Is an ERISA Bond the Same as a Fidelity Bond?

Confusion often arises when discussing “ERISA bonds” and “fidelity bonds.” While an ERISA bond is a specific type of fidelity bond, understanding their relationship requires clarity on their distinct purposes and requirements. This article explains how they protect against financial loss and outlines their governing regulations.

What is a Fidelity Bond?

A fidelity bond is a form of insurance protection for an employer against financial losses from dishonest acts by employees. These acts can include theft, fraud, or embezzlement. Businesses commonly obtain these bonds.

Its purpose is to protect the employer’s financial interests. If an employee commits a fraudulent or dishonest act causing a monetary loss, the bonding company reimburses the employer up to the coverage limit. This protection covers various scenarios, including misappropriation of company property or securities.

Companies obtain fidelity bonds as a risk management tool. While not always legally mandated, some contracts or lending agreements may require a business to carry one to protect other parties’ interests.

What is an ERISA Bond?

An ERISA bond is a specialized type of fidelity bond specifically mandated by the Employee Retirement Income Security Act (ERISA) of 1974. This federal law was enacted to protect the interests of participants in employee benefit plans and their beneficiaries. The bond’s specific purpose is to safeguard employee benefit plans, such as 401(k)s and pension plans, from losses due to fraud or dishonesty by individuals who handle plan funds or other plan property.

This bond protects the plan itself, not the employer directly. If a person handling plan assets engages in dishonest conduct like larceny, embezzlement, or misappropriation, the ERISA bond provides a means for the plan to recover the lost funds. The requirement for an ERISA bond underscores the importance of protecting the retirement savings and benefits that employees have accrued.

The bond ensures that if a plan official causes a covered loss to the plan through fraud or dishonesty, the plan can make a claim on the bond for reimbursement. This legal requirement helps to maintain the financial integrity of employee benefit plans.

Distinguishing ERISA Bonds from General Fidelity Bonds

An ERISA bond is a specific type of fidelity bond, but it operates under a distinct set of rules and serves a different beneficiary than a general fidelity bond. The core difference lies in their purpose: a general fidelity bond protects an employer from employee dishonesty, whereas an ERISA bond specifically protects an employee benefit plan and its participants. This distinction is fundamental to understanding their application.

The beneficiary of the bond also differs significantly. For a general fidelity bond, the employer is the named insured and directly receives compensation for covered losses. In contrast, an ERISA bond names the employee benefit plan as the insured party, meaning the plan itself (and by extension, its participants and beneficiaries) is the recipient of any payouts. This ensures that the assets intended for employees’ futures are protected.

Furthermore, the mandate for these bonds varies. General fidelity bonds are often acquired voluntarily by businesses as a risk management practice or are required by contractual agreements. ERISA bonds, however, are a legal requirement under federal law for most private-sector employee benefit plans. This legal obligation makes compliance with ERISA bonding rules non-negotiable for covered plans.

The scope of coverage also presents a difference. While general fidelity bonds can cover a wide array of employee dishonest acts affecting various company assets, ERISA bonds are narrowly focused on protecting plan assets from fraud or dishonesty by those who “handle funds or other property” of the plan. This includes acts such as theft, embezzlement, forgery, and other forms of financial misconduct directly impacting the plan’s finances. Regulatory oversight also differs, with general fidelity bonds typically falling under state insurance regulations, while ERISA bonds are subject to the specific regulations and enforcement of the Department of Labor (DOL).

ERISA Bonding Requirements

Compliance with ERISA bonding requirements is a critical obligation for employee benefit plans. Individuals who “handle funds or other property” of an employee benefit plan must be bonded. This typically includes trustees, plan administrators, and any other employees or service providers with access to plan assets or authority to direct their disposition. Not every fiduciary needs to be bonded, only those whose roles involve handling plan funds.

The required bond amount generally must be at least 10% of the amount of funds handled by the individual or plan in the preceding plan year. There is a minimum bond amount of $1,000 per plan, and a standard maximum bond amount of $500,000. However, for plans that hold employer securities, the maximum bond amount can be up to $1,000,000.

ERISA permits several types of bonds to satisfy this requirement, including individual bonds covering a single person, schedule bonds listing multiple individuals or positions, and blanket bonds covering all employees. The bond must be obtained from a surety or reinsurer that is listed on the Department of the Treasury’s approved list. It is important to note that deductibles are generally prohibited for coverage of losses within the maximum amount for which the person is required to be bonded.

Certain exemptions exist from the bonding requirements, such as for plans where all assets are held by regulated financial institutions like banks or insurance companies. Failure to comply with ERISA’s bonding requirements can lead to significant penalties imposed by the Department of Labor. Therefore, plan sponsors must regularly assess their bonding coverage to ensure continuous compliance and protect plan assets.