In 2002, the U. S. Department of Labor and Welfare Benefits Administration (PWBA) and the Internal Revenue Service (IRS) announced a joint effort to ensure that all plans comply with their form 5500 filing and the audit and bonding requirements. Failure to comply with new bonding requirements now triggers a requirement for an audit by an Independent Certified Public Accountant (Audit). Failure to comply with the Audit requirements can subject the plan sponsor (normally named as the Plan Administrator) or any individual so designated to daily calculated civil penalties up to $1,100 per day. Complying with these requirements is obviously the only course of action and ignorance is not an excuse.

Here are the rules:

The old rule that a plan needs an audit for the plan years the first day of which the plan is considered to cover 100 participants is well known. The requirement first applies when the number is 120 or more participants and continues until the number becomes less than 80. A new rule, however, requires an audit if less than 95% of the assets of the plan are "Qualified Plan Assets" meaning assets held by a financial institution, mutual funds, participant loans, qualifying employer securities and self-directed accounts. Under the new rule, the audit requirement may be satisfied by the maintenance of a fidelity bond in an amount equal to 100% of the non-qualifying plan assets. Unless the plan is already required to have an audit under the old rules (i.e., the 100 participants plan), the obvious choice for compliance with the new audit rule is the maintenance of the fidelity bond.

All plans are required to maintain a Fidelity Bond (Bond) equal to 10% of the plan assets or $500,000, if less. The amount of the Bond required to avoid the Audit requirement for a small plan (i.e., less than 100 participants) is 100% of the non-qualifying plan assets.

Plans that cover only business owners and their spouses are not subject to the audit requirements. Therefore, although such plans must maintain the 10% bond, the bonding applicable to non-qualifying assets is not needed to avoid the audit requirement.

A plan may be benefiting only owner employees because current contributions have not been made which would have benefited a non-owner employee. Such a plan does not qualify for the exception. Therefore, any employer with common law employees and non-qualifying assets must carefully determine the application of the exception.