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Compliance

Fidelity Bonds

HISTORY

The Teachers Insurance Annuity Association (“TIAA”) began as a stock life insurance company created by the New York State Legislature in 1918 to provide pensions for college and university teachers. The company expanded over time, and in 1952, TIAA created the College Retirement Equities Fund (“CREF”), which is a variable annuity that allows for investment in stock and that was designed to provide benefits to enrollees based on the rate of inflation. TIAA-CREF’s primary business continues to be retirement plan administration and annuity products, and it is one of the largest managers of employer-sponsored 403(b) tax-sheltered annuity plans.

Generally, eligible enrollees and/or their employers contribute funds to TIAA-CREF for pensions and life insurance. Much of TIAA-CREF operates on a non-profit basis, and as such, the funds contributed are usually tax exempt.

BYU–Hawaii’s faculty and staff have historically contributed to TIAA-CREF for pension plans. Because of these contributions, the university must file a Form 5500 with the Internal Revenue Service (“IRS”) each year as a Direct Filing Entity (“DFE”) for every pension benefit plan, including annuity arrangements (under sections 403(b)(1) and 403(b)(7) of the Internal Revenue Code). Any welfare benefit plans fully insured by the insurance carrier do not need to be reported in Form 5500.

In 2009, the IRS revised Form 5500 to require entities filing the form to certify that they obtain a fidelity bond for people handling plan funds to insure the plan against loss of funds from fraud or dishonesty.

APPLICABILITY TO BYU–HAWAII

Every employee of the university, including administrators and officers, who handles funds for an employee welfare benefit plan or an employee pension benefit plan must be bonded to protect the plan against losing funds from fraud or dishonesty.6 The amount for which each employee is bonded must be at least 10% of the amount of money they handle for the plan, capped at $500,000.

Regulations define “handling” as performing a duty that allows a person enough control to take or lose funds through fraud or dishonesty. This control can be exercised through direct access to funds or decisions made by the person within the course of their duties. The amount of funds at risk of loss makes no difference in the decision of whether a person is handling funds, except when the loss is negligible (e.g., when there are fiscal controls before doing clerical duties, or when the person handling checks or titles does not have the authority to negotiate their handling).

Examples of handling include the following:

  • Physical contact (except when closely supervised)
  • Possibility of physical contact (access to a safe or power to withdraw from an account even if the access is unauthorized or generally not required for their duties)
  • Power to transfer to third party or negotiate for value (titles, etc.)
  • Power to disburse or sign checks (including co-signing)
  • Supervisors of those mentioned above

The use of internal controls must be considered when determining whether a person handles funds. People with general responsibility over the corporation who make broad authorizations to employees with more specific decision-making power are not considered to be handling funds. A bank with dayto-day administrating duties is also not considered to be handling funds.

Money becomes funds for the plan the moment it is separated into a different account for distributing benefits or identified on a different set of records as such. If the money for the plan is held in the employer’s general account until distributed to an insurance carrier or service, the employer is not considered to handle the funds unless the funds flow back to the plan through administrators or employees of the employer. Fidelity bonds must cover all funds that may be used as a source for the benefits of the employee welfare benefit or pension benefit plan.

Only completely unfunded plans whose benefits come from a union or employer and whose assets remain in the assets of the union or employer until they are distributed are exempt from the requirement to bond employees.

REQUIREMENTS

Form

The fidelity bond must cover loss due to fraud or dishonesty regardless of whether the person gained from the action and regardless of whether the action was a crime; it must cover all actions that state law allows recovery from under a bond.

All bonds used must be from a corporate surety approved by the Secretary.19 Surety companies with which the plan has a conflict of interest are prohibited. If a surety company loses its solvency, the plan must bond under a new company. Bonds with accepted reinsurers of federal bonds and the Underwriters at Lloyds, London are acceptable as long as those companies follow the requirements below.

Different forms of bonds are permissible. The university may bond each responsible person individually or have a bond that covers a number of people (or their respective positions) and specifies the amount for which each is covered. The university may also bond all officers and employees with a blanket bond; this bond may cover each employee for the same amount or simply cover all losses regardless of the number that may occur.

Fiduciary liability insurance does not meet the requirements of these regulations, although comprehensive coverage insuring the plan against dishonesty may if it meets other requirements for the bond. A plan may use a bond already in existence as long as it meets the requirements of these regulations.

Amount

The amount of the bond must be 10% of the amount of funds being handled, at least $1,000 and up to $500,000. The amount is fixed at the beginning of each calendar, policy, or fiscal year. A plan is not required to bond employees for more than $500,000 unless specifically required by the Secretary of the Treasury.

The amount of the bond is calculated based on the amount handled by the person (or their predecessor) for the previous year. Because handling only considers the risk of loss, if a person only has control over part of the fund for a year at a time, the amount is calculated according to that part. A person having control over the total amount of the fund must be bonded for the total amount of the fund including any additions that occurred during the year.

Although the bond’s amount must be calculated according to previous years, the bond can cover the plan for more than one year as long as the amount remains sufficient. Importantly, the provisions of the bond must allow one year from its termination for the plan to recover funds discovered lost during the year the bond covered the plan.

The bond has to cover all losses from the first dollar lost to the last and cannot have a deductible. Upon request, the Secretary may grant a variance to this requirement if other bonding arrangements or the financial condition of the plan are sufficient to protect the participants’ interests. If a bond covers more than one person, it must cover 10% of the largest amount anyone on the bond handles. Some bonds may cover smaller amounts if excess indemnity can be secured for larger amounts.

If a bond covers more than one plan, a person on the bond who handles funds for more than one plan must be covered for the total amount of money they handle as if they were bonded separately for each plan. The terms of the bond must allow each plan to recover the maximum amount covered by the bond. Because the maximum amount for each plan is $500,000, a person can be bonded for more than $500,000 if the total amount of funds they handle for all plans covered by the bond exceeds that amount.

Any bonds covering more than one plan must clearly identify the plans being insured. If the plans are not specifically named as insured entities under the bond, there must be a rider or separate agreement to the bond to ensure that the bond covers loss by fraud or dishonesty as explained in these regulations. Bonds that must fulfill this requirement are bonds naming an employer as an insured entity with several plans or a bond covering more than one plan that allows the first plan listed to act for the rest.

COMPLIANCE CALENDAR

The amount of the bond covering employee pension plans is calculated from the amount of funds handled in the previous years. Responsible officials should review the terms of a bond every year to ensure that it offers sufficient coverage.