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Protecting Assets of Small Company Pension Plans - Hidden Costs of Non-Compliance Outstrip Penalties - June 10, 2003

This article is published word-for-word by permission from its author, Janet Maniscalco


Back in 2001, the Department of Labor tightened regulations regarding fidelity bonds for small company pension plans. As of April 17, 2001 even small company plans with less than 100 participants had a choice - obtaining fidelity bonds for their plan assets and report them on Form 5500 or procure an annual independent audit of the plan. While many plan sponsors complied with the rules, others neglected to observe the regulations. To encourage compliance, the DOL created a Delinquent Filer Voluntary Compliance Program. Still, adherence with the new rules was inconsistent. Some companies were going without sufficient bonds year after year.

DOL easing penalties, but demanding compliance

In December 2002, the U. S. Department of Labor's Pension and Welfare Benefits Administration (PWBA) and the Internal Revenue Service announced a joint project to ensure that all employee benefit plans comply with their Form 5500 filing obligations under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. In order to increase participation, penalties have been lowered to $1,500 or less per plan per year under a revised Delinquent Filer Voluntary Compliance Program.

The flip side of the lowered penalties is a tougher stance toward companies that refuse to bring their plans into compliance. While direct penalties are low, the true cost of non-compliance can be high. The DOL is targeting plans without fidelity bonds and pursuing lawsuits against them. In a landmark DOL case, Chao v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan Civil Action No. 1:00CV 889, a federal judge ordered the termination of a company

401(k) plan because the company and its majority owner had violated the Employee Retirement Income Security Act (ERISA) by failing to bond the pension plan offered to company employees. As part of the settlement, the company was required to 1) purchase and maintain a fidelity bond for the company's 401(k) plan until the plan was terminated and 2) pay all expenses (except annual maintenance fees) related to the distributions, rollovers or plan termination. A pension plan that was supposed to create wealth ended up as a liability, simply through the lack of a low cost fidelity bond.

Sponsor choice: Fidelity Bond or audit

Having a CPA perform an independent annual audit is the alternative to purchasing a fidelity bond for plan assets. In most cases, an audit is far more costly than a bond, especially since most assets typically found in a small company pension plan are only required to have a fidelity bond equal to 10% of their value. Assets held by a financial institution, such as a bank, insurance company, broker-dealer or regulated entity, as well as mutual funds, participant loans, qualifying employer securities, or self-directed individual account plans generally qualify for the 10% bond. Real estate does not fall into this category unless held in trust by an above institution.

However, not all assets can be covered with a 10% bond. Some assets are considered "non-qualifying" and are required by the DOL to carry a higher level of protection from fraud. Non-qualifying pension plan assets typically include limited partnerships, artwork, collectibles, mortgages, real estate and securities of "closely-held" companies and are typically held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code §408. If non-qualifying assets comprise 5% or more of the entire plan assets, the plan must have either an annual "full-scope" CPA audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year, or a fidelity bond equal to 100% of the value of the non-qualified assets. A limited-scope CPA audit, where the accountant bases the audit opinion on another party's review of the operation, is not sufficient to satisfy the DOL regulations.

Ways to Comply

Now and in the future, the PWBA of the Department of Labor and the IRS will be targeting small company pension plans that neglect or refuse to protect their plan assets. While past non-compliance can be addressed through the Delinquent Filer Voluntary Compliance Program, current and future compliance requires sufficient fidelity bonds for both qualifying and non-qualifying assets or an independent annual audit. With the precedent set of the DOL suing a company that did not comply and shutting down their pension plan, non-compliance is no longer a reasonable option. More information on the Snyder compliance case is available at: General information on compliance with current ERISA regulations is available at:

About the author:

Janet Maniscalco is a fidelity bond consultant at Colonial Surety Company, which offers bonds for qualifying and non-qualifying pension plan assets up to $5 million directly from its website: Janet can be reached at 800-221-3662 or

© 2003 Milberg Consulting LLC  All Rights Reserved

We intend the information in this publication as a general resource, not as legal or plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a tax or ERISA professional. Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update.


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