I have an HCE who wants to retire with a lump sum distribution. The plan is underfunded, so he is restricted under the a4 regs. He is willing to post the necessary bond, but how is the bond obtained? Should I direct him to his regular P&C agent? I assume it's a pretty specialized product.

From rev ruling 92-76

In order to secure an employee's repayment obligation of the restricted amount, the plan provides that prior to receipt of a distribution an employee must agree that upon distribution the employee will promptly deposit in escrow with an acceptable depositary property having a fair market value equal to at least 125 percent of the restricted amount. The plan also provides that the obligation of an employee under the repayment agreement alternatively can be secured or collateralized by posting a bond equal to at least 100 percent of the restricted amount. For this purpose, the bond must be furnished by an insurance company, bonding company or other surety approved by the U.S. Treasury Department as an acceptable surety for federal bonds. The plan also provides that an employee's obligation under the repayment agreement can be secured by a bank letter of credit in an amount equal to at least 100 percent of the restricted amount.

That's my question. How do I find an appropriate issuer? I tried a surety company our firm has used in the past to place ERISA fiduiary bonds, but they don't deal in bonds for restricted employees, which leads me to believe that the bond is a specialized product. Does anyone have any practical experience in this area?

Sorry merlin, you go to circular 570 by US Treasury and find an approved issuer. They you just have to start making phone calls. Here is link to Treasy site for the publication and listing.

http://www.fms.treas.gov/c570/c570.html

I'd recommend that you also see that the plan has the language to do this as well. We've seen a few documents that did not have the posting of a bond language.

Merlin, my impression is that companies that do this correctly, meeting all the requirements at reasonable cost are about as common as 3-eyed fishes.

If you find one, you should set up a referral service-I'd send them clients right away. I have never seen (or even heard of) one that I thought met the requirements, although I have seen a couple that did not.

Is it going to be rolled to an IRA? I seem to recall where the IRA itself can be used for security, which might alleviate the cost of purchasing a bond? Hold on a minute...ok, PLR 9514028. I've actually seen this approach used in 1 case, several years ago.

Andy,

That's what I was afraid of.

Belgarath,

I'm familiar with the PLR, but the math doesn't work out in my case. My client's lump sum is $1,000,000 and his unrestricted amount is 84,000, which leaves a restricted amount of 916,000. That means his security has to be 1,145,000. Does anything preclude him from pledging other property for the difference of 229,000?

I've spoken to an attorney about the PLR and he's of the opinion that they could have treated the restricted IRA as a bond or letter of credit, and my numerical issue would not arise. But the only way to be sure would be to get our own PLR. He quoted 6 months and $10-15,000 to get the PLR. Not enough time, too much money.

We just pay the restricted EEs an annuity and make them collect it over time.

Merlin, if you want to search, there are several old threads on this subject. I don't recall any providing a different answer, however.