What Is ERISA Bond Insurance and Who Needs It?

An ERISA fidelity bond is a specialized financial safeguard designed to protect employee benefit plans from potential losses. It functions as a type of guarantee, shielding the plan against financial harm resulting from fraudulent or dishonest acts committed by individuals who manage its funds. This requirement is a legal mandate for many private sector employee benefit plans, underscoring its importance in safeguarding the financial well-being of plan participants.

Understanding ERISA Fidelity Bonds

The Employee Retirement Income Security Act of 1974 (ERISA) established this bonding requirement to ensure the security and integrity of private pension and welfare plans. An ERISA fidelity bond covers losses caused by acts of fraud or dishonesty by those who handle plan assets. This coverage extends to various forms of misconduct, including larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, and willful misapplication of funds. The bond ensures that if an individual entrusted with plan assets commits a dishonest act leading to a financial loss, the plan can be reimbursed up to the bond’s coverage limit.

Who Must Be Bonded

ERISA mandates that virtually anyone who “handles” the funds or other property of an employee benefit plan must be covered by a fidelity bond. This broad definition of “handling” includes individuals who have physical contact with plan assets, exercise discretion over funds, possess the ability to transfer funds, or hold authority to disburse plan money.

Roles that commonly require bonding include plan administrators, trustees, and employees of the plan or plan sponsor involved in the receipt, safekeeping, or disbursement of funds. This extends to individuals with signatory authority over plan accounts or those who supervise activities that involve handling plan assets. Service providers, such as third-party administrators or investment advisors, also need to be bonded if their duties grant them access to or control over plan funds.

Certain exceptions exist for the bonding requirement. Plans that are completely unfunded, meaning benefits are paid directly from an employer’s or union’s general assets without segregating funds, are exempt. Plans not subject to Title I of ERISA, such as church plans or governmental plans, do not typically require an ERISA fidelity bond. Regulated financial institutions like certain banks, insurance companies, and registered brokers or dealers may also be exempt if they meet specific conditions.

Calculating the Required Bond Amount

The amount of an ERISA fidelity bond is determined by specific guidelines to ensure adequate protection for plan assets. Generally, each person required to be bonded must be covered for at least 10% of the funds handled in the preceding plan year. This calculation is based on the total assets of the plan at the beginning of the plan year.

There are both minimum and maximum limits for the bond amount. The bond cannot be less than $1,000, even if 10% of the funds handled falls below this figure. For most plans, the maximum required bond amount is $500,000. However, for plans that hold employer securities, this maximum increases to $1,000,000.

Plan administrators and fiduciaries are responsible for reviewing the bond amount annually to ensure it remains compliant with ERISA requirements. If a plan is new and has no preceding year’s funds, the amount is estimated using specific Department of Labor regulations. The bond must cover the plan for the entire year and cannot include a deductible.

Obtaining an ERISA Fidelity Bond

Acquiring an ERISA fidelity bond involves a straightforward process, typically through surety companies or insurance brokers. These providers must be listed on the U.S. Department of the Treasury’s Listing of Approved Sureties, also known as Department Circular 570, which ensures they are authorized to issue such bonds.

The application process generally requires providing specific information about the plan and the individuals to be bonded. This includes the legal name of the benefit plan, its Employer Identification Number (EIN), the total amount of plan assets, and details about the individuals who handle plan funds. For bond coverage exceeding $500,000, additional financial documentation may be required for underwriting.

Once the application is submitted, the bond provider reviews the information and provides a quote for the premium. For bonds within the standard limits, issuance can often occur within hours or on the same day. After the premium is paid, the bond is issued, fulfilling the legal requirement for the plan.

ERISA Fidelity Bonds vs. Fiduciary Liability Insurance

It is important to distinguish between ERISA fidelity bonds and fiduciary liability insurance, as they serve different purposes within the realm of employee benefit plans.

An ERISA fidelity bond specifically protects the plan from financial losses due to dishonest or fraudulent acts committed by individuals who handle its assets. This coverage focuses on criminal acts like theft, embezzlement, or forgery.

In contrast, fiduciary liability insurance protects the fiduciaries themselves, and sometimes the plan, from personal liability arising from breaches of their fiduciary duties. This type of insurance covers losses resulting from errors, omissions, or negligent acts, such as imprudent investment decisions or administrative mistakes, rather than intentional fraud. Fiduciary liability insurance is not legally mandated by ERISA but is widely recommended to protect individuals serving in fiduciary capacities from potential lawsuits and associated defense costs.