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Are PBGC plans exempt from an ERISA bond? 

Specifically asking about small DB plans that typically would not be subject to audit if the bond requirement is met. 

Does anyone have a citation for an answer? 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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PBGC plans are not exempt from the ERISA bonding requirement.  Who would even suggest such a thing?  Citations are rarely superfluous.  It would be like a asking for a citation that confirms if you follow all the rules in the IRC the plan is qualified.

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Thanks Mike!

I was thinking more along the lines if there was a specific exemption/waiver that it would be written somewhere and possible to cite, but yes, I see what you mean about citations. We've gotten pushback, so if there was a citation I could go look up, I would have wanted to read it. 

I rarely work with PBGC covered plans, so its just not an area I have much familiarity. 

 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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Just cite ERISA Section 412, 29 USC Section 1112.  Have them tell you where the exemption is.  You won't find a statutory provision that says PBGC-covered plans are subject to ERISA 412 even though they are covered by the PBGC.  There might be a PBGC opinion letter that addresses it tangentially, but it is doubtful you would find one that addresses it directly.    

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It wouldn't make sense to exempt. The PBGC insurance is insuring against inadequacy of minimum funding and plan investment experience to have sufficient assets to pay benefits when plan terminates. The ERISA bond (which covers only a small amount and is cheap to purchase) insures against embezzlement of plan funds. The PBGC wants that protection as well as participants and plan sponsor. Embezzlement (at least up to the minimum bond amount) is not a risk PBGC expects to take on for its premiums.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 5/18/2018 at 7:01 PM, pensiongeek said:

I think the question may be, not are they exempt, but does their PBGC coverage satisfy their ERISA bonding coverage requirement?

No, it doesn't.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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On 5/18/2018 at 5:26 PM, justanotheradmin said:

Thanks Mike!

I was thinking more along the lines if there was a specific exemption/waiver that it would be written somewhere and possible to cite, but yes, I see what you mean about citations. We've gotten pushback, so if there was a citation I could go look up, I would have wanted to read it. 

I rarely work with PBGC covered plans, so its just not an area I have much familiarity. 

 

Refer them to this: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2008-04

The applicable Q&As therein:

Q12: Do ERISA's bonding requirements apply to all employee benefit plans?

No. The bonding requirements under ERISA section 412 do not apply to employee benefit plans that are completely unfunded or that are not subject to Title I of ERISA. ERISA § 412(a)(1); 29 C.F.R. § 2580.412-1, § 2580.412-2.

Q13: What plans are considered "unfunded" so as to be exempt from ERISAs bonding requirements?

An unfunded plan is one that pays benefits only from the general assets of a union or employer. The assets used to pay the benefits must remain in, and not be segregated in any way from, the employer's or unions general assets until the benefits are distributed. Thus, a plan will not be exempt from ERISAs bonding requirements as "unfunded" if:

  • any benefits under the plan are provided or underwritten by an insurance carrier or service other organization;
  • there is a trust or other separate entity to which contributions are made or out of which benefits are paid;
  • contributions to the plan are made by the employees, either through withholding or otherwise, or from any source other than the employer or union involved; or
  • there is a separately maintained bank account or separately maintained books and records for the plan or other evidence of the existence of a segregated or separately maintained or administered fund out of which plan benefits are to be provided.

As a general rule, however, the presence of special ledger accounts or accounting entries for plan funds as an integral part of the general books and records of an employer or union will not, in and of itself, be deemed sufficient evidence of segregation of plan funds to take a plan out of the exempt category, but shall be considered along with the other factors and criteria discussed above in determining whether the exemption applies. 29 § 2580.412-1, § 580.412-2.

As noted above, an employee benefit plan that receives employee contributions is generally not considered to be unfunded. Nevertheless, the Department treats an employee welfare benefit plan that is associated with a fringe benefit plan under Internal Revenue Code section 125 as unfunded, for annual reporting purposes, if it meets the requirements of DOL Technical Release 92-01,(2) even though it includes employee contributions. As an enforcement policy, the Department will treat plans that meet such requirements as unfunded for bonding purposes as well.

Q14: Are fully-insured plans "unfunded" for purposes of ERISAs bonding requirements?

No. As noted above, a plan is considered "unfunded" for bonding purposes only if all benefits are paid directly out of an employer's or union's general assets. 29 C.F.R. § 2580.412-2. Thus, insured plan arrangements are not considered "unfunded" and are not exempt from the bonding requirements in section 412 of ERISA. The insurance company that insures benefits provided under the plan may, however, fall within a separate exemption from ERISAs bonding requirements. See ERISA § 412; 29 C.F.R. § 2580.412-31, § 2580.412-32. In addition, if no one "handles" funds or other property of the insured plan, no bond will be required under section 412. For example, as described in 29 C.F.R. § 2580.412-6(b)(7), in many cases 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 paid out to purchase benefits from an insurance carrier, insurance service or other similar 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 insured 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 belong to the plan (rather than to the employer, employee organization, or insurance carrier), were subject to "handling" by a plan official. [See also29 C.F.R. § 2580.412-5(b)(2); Q15, below; and Handling Funds Or Other Property, Q18.]

Q15: Are there any other exemptions from ERISA's bonding provisions for persons who handle funds or other property of employee benefit plans?

Yes. Both section 412 and the regulations found in 29 C.F.R. Part 2580 contain exemptions from ERISA's bonding requirements. Section 412 specifically excludes any fiduciary (or any director, officer, or employee of such fiduciary) that is a bank or insurance company and which, among other criteria, is organized and doing business under state or federal law, is subject to state or federal supervision or examination, and meets certain capitalization requirements. ERISA § 412(a)(3). Section 412 also excludes from its requirements any entity which is registered as a broker or a dealer under section 15(b) of the Securities Exchange Act of 1934 (SEA), 15 U.S.C. 78o(b), if the broker or dealer is subject to the fidelity bond requirements of a "self regulatory organization" within the meaning of SEA section 3(a)(26), 15 U.S.C. 78c(a)(26). ERISA § 412(a)(2). As with section 412's other statutory and regulatory exemptions, this exemption for brokers and dealers applies to both the broker-dealer entity and its officers, directors and employees.

In addition to the exemptions outlined in section 412, the Secretary has issued regulatory exemptions from the bonding requirements. These include an exemption for banking institutions and trust companies that are subject to regulation and examination by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation. 29 C.F.R. § 2580.412-27, § 2580.412-28. Unlike the exemption in section 412 for banks and trust companies, this regulatory exemption applies to banking institutions even if they are not fiduciaries to the plan, but it does not apply if the bank or trust company is subject only to state regulation.

The Department's regulations also exempt any insurance carrier (or service or similar organization) that provides or underwrites welfare or pension benefits in accordance with state law. This exemption applies only with respect to employee benefit plans that are maintained for the benefit of persons other than the insurance carrier or organization's own employees. 29 C.F.R. § 2580.412-31, § 2580.412-32. Unlike the exemption in section 412 for insurance companies, this regulatory exemption applies to insurance carriers even if they are not plan fiduciaries, but it does not apply to plans that are for the benefit of the insurance company's own employees.

In addition to the exemptions described above, the Secretary has issued specific regulatory exemptions for certain savings and loan associations when they are the administrators of plans for the benefit of their own employees. 29 C.F.R. § 2580.412-29, § 2580.412-30.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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