Bonding question

[BG5150]

I have a plan that used to be considered a one-participant plan, covering just an owner. He has recently had two employees become eligible for the plan. (It is a Money Purchase plan with a 0% contribution formula.) So, now the plan is subject to ERISA and must file an SF.

However, 98% of the assets are in non-qualifiying vehicles (an LLP and real estate). He must now get a bond for the $2MM in non-qualifying assets.

The wrinkle I have, is that ALL of the assets are the owner's. So any loss or theft (by him--he's the only one who handles the "funds" I would guess) would affect only his own assets.

Any thoughts on NOT getting a bond because of this?

[BG5150]

Not only are the assets solely the owner's, there is no foreseeable way for the other participants to get a benefit in the near future.

What makes this plan subject to ERISA? The fact it is a plan covering an employer and it's employees? Even though, as the plan is currently written, there is no benefit to protect for the employees? The "E" in ERISA stands for "Employee" doesn't it? "S" is for Security. However, at the moment there is nothing to secure.

[ESOP Guy]

I THINK the rule is the rule. Besides bonds are cheap. Advise the client to suck it up and buy the bond.

[Sully]

If the plan assets are 'participant directed' you may be able to reduce the bond to 10% of the total value.

[BG5150]

If the plan assets are 'participant directed' you may be able to reduce the bond to 10% of the total value.

Nope. Just assets held in a trust.

[12AX7]

BG - me thinks its not worth the risk of filing a Form 5500-SF without bonding info for the sake of saving a few $100 bills. DOL sometimes picks up on these things.

[John Feldt ERPA CPC QPA]

Is the formula zero, or was the plan frozen? If frozen, wouldn't that mean no new entrants, so the owner is the only one in the plan still?

[BG5150]

Is the formula zero, or was the plan frozen? If frozen, wouldn't that mean no new entrants, so the owner is the only one in the plan still?

Formula is "0%," not frozen.

Thing is, all the assets are the employers and are 100% vested. So, at the moment, there is no chance for any other participant to have a balance. So is a bond really necessary to protect his own assets and only his own assets?

[StormShadow]

I think you can argue that a 0% MPP where only the owner has a balance is not ERISA covered and thus no bond would be necessary.

Based on other threads, plans that were under IRS/DOL audit without bonds, the IRS/DOL just said get a bond retroactively and show proof. Furthermore, it has been noted that the only bonding enforcement is through a lawsuit... I do not think any judge will force this plan to get a bond when it is clear that there is no way for anyone else's money to be in the plan.

Have you tried calling the DOL and asking for their opinion?

Ultimately, let the client decide, just advise them on the issues and potential pitfalls. For filing purposes, you can file the SF and check the one-participant box, but be sure to fill in all the information.

[K2retire]

I am well aware that the DOL has increased staff and intends to step up enforcement -- but in my 13 years in this business I have NEVER heard of an inquiry because a 5500 had no bond or an insufficient bond.

[Doghouse]

Sadly, where non-qualifying assets are involved, and the bond is in lieu of an audit, the DOL is not very forgiving.

I had a very similar situation to OP. We took over a plan where the previous TPA had been filing a 5500EZ, even though there were other participants, albeit with no account balances. They weren't truly eligible to file an EZ, so it was when they switched over to a 5500 that it all hit the fan. The DOL did not agree that there were no other participants for this purpose (well, we thought we would try that - no downside). The determination was that they weren't exempt from the audit requirement for that particular year and they had to go back and get one. Because of the amount of assets and the nature of those assets, it was no small (and certainly no inexpensive) undertaking.

On another note, the DOL took the position that whether the plan was "frozen" or not, unless the plan language specifically precluded the entrance of new participants, they would continue to enter when eligible.