The 401(k) bonding requirement, an uncommonly known requirement, is arguably one of the most important details regarding your plan. Dating back to 1974, the passage of the Employee Retirement Income Security Act of 1974 mandated that qualified plans under IRC section 401(k) be insured against losses caused by fraud or dishonesty.
What is a Fidelity Bond?
A fidelity bond is a type of insurance that exclusively covers losses incurred by a qualified retirement plan due to fraud, theft, or dishonesty of plan administrators. Since only the administrators of the plan have access to the assets of the plan, this insurance is tailored to specifically cover the actions of those officials. Examples of actions covered under a Fidelity bond include forgery or embezzlement.
Who is affected by the Fidelity Bond requirement?
The Fidelity Bond insures the plan from acts by plan administrators, but the insurance is required to be purchased by the sponsor of the plan (typically the employer of said plan administrator). Certain plans, such as solo 401(k) plans covering the retirement plans of self-employed taxpayers, are exempt from the ERISA bonding requirements, and therefore are not required to purchase this insurance.
What amount of Fidelity Bonding is required?
The amount of bonding required to comply with ERISA guidelines is 10% of the plan funds handled in the preceding year by the bonded plan sponsor, with the following exceptions:
- Minimum level of bonding is $1,000
- Maximum level of bonding is $500,000
- Exception: If the plan has holdings in employer securities (ex: stock of plan sponsor), the maximum level of bonding is $1,000,000.
What happens if your plan is insufficiently bonded?
Being insufficiently bonded is typically a risk applicable to many smaller, growing plans, which have plan assets under $5M. Once your plan surpasses $5M in plan assets, your bonding requirement will remain $500,000, unless you begin holding stock of the employer (plan sponsor). However, if your plan is under the $5M threshold, it is important to be aware of how changes in plan assets change your bonding requirement. Insufficient bonding can result in any of the following:
- Triggering a plan audit by the DOL
- Plan not being in compliance with ERISA regulations
- Should a loss occur, fiduciaries of the plan (plan administrators) can be held personally liable
Maintaining compliance with the DOL’s bonding requirements is not difficult, but is highly important as the financial security of participants can be jeopardized if the plan is not adequately bonded.