How Much ERISA Fidelity Bond Do I Need?
Understand the crucial factors that determine your ERISA fidelity bond amount to ensure proper plan security and regulatory compliance.
An ERISA fidelity bond protects employee benefit plans from financial losses due to fraud or dishonesty by individuals managing plan funds. This specialized insurance safeguards plan assets, ensuring the security of funds for participants. Understanding the appropriate bond amount is a necessary step for plan sponsors to meet regulatory obligations and protect plan integrity.
Determining if a Bond is Required
The Employee Retirement Income Security Act (ERISA) mandates that virtually every person who handles funds or other property belonging to an employee benefit plan must be bonded. This requirement extends beyond traditional fiduciaries and includes any individual whose duties provide access to plan assets or decision-making authority that could lead to a loss through dishonest acts. Common roles subject to this rule include plan administrators, trustees, employees of the plan or plan sponsor who manage funds, and certain service providers.
An individual is considered to be “handling” plan funds if their responsibilities involve physical contact with cash, checks, or similar property. This also applies if they have the power to transfer funds, negotiate plan property, possess disbursement authority, or sign checks. Supervisory or decision-making responsibilities over activities that require bonding also fall under this definition. While many individuals associated with a plan need to be bonded, certain exemptions exist, such as for specific regulated financial institutions like banks, insurance companies, or registered brokers and dealers. Additionally, unfunded plans, where benefits are paid directly from an employer’s general assets without segregation, are exempt from this bonding requirement.
Calculating the Minimum Bond Amount
The standard method for determining the required ERISA bond amount is based on the funds handled by the plan or individual during the preceding plan year. Generally, the bond must be for at least 10% of the amount of funds handled. This calculation ensures that the bond coverage is proportionate to the assets under an individual’s control.
A statutory minimum bond amount of $1,000 applies, meaning even if 10% of the funds handled is less than this figure, the bond must still be at least $1,000. Conversely, there is a maximum bond amount that the Department of Labor can require for most plans. This cap is $500,000 for any one plan official. For example, if a plan official handles $6 million in assets, 10% would be $600,000, but the required bond would be capped at $500,000.
“Funds handled” encompasses all plan investments that can be used as a source for benefit payments, including cash, checks, marketable securities, and even real estate. The bond amount for each person must be fixed annually, based on the highest amount of funds handled by that person in the prior plan year. For new plans without a preceding year of operation, the amount of funds handled must be estimated.
Factors Influencing the Bond Amount
Specific situations can alter the standard bond calculation or necessitate additional consideration beyond the 10% rule. One notable exception applies to plans that hold employer securities, such as company stock. For these plans, the maximum bond amount can increase to $1,000,000, rather than the standard $500,000. For instance, if a plan with employer securities has $15 million in assets, 10% would be $1.5 million, but the bond would be capped at $1 million.
Plans that hold non-qualifying assets, which are investments not held by a financial institution (like limited partnerships, real estate), may face additional requirements. If these non-qualifying assets exceed 5% of the total plan assets, the bond amount might need to equal 100% of these specific assets, or the plan may need to arrange for an annual full-scope CPA audit. While a single bond can cover multiple plans, ERISA requires that any recovery to one plan does not diminish the coverage available to another plan under the same bond. Plan sponsors must carefully review the bond’s liability provisions to ensure adequate coverage for each plan.
Securing and Managing Your ERISA Bond
Once the required bond amount is determined, the next step involves securing and maintaining the ERISA bond. These bonds must be obtained from a surety or reinsurer listed on the Department of the Treasury’s Listing of Approved Sureties. Neither the plan nor any interested party can have a significant financial interest in the surety company or the agent through which the bond is acquired.
The plan has an ongoing responsibility to review and adjust the bond amount annually. This ensures that the coverage remains sufficient as plan assets or the amount of funds handled fluctuates. If the amount of funds handled increases, the bond amount must be updated to reflect the new requirement. The cost of an ERISA bond is economical, ranging from approximately $120 for a one-year bond to $180-$250 for a three-year bond. Failure to maintain the proper bond amount can lead to a Department of Labor investigation or potential liability exposure for individuals responsible for the plan.