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.

On June 29, 2020, the Internal Revenue Service (“IRS”) released Notice 2020-52 (“IRS Notice”) which grants certain COVID-19 related relief to retirement plan sponsors who employ a safe harbor 401(k) (“Safe Harbor”) plan design feature.  The majority of the guidance is temporary relief which expires on August 31, 2020.  However, the IRS Notice also includes a clarification that shall remain effective after August 31, 2020.

Temporary Suspension of Economic Loss / Safe Harbor Notice Content Requirement

Generally, a Safe Harbor feature is required to be effective for a full 12-month plan year.  However, in certain circumstances, it is permissible to suspend or reduce the Safe Harbor feature during the current plan year (“Mid-Year”) if certain additional requirements are met.  More specifically, in order for a Safe Harbor feature to permissibly be suspended Mid-Year, the plan sponsor of such plan must either:

1) be operating at an economic loss; or

2) the Safe Harbor notice issued by the plan sponsor to each eligible employee before the beginning of the plan year (“SH Notice”) must include specific language advising that:

a) the plan may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions; and

b) the reduction or suspension will not be effective for at least 30 days after all eligible employees receive notice of the intended suspension or reduction of employer Safe Harbor     contributions[1].

However, the IRS Notice temporarily suspends the economic loss and/or SH Notice content requirements described above.  Therefore, with regard to any suspension or reduction of Safe Harbor employer contributions that occurs from March 13, 2020 through and including August 31, 2020, a plan sponsor is neither required to have been operating at an economic loss nor to include the specific language referenced above within their annual SH Notice.

Temporary Suspension of 30 Day Advance Notice Requirement for Safe Harbor Profit Share

As suggested by the discussion above, generally a suspension or reduction of a Safe Harbor contribution feature may not occur any earlier than 30 days after each eligible employee receives supplemental notification of the intended suspension or reduction.  With respect to this 30 day advance notice requirement, the IRS Notice indicates that such requirement shall not apply with regard to the suspension or reduction of Safe Harbor profit sharing features that occur from March 13, 2020 through and including August 31, 2020.  It is important to note that this suspension of the 30 day advance notice requirement only applies to Safe Harbor profit sharing contribution features and does not apply to Safe Harbor matching contribution features.    Regardless, the temporary relief within the IRS Notice shall only be available if:

1. A supplemental notice advising of the suspension or reduction in Safe Harbor profit sharing contributions is received by each eligible employee by no later than August 31, 2020; and
2. The plan amendment that reduces or suspends the Safe Harbor profit sharing contributions is adopted no later than its effective date.

Suspension or Reduction of Safe Harbor Contribution for HCEs Only

In general, it is not permissible to implement a Mid-Year change to a Safe Harbor plan that reduces or otherwise narrows the group of employees eligible to receive Safe Harbor contributions.  Thus, for example, it would not be permissible to amend a Safe Harbor plan Mid-Year in order to exclude all “Sales Associates”.  However, the IRS Notice clarifies that it is permissible to implement a Mid-Year amendment to a Safe Harbor plan in order to reduce or suspend a Safe Harbor contribution if such reduction or suspension only applies to “highly compensated employees” (“HCEs”).  Typically, an HCE is any employee who owns greater than 5 percent of the plan sponsor or earned greater than $125,000[2] in the prior year.

In order to implement the HCE clarification discussed in the IRS Notice, the affected HCEs must first receive an updated SH Notice.  Such updated SH Notice must advise them of the change to their eligibility to receive the Safe Harbor contribution and must also provide them with an opportunity to change their deferral election before the Mid-Year reduction or suspension is implemented. In general, these timing requirements are deemed to be satisfied if the updated SH Notice is provided at least 30 days before the effective date of the change.

We hope that this article helped you to better understand this topic.  However, please be advised that it 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.

[1] Each Safe Harbor notice prepared by Legacy Retirement Solutions, LLC for its clients includes the necessary language advising all eligible employees that the plan at issue may be amended Mid-Year to reduce or suspend Safe Harbor employer contributions and that such reduction or suspension will not be effective for at least 30 days after such notice is received.

[2] This is the current 2020 dollar amount which is annually adjusted by the IRS for cost of living increases.

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act which was signed into law in December of 2019 has enacted sweeping changes to the retirement plan industry.  As a result, this is the third and final article in a series that are intended to summarize the most impactful aspects of the SECURE Act as they apply to tax-qualified retirement plan sponsors.  If you would like to review prior articles in the series, please refer to our website at legacyrsllc.com/category/statutory-regulatory/.

It is important to understand that even though this legislation was only recently enacted, many of its provisions are already effective.  Therefore, it is critical for retirement plan sponsors to take the time to educate themselves on the impact of these changes in order to help ensure the proper administration and operation of their retirement plans.

Required Distributions for Designated Beneficiaries

One of the more impactful provisions of the SECURE Act involves the timing of distributions that may be made from defined contribution plans following the death of the plan participant.  More specifically, effective with regard to participant deaths that occur after December 31, 2019, distributions to “designated beneficiaries” must generally be made by no later than 10 years following the end of the year in which the participant dies (“10 Year Rule”).  In this context a “designated beneficiary”, is an individual formally designated by the participant as the beneficiary of his or her retirement plan account but who is not the participant’s spouse.

Prior to the SECURE Act, designated beneficiaries were permitted to take a distribution of the decedent’s plan account over the life expectancy of the designated beneficiary.  Thus, in most circumstances, the prior rule would have granted greater flexibility to a designated beneficiary regarding his or her ability to delay the tax impact of an inherited retirement plan account.  Presumably, the additional federal tax revenue generated by the implementation of this provision was intended to offset the loss in tax revenue resulting from other provisions of the SECURE Act.  For example, the SECURE Act also increased the age that “required minimum distributions” (“RMDs”) must begin from age 70-1/2 to age 72.

Notwithstanding the foregoing, several exceptions apply to the new 10 Year Rule.  Most importantly, as suggested above, spouses are exempt from the 10 Year Rule and will remain able to receive distributions from their deceased spouse’s retirement plan account over the surviving spouse’s life expectancy.  Also, in general, the following categories of designated beneficiaries are exempt from the 10 Year Rule: 1) disabled or chronically ill individuals; 2) someone who is not more than 10 years younger than the deceased participant; or 3) a minor child of the deceased participant.  However, with respect to minor children eligible for the 10 Year Rule exception, the 10 Year Rule distribution period begins in the year after the year that such child reaches the age of majority.

Increased Penalties for Late Filed Forms 5500

Effective for Forms 5500, Annual Return/Report of Employee Benefit Plan, (“Form(s) 5500”), required to be filed after December 31, 2019, late filing penalties assessable by the Internal Revenue Service (“IRS”) have increased to $250 per day up to a maximum of $150,000 per late filed return. This is a significant increase over the previously applicable IRS late filing penalties of $25 per day up to $15,000 per late filed return.

The new IRS late-filing penalty assessments associated with Form 5500 are severe.  However, the establishment of “reasonable cause” to attempt to abate an IRS late-filing penalty assessment remains.  In addition, at times the Department of Labor’s (“DOL”) “Delinquent Filer Voluntary Compliance Program” (“DFVC”) may be available to eliminate an IRS assessed Form 5500 late-filing penalty.  Finally, this increase to the IRS late-filed Form 5500 penalty amounts does not impact the DOL’s ability to concurrently assess its own late filed Form 5500 penalties.

Portability of Lifetime Income Options

Effective for plan years beginning on or after December 31, 2019, a plan sponsor of a defined contribution plan generally is permitted to allow a participant without a distributable event to receive an “in-kind” distribution of a lifetime income investment product held under the plan.  However, the ability to offer such a distribution is limited to situations where the lifetime income investment at issue is no longer authorized to be an investment under the plan.

As suggested by their name, lifetime income investment products generally are designed to be held by the owner for his or her lifetime.  As such, lifetime income products generally include early sale / termination charges that are intended to encourage lengthy holding periods.  In the situation where a plan sponsor decides to remove an existing lifetime income product from a plan’s permissible investment menu, this has the potential to force a participant to liquidate, at significant expense, a lifetime income product that is no longer permitted as a plan investment.  Thus, this new provision of the SECURE Act would allow a participant invested in a lifetime income product to obtain a distribution of the investment and avoid incurring the otherwise applicable fee or penalty.

Presumably, this provision of the SECURE Act will encourage more plan sponsors to offer lifetime income options within defined contribution plans.  This is because this rule change will eliminate one of the perceived problems associated with offering lifetime income options within retirement plans.

Lifetime Income Provider Fiduciary Safe Harbor

Several of the provisions of the SECURE Act include at least tacit encouragement for defined contribution plan sponsors to offer lifetime income investment options to participants.  However, a plan sponsor that decides to include a lifetime income investment product within a plan’s investment menu is generally responsible on a fiduciary level for the selection of the insurance company offering such product.  Further complicating such selection process is the realization that payments made under such investment product may not even begin until several decades after the initial selection process is completed and will likely continue for several decades after such payments begin.  Thus, many plan sponsors are rightfully wary to act as a fiduciary while selecting an insurance company to offer an insurance product that may need to make payments to participants forty or more years into the future.

In order to attempt to alleviate this valid concern, the SECURE Act outlines a “safe harbor” process for a plan sponsor to follow in order to have certainty that it has satisfied its fiduciary duty of prudence when selecting an insurance provider to offer a lifetime income investment product within the plan.  This provision was effective upon the date of enactment of the SECURE Act so it is currently effective.

In order to take advantage of the newly established safe harbor, the plan sponsor must first engage in an “objective, thorough, and analytical search for the purposes of identifying insurers.”  Then, subsequent to completing this due diligence obligation, the plan sponsor must consider the financial capabilities of each insurer with regard to its ability to satisfy its obligations under the lifetime income investment product and conclude that the insurer is financially able to satisfy those obligations. The SECURE Act states that a fiduciary will be deemed to satisfy this requirement if it obtains certain written representations specified under the SECURE Act from the insurers in question.

The plan sponsor must also consider the costs of the lifetime income product in relation to its benefits and conclude that the cost is “reasonable”.  Although the SECURE Act does not explicitly define what constitutes reasonable in this context, it does indicate that a plan sponsor is not required to select the lowest cost option.  In addition, the SECURE Act specifies that a fiduciary does not have an on-going obligation to review the appropriateness of previously selected lifetime income products.  Instead, such investment only needs to be approved at the time of purchase or initial selection.

SECURE Act Plan Amendment Deadline

Many of the provisions of the SECURE Act will result in the need to implement formal amendments to existing retirement plan documents.  In this regard, the SECURE Act establishes a deadline to amend for the changes that it implements.  That deadline is the end of the first plan year beginning on or after January 1, 2022.  Thus, the earliest date that a plan would need to be amended in order to memorialize the changes required under the SECURE Act would be December 31, 2022.  In addition, a delayed amendment deadline applies for collectively bargained and governmental plans.

We hope that this article helped you to better understand this topic.  However, please be advised that it 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.