What Is an ERISA Fidelity Bond and Who Needs One?
ERISA fidelity bonds protect employee benefit plans. Learn why they're required, who needs one, and how to ensure your plan is compliant.
An ERISA fidelity bond protects employee benefit plans, safeguarding the financial well-being of participants and beneficiaries. Its purpose is to insure the plan against losses from fraud or dishonesty committed by individuals who manage or access plan assets. This requirement stems from the Employee Retirement Income Security Act of 1974 (ERISA), a federal law setting standards for private-sector employee benefit plans and their oversight.
Understanding ERISA Fidelity Bonds
An ERISA fidelity bond functions as a specific type of insurance designed to shield an employee benefit plan from financial harm. It protects against losses from fraudulent or dishonest actions by individuals handling the plan’s funds or property. The bond covers illicit activities such as larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, and willful misapplication of plan assets.
An ERISA fidelity bond differs significantly from fiduciary liability insurance. The fidelity bond protects the plan itself against intentional acts of dishonesty. Fiduciary liability insurance, however, protects the plan’s fiduciaries, covering claims from breaches of fiduciary duty like mismanagement or errors in judgment, rather than deliberate fraudulent acts.
The fidelity bond’s coverage is specifically for the benefit of the plan, ensuring reimbursement for stolen funds if a covered loss occurs. Deductibles or similar features that would shift a portion of the loss onto the plan are prohibited for the required bond amount. This highlights that the fidelity bond safeguards plan assets against criminal intent.
Who Needs a Bond
An ERISA fidelity bond is required for nearly every person who “handles” funds or other property of an employee benefit plan. This broadly defined term includes individuals whose duties or activities could lead to a loss of plan funds or property through fraud or dishonesty. This encompasses physical contact with plan assets, the power to transfer or disburse funds, or the ability to sign checks or other negotiable instruments.
Common roles that necessitate bonding include plan administrators, trustees, and other fiduciaries. Employees of the plan sponsor, such as an employer or union, who handle plan funds through receipt, safekeeping, or disbursement of assets, also fall under this requirement. Third-party administrators and investment managers who exercise control over plan assets are usually subject to bonding.
This bonding obligation applies to most private-sector employee benefit plans covered by ERISA, including various retirement plans like 401(k)s, 403(b)s, and traditional pension plans. Some funded welfare benefit plans are also subject to these requirements. Exceptions include entirely unfunded plans, where benefits are paid directly from an employer’s general assets, or plans not subject to Title I of ERISA, such as governmental or church plans.
Determining Your Bond Amount
The Employee Retirement Income Security Act specifies rules for calculating the minimum required bond amount for employee benefit plans. Generally, the bond must cover at least 10% of the total funds handled by the plan or its officials in the preceding plan year. This calculation is based on assets as of the first day of each plan year, ensuring the bond amount reflects the plan’s current scale.
There are established minimum and maximum bond amounts. The minimum bond required is $1,000, applying even if 10% of handled funds falls below this figure. The maximum bond amount typically required by the Department of Labor is $500,000 for any single plan, increasing to $1,000,000 for plans holding employer securities.
Plan sponsors can purchase a bond for an amount greater than the statutory minimum or maximum for additional risk mitigation. If a plan includes non-qualifying assets, such as real estate or limited partnerships, comprising more than 5% of total plan assets, additional bonding requirements may apply, potentially requiring 100% coverage of those amounts.
Obtaining and Maintaining Your Bond
To obtain an ERISA fidelity bond, plan sponsors must procure it from a surety or reinsurer listed on the Department of the Treasury’s Listing of Approved Sureties (Department Circular 570). This ensures the bond issuer is financially sound and recognized by federal authorities. Plan sponsors can typically acquire these bonds through insurance brokers specializing in employee benefits or directly from approved surety companies.
The application process generally requires detailed information about the plan, including its asset values, and identifying the individuals who need to be bonded. Maintaining compliance with ERISA bonding requirements involves several ongoing obligations. The bond generally has a term of at least one year and must be renewed annually.
It is important to adjust the bond amount for significant changes in plan assets, particularly an increase, to ensure continuous adherence to the 10% rule. Plan sponsors must accurately report their fidelity bond coverage on their annual Form 5500 filing. Failure to maintain adequate bonding or properly report it can lead to scrutiny from the Department of Labor, potentially triggering an audit and exposing plan fiduciaries to personal liability for losses that should have been covered by the bond.