said he'll never elect to defer, it seems that the owner will still have to obtain a fidelity bond since it's technically an ERISA plan. Would the bond still be required if the nhce signed an irrevocable waiver of participation?

[Tom Poje]

1. an irrevocable waiver is suppossed to be signed when someone first becomes eligible to participate. it sounds like that date has passed.

2. even if they could sign such a waiver, you would then have an NHCE who is includable and not benefiting for 401k purposes and would fail coverage.

[ESOP Guy]

Besides my experience is that bond is one of the cheapest insurance.

I would have the owner even ask his insurance agent. It is very common for an ERISA bond rider to be included with his general liability policy automatically. In short I have found that often times the person has a bond and doesn't even know it.

[mming]

Thank you both for responding. I'm glad the coverage aspect was brought up. I think that normally, even if a participant chooses not to defer, they are still considered to be benefitting because they have the choice to defer. It sounds like signing a waiver changes this?

I know this setup may sound less than ideal for a 401k - it was established originally to accept a large RO of illiquid assets. The elderly owner is hoping to create permanency with just deferring a catch-up contribution every year (so testing won't be an issue).

It's true that bonding is generally inexpensive , but the illiquid assets mentioned above are nonqualifying assets, making coverage rather pricey. We generally refer plans to a company that specializes in offering ERISA fidelity bonds who have cautioned us that most insurance companies that provide business liability policies onto which such a rider can be added will not cover nonqualifying assets.

[Tom Poje]

if someone chooses not to defer, they show up on the ADP as 0%

for coverage they are treated as includable and benefiting.

if someone 'elects out' from day one, then they are not simply not eligibile to defer, the only people who show on the ADP test are those who could defer, so such a person wouldn't even appear on the ADP test.

however, once they have met the eligibility requirements, they would be treated as includable and not benefiting for coverage purposes sonce they can't get anything.