Small Plan Audit Waiver Bonding when Non Qualified Assets change during plan year

[Pixie]

My client has the proper bond in place to cover the beginning of plan year assets and qualifies for the small plan audit waiver. During plan year 2012, they purchase real estate and as of the end of 2012, their bond did not cover 100% of the non-qualifying plan assets. Does the plan still meet the small plan audit waiver for the 2012 plan year due to the fact that the bond correctly covered the assets at the start of the plan year?

We are in the process of increasing the bond.

Thank you!

[ETA Consulting LLC]

I would not challenge it when you immediately corrected the amount (especially when you have consistently met the requirement).

Good Luck!

[Kevin C]

The examples in §2520.104-46 determine the necessary bond amount for a year by referring to the market value of non-qualifying assets as of the end of the prior year. The paragraph above the examples has the rule for determining the bond amount.

2520.104-46 (b)(1)(iii)

(A)

For purposes of this paragraph (b)(1), the determination of the percentage of all plan assets consisting of qualifying plan assets with respect to a given plan year shall be made in the same manner as the amount of the bond is determined pursuant to Secs. 2580.412-11, 2580.412-14, and 2580.412-15.

(B)

Examples. Plan A, which reports on a calendar year basis, has total assets of $600,000 as of the end of the 1999 plan year. Plan A's assets, as of the end of year, include: investments in various bank, insurance company and mutual fund products of $520,000; investments in qualifying employer securities of $40,000; participant loans, meeting the requirements of ERISA section 408(b)(1), totaling $20,000; and a $20,000 investment in a real estate limited partnership. Because the only asset of the plan that does not constitute a "qualifying plan asset" is the $20,000 real estate investment and that investment represents less than 5% of the plan's total assets, no bond would be required under the proposal as a condition for the waiver for the 2000 plan year. By contrast, Plan B also has total assets of $600,000 as of the end of the 1999 plan year, of which $558,000 constitutes "qualifying plan assets" and $42,000 constitutes non-qualifying plan assets. Because 7%—more than 5%—of Plan B's assets do not constitute "qualifying plan assets," Plan B, as a condition to electing the waiver for the 2000 plan year, must ensure that it has a fidelity bond in an amount equal to at least $42,000 covering persons handling non-qualifying plan assets. Inasmuch as compliance with section 412 requires the amount of bonds to be not less than 10% of the amount of all the plan's funds or other property handled, the bond acquired for section 412 purposes may be adequate to cover the non-qualifying plan assets without an increase (i.e., if the amount of the bond determined to be needed for the relevant persons for section 412 purposes is at least $42,000). As demonstrated by the foregoing example, where a plan has more than 5% of its assets in non-qualifying plan assets, the bond required by the proposal is for the total amount of the non-qualifying plan assets, not just the amount in excess of 5%. [Added March 9, 1978, by 43 FR 10130. Amended October 19, 2000 by 65 FR 62957.]