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Question 324: What is the effect of the recent Advisory Opinion on bonding requirements for open MEPs? |
Answer: Advisory Opinion 2012-04A (herein referred to as the "Opinion") which determined that the underlying employers of an open MEPs have each established separate ERISA plans, has profound implications for the fidelity bond required under ERISA § 412. ERISA § 412 requires plan officials who handle plan funds to be bonded. The amount of the bond is 10% of the funds or other plan assets handled, up to a maximum of $500,000 (or $1,000,000 if the plan holds employer securities). Exceptions exist for certain regulated financial institutions. The question for an open MEP is whether the $500,000 applies to the MEP as a whole, or whether it is determined separately for each underlying ERISA plan. The answer is not readily apparent from the statute itself, but fortunately the DOL issued an extensive (and largely overlooked) series of Q&As on bonding questions in 2008 in Field Assistance Bulletin 2008-04 which answers the question quite clearly. Q&A 23 states that the bond can insure more than one plan. Q&A 10 allows a service provider to purchase a bond to satisfy the requirements, and does not require that the individual ERISA plan pay for the cost. However, Q&A 11 allows the plan to pay the costs. Q&As 23 and 24 make it clear that where multiple plans are involved, the amount of the bond must be at least equal to the sum of amounts each plan must obtain. Q-23: Can a bond insure more than one plan?So, let's put this in the context of an open MEP. Suppose the MEP, while one plan for purposes of the Internal Revenue Code, consists of 500 separate plans for purposes of ERISA. 100 of these plans each has more than $5 million in assets. The remaining 400 plans average $3,000,000 in assets each. Following the logic from the examples in Q&A 23, that means the fidelity bond covering those who handle the assets of the MEP must be at least $170,000,000 (400 X 10% X $3,000,000 + 100 X $500,000). Each of the 100 large plans must have at least $500,000 of coverage, regardless of claims by any other plan. Each of the other 400 plans must have coverage of at least 10% of assets, regardless of claims by any other plan. The next question, of course, is how soon must the plan officials obtain the bond. The answer, of course, is "immediately." The Opinion did not set forth new law. The Opinion applied existing precedents and law to a particular situation. Open MEPs didn't become a series of separate plans in the middle of 2012. They always have been a series of separate plans if you follow the DOL's reasoning. The bond for 2012 should have been in place long before now, and the sooner it is obtained, the better. For further discussion of the qualification issues related to MEPs in general, see Chapter 18 of the new 6th Edition of my book, Who's the Employer. For a comparison of the Code and ERISA issues relating to open MEPs, see my article, Multiple Employer Plans: An ERISA Enigma, appearing in the Winter 2012 issue of the Journal of Pension Benefits (Vol. 19, No. 2, p. 6). |
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.
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