Almost every sponsor of every tax-qualified retirement plan must obtain a fidelity bond in accordance with section 412 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  Despite the broad application of this requirement, a surprising number of plan sponsors are unaware of this requirement and, in fact, do not have a bond at all or do not have a bond in the proper amount.  Consequently, this article is written in order to help explain the requirement in order to attempt to ensure that those who are subject to this requirement satisfy it.

Obviously, in order to reasonably expect to satisfy this “ERISA bond” (“ERISA Bond”) requirement, it is necessary to understand exactly what it is.  In this regard, an ERISA Bond is a type of insurance that protects a plan against losses caused by acts of fraud or dishonesty. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.

It is important to understand that the ERISA Bond is different from fiduciary insurance.  The ERISA Bond protects plan participants from the acts of fraud or dishonesty described above.  However, fiduciary insurance protects a plan fiduciary from claims relating to a fiduciary breach under ERISA.  Thus, the ERISA Bond protects plan participants while fiduciary insurance protects plan fiduciaries.  In addition, the ERISA Bond is a mandatory requirement under ERISA for most retirement plans while fiduciary insurance is not required.

As mentioned above, most retirement plans are required to have an ERISA Bond.  This raises the question of exactly which plans must obtain the ERISA Bond. Although the bonding requirements generally apply to most ERISA retirement plans (and many funded welfare benefit plans), the ERISA bonding requirements do not apply to plans that are not subject to Title I of ERISA; the most notable of which are owner only, “solo k”, plans or to employee benefit plans that are completely unfunded (i.e., the benefits are paid directly out of an employer’s or union’s general assets).

Now that we understand which plans must have ERISA Bond coverage, we also need to understand exactly which persons must be covered by the ERISA Bond.  Under ERISA, every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered by an ERISA exemption. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.

In application, the “handles funds or other property” qualification generally encompasses the ERISA plan administrator and those officers and employees of the plan or plan sponsor (employer, joint board, or employee organization) who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds.

“Funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to plan participants or beneficiaries. Plan “funds or other property” includes all plan investments such as land and buildings, mortgages, and securities in closely-held corporations. It also includes contributions from any source (such as employers, employees, and employee organizations) that are received by the plan, and cash, checks and other property held for the purpose of making distributions to plan participants or beneficiaries.

A person is deemed to be “handling” funds or other property of a plan whenever his or her duties or activities could cause a loss of plan funds or property due to fraud or dishonesty, whether acting alone or in collusion with others. The general criteria for “handling” includes but is not limited to: 1) physical contact with cash, checks or similar property; 2) power to transfer funds from the plan to oneself or to a third party; 3) power to negotiate plan property (e.g., mortgages, title to land and buildings or securities); 4) disbursement authority or authority to direct disbursement; 5) authority to sign checks or other negotiable instruments; or 6) supervisory or decision-making responsibility over activities that require bonding.

Generally, the amount of the ERISA Bond must be equal to at least 10% of the amount of funds “handled” in the preceding year. The bond amount cannot, however, be less than $1,000, and the Department cannot require a plan official to be bonded for more than $500,000, or $1,000,000 for plans that hold employer securities. These amounts apply for each plan named on a bond.

For example, assume a company’s plan has total assets of $1,000,000. The plan trustee, named fiduciary and administrator are three different company employees that each have access to the full $1 million, and each has the power to transfer plan funds, approve distributions, and sign checks. Under ERISA, each person must be bonded for at least 10% of the $1 million or $100,000.  (Note: Bonds covering more than one plan may be required to be over $500,000 to meet the ERISA requirement because persons covered by the bond may handle funds or other property for more than one plan.)

Finally, it is permissible under ERISA to pay for the ERISA Bond with plan assets. The purpose of the ERISA Bond requirements is to protect the plan. The ERISA Bond does not protect the person handling plan funds or other property or relieve them from their obligations to the plan.  As a result, there is no conflict created if the plan pays for the ERISA Bond.

As much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that the issues discussed herein may apply to your (or your client’s) company, be sure to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act became law in December of 2019 and dramatically changed the laws regulating tax-qualified retirement plans.  Since then, a package of retirement plan related bills were added to a huge omnibus spending bill in December of 2022 and nicknamed “SECURE 2.0”.  SECURE 2.0 seems to be the primary focus of everyone in the retirement plan industry these days…as it should.  However, it is important to remember that some aspects of the “original” SECURE Act are extremely impactful and have not yet become effective.

This article is focused on one such issue that will dramatically alter eligibility for 401(k) plans.  More specifically, the impending requirement to allow “long term part-time employees” (“LTPTE(s)”) to defer their salary into 401(k) plans.  For most plan sponsors, this new requirement will become effective January 1, 2024 and it could require them to allow previously ineligible employees to participate in their 401k plans.  Therefore, it is critical for retirement plan sponsors to both understand this requirement and review the necessary data now to ensure that they are ready to operate in accordance with this new obligation as soon as the first day of 2024.

Reduced Eligibility Requirements for Long-term, Part-time Employees

Most plan sponsors understand the eligibility service requirements that apply to their employees under the Internal Revenue Code and the Employee Retirement Income Security Act (“ERISA”).  Under the current pre-SECURE Act rules, a plan sponsor generally can restrict retirement plan participation to only those employees who accrue at least 1,000 hours of service during a 12-month eligibility period in order to achieve one “year of service” (“One Year of Service Rule”).  However, the SECURE Act dramatically changed the application of the One Year of Service Rule … but only in connection with a 401(k) elective deferral feature.

Effective for plan years beginning after December 31, 2020, employees with at least 500 hours of service in three consecutive 12 month periods must be permitted to make elective deferrals under a 401(k) defined contribution plan.  This change to the service eligibility rules does not impact the age eligibility rules.  Thus, requiring the attainment of age 21 in order to be allowed to make elective deferrals into a 401k plan is still permitted.

To reiterate, the new SECURE Act eligibility provision only applies to an elective deferral feature of a 401(k) plan.  Thus, a plan sponsor who is forced to allow LTPTEs to defer a portion of his or her salary into a 401(k) plan in this manner could continue to restrict the same employee from receiving an employer matching or profit sharing contribution until such individual satisfied the “normal” One Year of Service Rule.  In addition, the LTPTEs who are allowed to defer a portion of their income are excluded from the nondiscrimination, minimum participation, top-heavy and coverage requirements that might otherwise apply.  Therefore, in general, the ability of the LTPTEs to defer as a result of this exception will not hurt the plan sponsor due to any otherwise applicable mandatory compliance testing requirement.

Finally, and most importantly for purposes of this article, the first 12-month period used to measure the completion of 500 hours of service in order to determine whether a LTPTE has accrued 500 hours of service in three consecutive 12 month eligibility periods begins no earlier than January 1, 2021.  Thus, under the new rule, the absolute earliest that an LTPTE could accrue three consecutive 12 month eligibility periods with at least 500 hours of service would be December 31, 2023 which would then trigger an initial participation date of no earlier than January 1, 2024.  January 1, 2024 is now less than one year away.  Therefore, it is critical for plan sponsors to begin collecting and analyzing the relevant payroll and employment data from 2021 and 2022 now in order to be prepared for this significant change to the eligibility rules in 2024.

SECURE 2.0 Further Reduces Long-term, Part-time Employee Eligibility

We mentioned SECURE 2.0 at the beginning of this article.  For better or worse, the broad impact of SECURE 2.0 included a further reduction to the LTPTE rules imposed under the SECURE Act.  In this regard, SECURE 2.0 reduced the three year period during which an employee accrued at least 500 hours of service to a two year period during which an employee accrued at least 500 hours of service. However, this rule change will not go into effect until plan years beginning after December 31, 2024.  Therefore, the earliest that an LTPTE must be allowed to defer to a 401k plan under the revised SECURE 2.0 rule would be January 1, 2025.

To be clear, the SECURE 2.0 rule adjustment does not alter a plan sponsor’s obligation to comply with the SECURE Act LTPTE rules for 2024.  Consequently, in general, the SECURE Act “three year” rule will apply for 2024.  However, effective for 2025 and into the future, the SECURE 2.0 “two year” rule will apply.

We hope that this article helped you to better understand this topic and encouraged plan sponsors to begin to act now to collect the necessary data to remain compliant with the new law.  However, please be advised that this article is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.

Although available for over two decades, it is still surprising to see the general lack of awareness that most employers have regarding their eligibility for a tax credit in connection with their establishment of a retirement plan.  As a result, this article is intended to familiarize readers with this tax credit so that they can evaluate its applicability to their (or their client’s) tax situation.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)[1] initially created a three year tax credit eligibility in relation to “qualified plan start-up costs” incurred by certain small employers who establish a new “eligible employer plan”.  For this purpose, qualified plan start-up costs are any ordinary or necessary expenses incurred with regard to the establishment of such plan, its administration or certain costs incurred related to employee investment education expenses.

The value of this credit was then increased under the Setting Up Every Community for Retirement Enhancement (“SECURE”) Act for tax years beginning after December 31, 2019 from 50% of start-up costs up to a potential maximum of $500 per year to 50% of start-up costs up to a potential maximum credit of $5,000 per year.  However, Congress wasn’t done there.

In December of 2022, the SECURE 2.0 Act of 2022 (“Secure 2.0”) further incentivized employers to start new retirement plans by increasing this tax credit even more. For tax years beginning after December 31, 2022, the start-up tax credit for an employer with 50 or fewer employees increased from 50% to 100% of the start-up costs up to a potential maximum credit of $5,000 per year. However, businesses with 51-100 employees remain subject to the “old” 50% of start-up costs restriction.    Employers with over 100 employees are not eligible for this credit.  Also, the employer may not deduct any start-up costs if it claims a credit.

It is important to note that this start-up credit is only available with respect to the establishment of an “eligible employer plan”.  In general, an eligible employer plan is a tax-qualified plan under section 401(a) of the Code (such as a profit sharing plan, 401(k) plan and/or defined benefit plan, among others), Simplified Employee Pension Plan (“SEP”) or Savings Incentive Match Plan for Employees (“SIMPLE”).  In addition, in order to qualify for the credit, the newly established plan must have at least one participating non-highly compensated employee.  This final eligible plan qualification is of great importance because it effectively eliminates the credit with regard to “solo(k)” plans.

With SECURE 2.0’s increase to the start-up credit, Congress also granted another tax credit in relation to the amount of employer contributions made to start-up plans (other than defined benefit plans) for the benefit of employees earning less than $100,000. The amount of this credit is capped at $1,000 per employee for employers with 50 or fewer employees and slowly phases out for employers with between 51-100 employees. Employers with over 100 employees are not eligible for this credit.  This tax credit is further restricted to 100% of the eligible amount in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year and no credit for any tax years after the fifth year.

Although beyond the scope of this article, it is noteworthy that the SECURE Act also established a tax credit for plans that implement an “eligible automatic enrollment arrangement” (“EACA”) of $500 for each of the first 3 years that the plan has such an auto enrollment feature.  This “auto enroll” tax credit is separate and distinct from the start-up tax credits that are the subject of this article and both the start-up and auto enroll credits can be claimed concurrently.  Also noteworthy is that the EACA need not be in place at the time the plan is established in order to qualify for the credit.  As with the previously discussed small plan establishment tax credit, this credit is effective for tax years beginning after December 31, 2019.

Obviously, these rules are complicated and everyone’s tax situation is different.  Consequently, as much as we hope this article helped you to better understand this topic, it is not to be construed as financial, tax or legal advice.  Therefore, if you believe that it may apply to your (or your client’s) company, be sure to further discuss it with a qualified accountant or tax professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.