Bond for non-qualfying assets--capped at $500k?

[BG5150]

Plan has $2MM in assets, of which $1.5MM are in non-qualifying assets (real estate and partnerships).

Does the bond have to be the full $1.5MM?  Or it is capped at the traditional $500,000?

[Belgarath]

Full 1.5 MM.

[BG5150]

That's what I thought.  thanks.

[Jakyasar]

I was once told by an agent it should 100% of the non-qualified assets plus 10% of the qualified assets i.e. 2 separate bonds and that is what I do.

[C. B. Zeller]

27 minutes ago, Jakyasar said:

I was once told by an agent it should 100% of the non-qualified assets plus 10% of the qualified assets i.e. 2 separate bonds and that is what I do.

Interesting, because that's not what the reg says. One of the examples in the reg clearly says you can use one bond to cover both the qualifying and non-qualifying assets. However it might be easier to get a second bond than to argue with a DOL agent if the plan is under audit.

DOL reg 2520.104-46(b)(1)(iii)(B), relevant section highlighted.

Quote

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%.

 

[Jakyasar]

Well, this as it may be, the insurance company did not allow a single bond (I think it was Colonial) and had to get 2 bonds, this was a while back. I am just sharing my experience. By the way, thank you for pointing to the example.

[BG5150]

Just one bond covering 100% of the non-qualifying assets OR 10% of total plan assets, whichever is greater.  (And, as we now remember, there is no $500,000 cap if/when the the nonqualifying assets are more than $500k.  Or, I guess, $1MM if there employer securities involved.)

Side question about the $1MM bond.

If a plan has $12MM in assets, but only, like, $40,000 in employer stock, do I still need a $1MM bond?

[Belgarath]

Yup. Lesser of 10% or $1MM.