ERISA Fidelity Bonds
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What Is a Fidelity Bond?
Despite being called bonds, fidelity bonds are more akin to insurance policies. They protect policyholders against losses incurred as the result of fraudulent or dishonest acts by trusted parties.
Under the Employee Retirement Income Security Act of 1974 (ERISA), any fiduciary, officer, employee, or service provider who handles plan assets of an employee benefit plan must be bonded. Bonds must be placed with a surety company listed as approved by the Department of Treasury and may be paid for out of plan assets.
Who Must Be Bonded?
Any fiduciary, officer, employee, or service provider who handles plan assets must be bonded. In this context, "handle" can mean:
- Physical contact
- Power to transfer
- Disbursement authority
- Authority to sign checks
- Any supervisory or decision making responsibility over trust assets
It should be noted that ERISA does not require all fiduciaries to be bonded – only those who handle plan assets. For example, a financial advisor owes plan participants a fiduciary duty, but need not be bonded if he only advises and doesn’t handle plan assets.
What Losses Are Covered?
Fidelity bonds protect against losses resulting from fraud or dishonesty. This covers:
The covered party must be bonded for at least 10% of the plan assets handled with a minimum bond amount of $1,000 per plan. The maximum bond amount that can be required under ERISA with respect to a single official is $500,000 per plan. The maximum increases to $1,000,000 when the plan holds employer securities.
Fidelity Bonds vs. Fiduciary Liability Insurance
Fiduciary liability insurance insures the employee benefit plan against losses caused by breaches of fiduciary responsibility, whereas fidelity bonds cover losses caused by fraud or dishonesty. ERISA does not require fiduciary liability insurance.
Exemptions to the Bonding Requirement
ERISA provides some limited exemptions to its bonding requirement:
- Unfunded Plans: Plans that only pay benefits out of general employer or union assets, also known as unsegregated funds, are exempt from ERISA bonding requirements.
- Entities Already Subject to State or Federal Regulation: Entities that handle plan assets but are already subject to state or federal oversight may be exempt from ERISA bonding requirements. Commonly exempt entities include:
- Banking institutions
- Trust companies
- Savings and loan associations
- Insurance companies
- Brokers and dealers
Do I Need a Lawyer to Understand Fidelity Bonds?
ERISA is a fairly complex statute that places many requirements on employee benefit plans. An experienced employment lawyer can help determine whether your employee benefit plan is subject to ERISA bonding requirements, who must be bonded, and for how much.
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Last Modified: 07-16-2014 04:45 PM PDT
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