The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law which sets the minimum standard for private sector employers which offer their employees plans. The provisions of ERISA protect workers by ensuring that the pension plans have adequate funding as well as reasonable vesting requirements.
Employee benefit plans covered by ERISA are required to fulfill certain requirements, including:
- Provide plan information: Participating employees must have access to:
- copies of plan rules;
- financial information; and
- documents pertaining to plan management;
- Create a fiduciary responsibility: Numerous parties are subject to duties of care and loyalty, including:
- plan trustees;
- administrators; and
- investment committees; and
- Provide a grievance and appeals process: ERISA plans are required to provide a mechanism to request payment of benefits and to appeal denials of benefits.
If an employee benefit plan does not meet the ERISA requirements, ERISA grants workers the right to sue their employer in federal court.
What Types of Benefits Does ERISA Cover?
ERISA covers a variety of employee welfare benefit plans. Benefits which are covered by ERISA include plans that employers maintain to provide:
- Benefits for:
- disability; or
- Medical, surgical or hospital care;
- Unemployment benefits;
- Apprenticeship and training programs;
- Day care centers;
- Vacation benefits;
- Prepaid legal services; and
- Retirement plans.
Who is Exempt from ERISA?
An individual or company is exempt from ERISA coverage if the individual is self-employed or if you have a partnership where only the individual and their partner are covered by the plan. This is due to the fact that no employees are covered under the plan.
Is My Retirement Plan Covered by ERISA?
In general, ERISA applies to the majority of private sector employers that choose to offer some type of retirement plan to their employees. There are, however, some exceptions, including:
- Most government employers;
- Benefit plans designed solely for complying with:
- workers’ compensation;
- disability; or
- unemployment laws;
- Unfunded excess benefit plans; and
- Plans maintained outside of the United States which are intended to benefit non-resident aliens.
It is important to note that ERISA does not require employers to provide retirement benefits.
What is a Fidelity Bond?
Although they are referred to as bonds, fidelity bonds are more akin to insurance policies. These bonds protect policyholders against losses which are incurred as a result of dishonest or fraudulent acts committed by trusted parties.
Pursuant to ERISA, certain parties who handle plan assets of employee benefits plans are required to be bonded, including:
- Employees; or
- Service providers.
These bonds will cover the plan from loss of assets due to dishonesty or fraud. An ERISA bond is required to protect the applicants and beneficiaries from the dishonest acts of a fiduciary who handles the plan assets.
Who Must be Bonded?
As previously noted, any party who handles an ERISA plan asset is required to be bonded, including:
- Employees; or
- Service providers.
In the context of these plans, handle can mean:
- Physical contact;
- Power to transfer;
- Disbursement authority;
- Authority to sign checks; and
- Any supervisory or decision making responsibility over trust assets.
It is important to note that ERISA does not require all fiduciaries to be bonded, but only those individuals who handle plan assets. For example, financial advisors owe plan participants a fiduciary duty but they are not required to be bonded if they only handle advice and they do not handle plan assets.
What Coverage Amount is Required for a Fidelity Bond?
The parties listed above who handle plan assets are required to be bonded for at least 10% of the amount of the funds which they handle. The bond amount which is required pursuant to ERISA for one plan is a minimum amount of $1,000 and a maximum amount of $500,000 per plan.
The maximum amount increases to $1,000,000 when the plan holds employer securities.
What are the Requirements for a ERISA Fidelity Bond?
There are several requirements for ERISA fidelity bonds, including:
- The bond must have a minimum payout equal to at least 10% of the amount of funds they handle;
- The bond must be a minimum amount of $1,000 and a maximum amount of $500,000 per plan;
- The bond does not have a deductible;
- The bond must be in the name of the retirement plan or a trust;
- The bond covers ERISA criminal losses regulation;
- The bond is placed with the Department of Treasury-approved surety or reinsurer, and the plan fiduciaries cannot have any control or interest in the surety or reinsurer; and
- The bond is fixed each year for each fiduciary.
What are the Exemptions to the Bonding Requirement?
There are certain limited exemptions to the ERISA bonding requirement, including:
- Unfunded plans: Plans which only pay benefits out of general employer or union assets, also referred to as unsegregated funds, are exempt from ERISA bonding requirements; and
- Entities that are already subject to state or federal regulation: Entities which handle plan assets but are already subject to federal or state oversight may be exempt from ERISA bonding requirements. Commonly entities that are exempted include:
- banking institutions;
- trust companies;
- savings and loan associations;
- insurance companies; and
- brokers and dealers.
What Losses are Covered Under the Fidelity Bond?
A fidelity bond protects against the losses which result from dishonesty or fraud and covers:
What is the Difference Between Fidelity Bonds and Fiduciary Liability Insurance?
Fiduciary liability insurance insures employee benefit plans against the losses which are caused by breaches of fiduciary responsibility. A fidelity bond covers losses which are caused by dishonesty or fraud, as noted above.
Fiduciary liability insurance is not required by ERISA. Although fiduciary liability insurance is not required by ERISA like a fiduciary bond, every fiduciary of an ERISA plan should consider carrying liability insurance coverage.
How Can You Protect Your Rights with ERISA?
In order for an individual to protect their investment in their retirement account, it is important that they stay informed. An employer has a fiduciary duty to their employees to properly administer pension plans.
Pursuant to ERISA, every employee is entitled to be provided with a summary of the plan as well as to be provided with calculations of their benefits. It is important for an individual to be aware of the rules governing their plan and how much money is in their account.
In addition, they should closely examine the language of any non-compete provisions in the pension plan. It may be helpful to discuss these issues with an attorney.
Once an individual has signed their employment agreement and becomes enrolled in the pension plan, they may be bound by the non-compete agreement, which may limit their access to their retirement funds in the future.
Do I Need a Lawyer?
ERISA may be complex to understand and it places numerous requirements on employee benefit plans. It can be helpful to consult with a workers’ compensation lawyer who has experience with pensions and benefits.
Your lawyer can assist you with determining whether your employee benefit plan is subject to ERISA bonding requirements, the individual who must be bonded, and how much the bond should be. Always remember that a lawyer can review any document you are required to sign before you sign it and help you understand the implications.