What Is an ERISA Bond and Who Is Required to Have One?

Understanding the ERISA Bond

The Employee Retirement Income Security Act of 1974 (ERISA) established comprehensive standards to protect participants in employee benefit plans. A key component of these protections is the requirement for a fidelity bond, often referred to as an ERISA bond. This bond acts as a specialized form of insurance, designed to safeguard plans from potential financial losses.

An ERISA bond specifically protects the plan from losses caused by fraud or dishonesty committed by individuals who handle the plan’s funds or other property. This requirement is mandated under ERISA Section 412. The bond ensures the plan can recover lost assets if such misconduct occurs.

The necessity of this bond stems from the significant responsibility involved in managing employee benefit plans. The bond provides a layer of security, protecting the collective assets of plan participants against misuse, theft, or other forms of financial malfeasance by plan fiduciaries and employees.

This fidelity bond differs from other types of insurance, such as fiduciary liability insurance, which protects plan fiduciaries from breaches of their duties. An ERISA bond focuses specifically on acts of fraud and dishonesty. It serves as a direct financial guarantee to the plan, ensuring recovery for specified criminal acts rather than covering broader errors or omissions.

Who Needs an ERISA Bond

Generally, any individual who “handles” funds or other property of an employee benefit plan is required to be bonded under ERISA. This broad definition encompasses a wide range of roles and responsibilities within a plan’s operation, covering anyone with direct or indirect control over plan assets.

Individuals typically requiring bonding include plan administrators, trustees, and employees who manage contributions, benefit payments, or other financial transactions. This requirement extends to anyone with the power to exercise control over cash, checks, or other plan property, even those with authority to disburse funds or sign checks.

Specific exemptions apply, primarily for certain regulated financial institutions. Banks, trust companies, and insurance companies subject to state or federal supervision may be exempt from the bonding rule. This exemption typically applies when the institution possesses substantial capital and is regulated in a manner that offers comparable protection to the plan.

Another common exemption applies to plans where the only assets are insurance contracts or annuities, as these are generally held by regulated insurance companies. Plans with fewer than 100 participants that do not hold employer securities may also qualify for alternative bonding arrangements. The primary focus for determining bonding necessity remains on the degree of control and access an individual has to plan assets.

Determining the Bond Amount and Coverage

The required amount of an ERISA bond is directly tied to the value of the plan assets handled by the bonded individuals. The general rule is that the bond must be for at least 10% of the funds handled by the individual or entity in the preceding plan year. This calculation ensures the bond amount scales with the financial exposure of the plan.

Specific minimum and maximum limits apply to the bond amount. The bond must be for a minimum of $1,000, regardless of the plan’s size. For most plans, the maximum bond amount required is $500,000. For plans that hold employer securities, the maximum bond amount increases to $1,000,000 to provide additional protection for these specific assets.

The bond covers losses to the plan resulting from acts of fraud and dishonesty. This includes misconduct such as larceny, embezzlement, forgery, theft, and misappropriation of plan funds. Its purpose is to protect the plan from criminal acts committed by those who manage its assets.

The ERISA bond protects the plan from these losses, not the individual who committed the fraudulent act. If a bonded individual causes a loss through dishonesty, the surety company pays the plan, and then typically seeks to recover the funds from the responsible party. This structure reinforces the bond’s role as a safeguard for plan participants’ assets.

Obtaining and Maintaining an ERISA Bond

ERISA bonds are secured from surety companies, which underwrite these types of guarantees. Surety companies assess the risk before issuing a bond. The process involves an application and an underwriting review.

When applying for an ERISA bond, a surety company requires information about the plan’s assets, including the total value of funds handled in the prior year. They also need details about the individuals who need to be bonded, such as their roles and responsibilities within the plan. This information helps the surety determine the appropriate bond amount and assess risk.

Maintaining an ERISA bond is an ongoing requirement for covered plans. Bonds typically need to be renewed annually, and the bond amount may need to be adjusted if the plan’s assets change significantly. If the amount of funds handled increases, the bond amount may need to be raised to meet the 10% rule, up to the statutory maximums.

Failure to maintain the required ERISA bond can result in penalties from the Department of Labor. Plan fiduciaries have a responsibility to ensure that all individuals subject to bonding requirements are adequately covered. Regular review of plan assets and personnel changes helps ensure continuous compliance with ERISA bonding regulations.