Fidelity Bonds for Your Retirement Plan

Under the Department of Labor (DOL) regulations, your retirement plan will need to maintain an ERISA Fidelity Bond. A fidelity bond protects the assets in the plan from misuse or misappropriation by the plan fiduciaries. Plan fiduciaries include the plan trustees and any person who has control over the management of the plan and its assets.

Required ERISA Fidelity Bond Amount

At the very least, the bond must be equal to 10% of the value of the total plan assets, with a minimum bond value of $1,000 and a maximum bond value of $500,000. For the first year, the bond amount will be based on the estimated amount of assets that will be handled by the plan for the year.

If you have non-qualifying assets more than 5% of the total plan assets, additional requirements apply. Non-qualifying assets are those assets not readily tradable on a recognized exchange. These may include limited partnerships, artwork, collectibles, mortgages, real estate, securities of closely-held companies and other assets held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as custodian for retirement accounts. Non-qualifying assets require additional bond coverage equal to 100% of these assets or could subject a plan to obtain a full-scope audit, where an independent CPA physically confirms the existence of the assets at the start and end of each Plan Year.

Why do I need an Erisa Fidelity Bond?

There are serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond. Not having this required coverage can be a red flag to the Department of Labor that they need to take a closer look at the plan. You are not only at risk for a DOL audit, but there are citations associated with not having this required coverage.

How do I obtain an Erisa Fidelity Bond?

As a convenience to you, EJReynolds has partnered with Colonial Surety Company, a national online insurance company that is U.S. Treasury listed and licensed in all states and territories. As experts in all aspects of ERISA regulations, Colonial Surety Company will ensure that you are properly bonded and that your bond is renewed prior to expiration so that your plan remains in compliance.

You can easily obtain an ERISA Fidelity Bond for your plan at:

Or, contact EJReynold and we’ll connect you with one of our expert ERISA Bond partners.

What you need to know about Required Minimum Distributions (RMD)

What are Required Minimum Distributions?

Required Minimum Distributions (RMDs) are minimum payments that must be made to participants in qualified plans and to owners of IRAs on an annual basis after an individual has attained a certain age.

When must RMDs begin in a qualified retirement plan?

In general, RMDs must begin no later than April 1st following the calendar year in which the participant attains age 70 ½ or retires.

RMDs must commence, however, for “5-percent” owners no later than April 1st following the calendar year in which the participant attains age 70 ½ even if the owner is still actively employed.

A plan may, but is not required to, require RMDs begin for all participants (owners and non-owners) no later than April 1st following the calendar year in which the participant attains age 70 ½ (but most plans don’t).

For example, a non-owner participant turns 70 ½ on July 1, 2018 and retires on July 31, 2018. His first RMD is due for 2018 but may be made as late as April 1, 2019. If he elects to take his first RMD in 2019, then he will be required to receive two RMDs in 2019 (one for the 2018 calendar year and one for 2019).

What is a “5-percent” owner?

Generally, a “5-percent owner” is any individual who owns more than a 5% interest in the company, and certain family members of 5-percent owners.

Do the same rules apply to IRAs?

Not exactly; the exception discussed above for non-owners does not apply to traditional IRAs. RMDs must commence no later than April 1st following the calendar year in which the IRA owner attains age 70 ½.

Note: Roth IRAs are not subject to the RMD rules until after the death of the IRA owner.

What is the due date for RMDs?

After the first year (when the distribution must be made by the following April 1st), RMDs from a defined contribution or 401(k) plan must be made each year by December 31st. For a defined benefit plan, including cash balance plans, the RMD must be calculated and distributed as of April 1steach year.

Note:It is important to remember that most plan recordkeepers and IRA custodians need time to process distributions. A good third party administrator will make sure the plan sponsor is aware of any RMDs that must be made so that they can be issued in a timely manner.

For IRAs, the owner should make sure he or she communicates with his or her IRA custodian so that there is ample time to process the necessary distribution.

Correcting Mistakes in 401(k) Plans

According to the IRS*, some of the most common mistakes made in 401(k) plans include:

  • Failure to include or exclude certain types of compensation for contribution purposes
  • Failure to include eligible employees and/or exclude ineligible employees
  • Failure to withhold loan payments resulting in defaulted participant loans
  • Failure to make required top-heavy minimum contributions

The good news is that most of these mistakes can be corrected through the self-correction procedures set forth under the Internal Revenue Service’s Employee Plans Compliance Resolution System (EPCRS)!

Overview of EPCRS

The purpose of EPCRS is to allow plan sponsors to correct plan defects and protect the qualified status of their plans. EPCRS includes three programs:

  • Self-Correction Program (SCP)– This program allows plan sponsors to self-correct certain defects without having to go to the IRS for approval.
  • Voluntary Correction Program (VCP)– This program allows plan sponsors to correct failures by filing for approval with the IRS. Certain defects must be corrected under this program, and there are fees associated with the filing.
  • Audit Closing Agreement Program (Audit CAP)– This program is available for failures that are discovered during examination that have not been corrected under SCP or VCP. Although the plan sponsor can still make corrections, the IRS will impose sanctions.

General Correction Principles

Regardless of the program used, there are basic principles that govern all corrections:

  • Corrections should restore the plan and its participants to the position they would have been had the failure not occurred.
  • Corrections should be reasonable and appropriate for the error and should (1) be consistent with existing laws and regulations, (2) provide benefits in favor of non-highly compensated employees, and (3) retain assets in the plan.
  • There generally should be a full correction for all plan years.
  • The correction generally must include related earnings.

In addition, EPCRS includes correction methods for certain plan failures that are deemed to be reasonable and appropriate provided that the corrections are made in accordance with the prescribed methods.

Types of Plan Qualification Failures

EPCRS categorizes plan defects as follows:

  • Operational Failures– A failure to follow the terms of the plan. Most mistakes fall in this category and can be corrected through the self-correction program as long as they are discovered in time (see below).
  • Plan Document Failures– A failure that occurs because one or more plan provisions (or absence of provisions) violate the requirements of the Internal Revenue Code (e.g. failure to adopt required plan amendments in a timely manner).
  • Demographic Failures– A coverage or nondiscrimination testing failure that is not an operational failure. Generally, these failures must be corrected by amending the plan to provide for additional benefits on behalf of non-highly compensated employees.
  • Employer Eligibility Failures– Adoption of a 401(k) plan by an employer that fails to meet the employer eligibility requirements to sponsor a 401(k) plan.

Note: The self-correction program is not available for plan document, demographic, or employer eligibility failures.

General Rules for the Self-Correction Program
In general, insignificant operational failures may be corrected under SCP at any time; significant operational failures can only be corrected under SCP if they are completed (or substantially completed) by the last day of the second plan year following the plan year in which the error occurred. Corrections of significant failures that are made outside of the required timeframe must be completed through VCP. Whether a particular failure is significant is based on the relevant facts and circumstances.

Note: There are a limited number of operational failures that must be corrected under VCP (e.g. plan loan failures).

Correcting Mistakes
The rules governing retirement plans are complex and mistakes happen. Since the IRS can, and will, impose sanctions when failures are found during examination, it is always best to fix plan defects under SCP or VCP so that costly sanctions can be avoided!

To learn more about EPCRS and correcting plan failures, please contact us.

*Source:“EPCRS: Correcting Common 401(k) Mistakes”, July 25, 2013, IRS Phone Forum