What Is an ERISA Bond and Who Needs One?

An ERISA bond is a type of fidelity bond that protects employee benefit plan assets from losses due to fraud or dishonesty by individuals managing those funds. It acts as a financial guarantee, allowing the plan to recover lost money if misconduct occurs. This bond helps secure retirement savings for participants.

Understanding ERISA Fidelity Bonds

An ERISA fidelity bond shields employee benefit plans from financial harm due to dishonest actions. These actions include larceny, theft, embezzlement, forgery, or wrongful abstraction of plan assets. The bond’s purpose is to protect the plan and its participants, not the individuals handling the funds.

ERISA law mandates that virtually every person handling funds or other property of an employee benefit plan must be covered by a bond. This requirement extends beyond fiduciaries to anyone with access to plan assets, authority over disbursements, or decision-making power. This includes plan administrators, trustees, certain employees of the plan sponsor, and service providers like third-party administrators or investment advisors if they handle plan assets.

Exemptions from this bonding requirement exist under ERISA. For instance, unfunded plans, where benefits are paid directly from an employer’s or union’s general assets, are exempt. Some regulated financial institutions, including banks, insurance companies, and registered brokers and dealers, may also be exempt if they meet specific conditions due to existing federal or state oversight. An ERISA fidelity bond covers dishonest acts, while fiduciary liability insurance protects fiduciaries against claims of mismanagement or breaches of duty.

Calculating the Required Bond Amount

The amount of an ERISA fidelity bond is determined by specific guidelines. The bond must be at least 10% of the total funds handled by the individual or the plan’s total assets at the start of the plan year. This percentage applies to the highest amount of funds handled during the preceding year. For new plans, the amount can be based on an estimate of total assets for the upcoming year.

Minimum and maximum limits apply to the bond amount. The bond cannot be less than $1,000. For most plans, the maximum required bond amount is $500,000. However, for plans holding employer securities, the maximum increases to $1,000,000.

These limits apply per plan, so an individual handling funds for multiple plans may need a bond for each. Plan fiduciaries must review the bond amount annually to ensure sufficiency, especially if plan assets change.

Acquiring and Managing Your Bond

Obtaining an ERISA fidelity bond typically involves a structured process through surety companies or insurance providers. Bonds must be secured from a surety or reinsurer listed on the Department of the Treasury’s Circular 570. The application generally requires basic information about the management company, the plan, and involved officers. While requirements vary, many bonds up to $500,000 can be issued quickly, often online. Larger bond amounts may require additional financial documentation, extending processing time.

Managing an ERISA bond involves ongoing responsibilities. Plan administrators must ensure renewal before expiration to maintain continuous coverage. Many providers offer multi-year terms, simplifying management and potentially offering cost savings. An annual review of the bond amount is necessary to confirm it meets regulatory requirements, especially as plan assets fluctuate. Maintaining accurate records of the bond, including coverage amount and effective dates, is important for compliance and potential audits.

Risks of Not Having a Bond

Failing to obtain or maintain a required ERISA fidelity bond carries consequences for plan sponsors and individuals. The Department of Labor (DOL) can impose significant fines and penalties for non-compliance. Reporting an inadequate or absent bond on the annual Form 5500 can flag the plan for increased scrutiny and trigger a DOL audit. Such audits are time-consuming and may incur substantial fees, potentially ranging from $8,000 to $12,000.

Beyond financial penalties, fiduciaries who fail to comply can face personal liability for losses that a proper bond would have covered. This personal exposure can be substantial, as the bond protects the plan, not the individual. Consistent non-compliance with ERISA requirements, including bonding, can also jeopardize the plan’s tax-exempt status with the IRS, leading to adverse tax consequences for the employer and participants. The absence of a required bond is considered an unlawful act under ERISA.