Five Tips to Make Your Employee Benefit Plan Run Smoothly

Accordingly, we recommend that you remit employee deferrals to the plan on the day that you make your payroll tax deposits. Further, when an employer is delinquent in forwarding participant contributions and holds them commingled with its general assets, the employer is deemed to have engaged in a nonexempt prohibited transaction as a loan to the plan sponsor for the use of employee funds.

The DOL administers a Voluntary Fiduciary Correction Program (VFCP) which allows plan sponsors to self-report instances of non-compliance without penalty provided that projected lost earnings associated with late remittances are remitted to the plan and all other provisions of the VFCP are met.

TIP #2 MAKE SURE DEFERRALS ARE IN ACCORDANCE WITH ELECTIONS AND COMPENSATION DEFINITIONS SPECIFIED IN THE PLAN DOCUMENT
Your plan document specifies whether compensation subject to deferral includes bonuses paid during the plan year. Accordingly, employee deferrals from bonus dollars may not be made on an ad hoc or discretionary basis but instead are required to follow the provisions outlined in the plan document. If deferrals are not in accordance with elections and compensation definitions specified in the plan document, the Department of Labor will require your organization to recalculate and then credit the accounts for any lost contributions. Additionally, you may face a penalty.

TIP #3 PROTECT YOURSELF AGAINST FRAUD WITH A FIDELITY BOND AND FIDUCIARY INSURANCE
A fidelity bond is required for a plan by ERISA Section 412. The primary purposed of the fidelity bond is to protect the plan against fraud or dishonesty, such as embezzlement from the plan; therefore the plan, not the plan sponsor must be the named insured. Usually employee dishonesty policies meet the bonding requirement; however, the plan must be the named insured either in addition to or in lieu of the plan sponsor.

The amount of the bond must be at least 10 percent of the plan assets at the beginning of the year, but not less than $1,000, nor more than $500,000. For purposes of fixing the amount of the bond, the amount of funds handled is determined by the funds handled by the person, group, or class to be covered by the bond, during the preceding reporting year. The bond must insure from the first dollar of loss up to the requisite bond amount. No deductible is allowed which, in effect, shifts a portion of the risk to the insured.

The purpose of fiduciary insurance is to protect the plan fiduciaries from liability, for example, in the event of lawsuits against the fiduciaries for ‘breach of fiduciary duty’ from either the participants or the government. Fiduciary insurance is not required, but many ERISA consultants recommend that the insurance be purchased to protect the decision makers of the plan.

It is possible that fiduciary insurance can qualify as fidelity bonding, but that depends on how the insurance contract is written. In most cases, it is expected that a separate fidelity bond is needed. Accordingly, you should consult with your insurance agent to make sure your insurance coverage specifically meets the bonding requirements of ERISA.

TIP #4 MAINTAIN VOLUNTARY NON-PARTICIPATION DOCUMENTS
It’s a prudent practice to maintain evidence of an eligible participant’s election not to participate in the plan to clearly document their decision so they cannot assert in a later year that they had chosen to participate and that the Plan Sponsor incorrectly excluded them from the plan.

TIP #5 DEVELOP AN INVESTMENT POLICY STATEMENT
Since a primary role of a plan trustee is to protect the assets on behalf of the plan participants, it is a prudent practice to develop an investment policy statement and to document in the plan minutes the due diligence process in place to monitor the appropriateness of the investments offered in the plan. Failure to do so could result a breach of your Fiduciary duties.

Anthony T. Carideo Jr., CPA is a Member of the Firm at Wolf & Company, P.C.  and provides assurance, tax, and accounting services. He can be reached at 617- 428-5405 or by email to acarideo@wolfandco.com.

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting, tax or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use.  The information in this publication is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this publication. Copyright 2012.