The Employee Retirement Income Security Act (“ERISA”) requires that 401K retirement plans have a fidelity bond to cover every person who handles funds or other property of a 401K Plan. Such persons may include any director, officer, or employee of the company that sponsors the plan. The plan administrator, trustees and accounting or human resource employees directly involved with the plan are included.
The fidelity bond is an insurance policy obtained through the company’s casualty insurance broker to protect the plan against employee theft or fraud. The required amount of coverage is at least 10% of the total value of the plan assets, calculated at the beginning of the plan year, with a minimum of $1,000 and a maximum of $500,000. If the plan holds employer (sponsor) stock, the bond requirement is $1 million. Thus, plans with $5,000,000 or $50,000,000 are both required to have a $500,000 bond.
Often, new 401K plans start out with coverage for the anticipated asset level in the first couple of years and the plan administrator forgets to increase the bond coverage as the assets in the plan grow. Some companies purchase a larger bond requirement than is immediately necessary, so that increases in the bond coverage will not have to be made as often. Another way to ensure proper bond coverage is to purchase a policy rider that will automatically increase the bond coverage amount as the value of the plan assets increases. Once the bond coverage is set at $500,000, it never has to be changed as long as employer stock is not an asset of the plan.
Over the years, I have audited many 401k plans and have detected many instances of inadequate bond coverage, especially with plans that are being audited for the first time. Auditors that identify this situation should inform the client of the deficiency and consider including a disclosure in the annual audit report. This report gets attached to and filed with the Form 5500 annual tax reporting form. The Form 5500 includes a disclosure of the bond coverage. Not complying with the requirement can lead to an audit by the Internal Revenue Service or Department of Labor. Also, the fiduciaries of the plan can be personally liable for losses that should have been covered by a fidelity bond. Considering the low cost of this bond coverage, companies should avoid these costly audits and adhere to bond coverage.
Review your bond coverage now and annually. Multiply the total plan assets times 10% and compare that to the bond coverage with a $500,000 limit. Be sure your 401K Plan is in compliance with the requirements.
James M. Sausmer recently retired from Mazars USA LLP as a Partner and is currently directing the audits of 401K plans for Rizick & Rizick CPAs, LLC. Contact Jim.