The sum is one multiplication. It still comes out wrong often enough to be one of the most common findings there is, because four things about the rule are not what they look like.
Ten per cent of the funds handled in the preceding plan year, floored at $1,000 and ceilinged at $500,000, or $1,000,000 where the plan holds employer securities. Per person, per plan, with no deductible. The figures you type never leave your browser. Privacy.
Funds handled, not the closing balance. Money that arrived and left during the year was still at risk while it was there, so contributions count even though they are no longer sitting in the account.
Searching all Form 5500 and 5500-SF filings published by the Department of Labor. Search by company name or by the plan name on your statement. The search runs in your browser, and the name you type is never sent anywhere.
Directly, rather than through a diversified fund that happens to contain some. This is the only input that changes the ceiling, and it doubles it. The filing does not record it, so it is the one thing we have to ask.
The arithmetic is one multiplication. These are the four places the number still comes out wrong, and every one of them has been quoted to a plan sponsor by somebody selling a bond.
The bond for the year ahead is sized on the year behind, and it has to be in place at the start of the year. Sizing it against the year in progress uses a number that did not exist when the bond had to be bought.
Field Assistance Bulletin 2008-04, Q35 and Q41: the bond “must be fixed or estimated at the beginning of the plan’s reporting year ... based on the highest amount of funds handled by the person in the preceding plan year”.
It is not a cap on the requirement and not a cap on what you may buy. A plan holding forty million is required to carry $500,000 and may reasonably decide that is thin. $1,000,000 where the plan holds employer securities directly.
FAB 2008-04, Q36: “nothing in section 412 precludes the plan from purchasing a bond for a higher amount”. Q38 for the employer securities maximum.
Not one number for the company. One bond may name several plans, but it has to let each plan recover the full amount that plan would have required on its own. Two plans sharing a $500,000 bond are not both bonded for $500,000.
FAB 2008-04, Q23: any such bond “must ... allow for a recovery by each plan in an amount at least equal to that which would have been required for each plan under separate bonds”. Q18 for who counts as handling funds.
This is the one that catches brokers who fold the bond into a commercial crime policy, because crime policies carry a retention as standard. The plan ends up holding a certificate that looks right and cover that does not qualify.
FAB 2008-04, Q30: the bond must “insure the plan from the first dollar of loss”, so bonds “cannot have deductibles or similar features whereby a portion of the risk required to be covered by the bond is assumed by the plan”.
The floor is $1,000 whatever the arithmetic produces (Q37). The primary source for all of the above is DOL Field Assistance Bulletin 2008-04, which is the Department’s own question and answer set on the bonding requirement, with the measurement rules at 29 CFR 2580.412-14 and 2580.412-15.
At least 10% of the funds each person handled in the preceding plan year, with a floor of $1,000 and a maximum of $500,000 that the Department of Labor can require for any one plan. That maximum rises to $1,000,000 where the plan holds employer securities directly. Because the test is per person and per plan, the person who handled the most sets the largest bond, and a company running two plans cannot cover both with one plan's worth of coverage.
Last year's. Field Assistance Bulletin 2008-04 says the bond must be fixed or estimated at the beginning of the plan's reporting year based on the funds handled in the preceding plan year, and put in place as soon after the year begins as the prior year's figures can practicably be worked out. Sizing it against the year in progress uses a number nobody could have known when the bond had to be bought, which is the single most common way this gets calculated wrong.
No, not on the amount the bond is required to cover. Section 412 requires the bond to insure the plan from the first dollar of loss, so deductibles and self insured retentions are not permitted on the required amount. This is where a bond folded into a commercial crime policy usually fails, because crime policies carry a retention as standard, and the plan ends up holding a certificate that looks correct and cover that does not qualify.
No. $500,000 is the most the Department of Labor can require for one plan, not a cap on the requirement and not a limit on what a plan may buy. Nothing in section 412 stops a plan from purchasing a larger bond, and for a plan holding many multiples of that figure, carrying only the required minimum is a decision worth making deliberately rather than by default.
Not for your own people. A service provider is subject to section 412 only if it handles plan funds itself, and if it does, it must be bonded for that. A provider can also buy its own bond insuring the plan, and nothing in ERISA requires the plan to pay for it. What none of that does is discharge the bonding of the people at your company who handle plan funds, typically whoever releases payroll remittances and approves distributions. The Department of Labor also puts the monitoring on you: the fiduciaries who retain a service provider are responsible for making sure that provider is properly bonded.
A surety or reinsurer named on the Department of the Treasury's Listing of Approved Sureties, Circular 570, or Underwriters at Lloyds of London on certain conditions. There is also an independence test that is easy to trip over in a small company: neither the plan nor any party in interest may hold control or a significant financial interest in the surety, the reinsurer, or the agent or broker the bond is placed through. If the broker is a relative or a part-owner of the business, check that before binding.
No. They cover different things. The section 412 fidelity bond insures the plan against losses from fraud or dishonesty by the people who handle plan funds. Fiduciary liability insurance covers losses caused by breaches of fiduciary duty, and the Department of Labor states plainly that it is neither required by nor subject to section 412. Carrying one does not satisfy the requirement for the other.