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. These bonds cover the plan from loss of assets due to fraud or dishonesty. The ERISA bond is required to protect the applicants and beneficiaries from dishonest acts of a fiduciary who handles the 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, but 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 Coverage Amount is Required for a Fidelity Bond?
A fiduciary, officer, employee, or service provider who handles plan assets must be bonded for at least 10% of the amount of funds he or she handles. The bond amount required under ERISA for one plan is a minimum of $1,000 and a maximum of $500,000 per plan. The maximum increases to $1,000,000 when the plan holds employer securities.
What are the Requirements for a ERISA Fidelity Bond?
ERISA Fidelity bonds have several requirements:
- The bond must have a minimum payout equal to at least 10% of the amount of funds he or she handles.
- The bond is required to be a minimum of $1,000 and a maximum 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 Department of Treasury-approved surety or reinsurer, and the plan fiduciaries cannot have any control or interest in the surety or reinsurer.
- The bond is fixed annually for each fiduciary
What are the 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
What Losses are Covered Under the Fidelity Bond?
Fidelity bonds protect against losses resulting from fraud or dishonesty. This covers:
What is the Difference Between Fidelity Bonds and Fiduciary Liability Insurance?
Fiduciary liability insurance insures the employee benefit plan against losses caused by breaches of fiduciary responsibility. Fidelity bonds cover losses caused by fraud or dishonesty. ERISA does not require fiduciary liability insurance. Although fiduciary liability insurance isn’t required by ERISA, as a fiduciary bond is, every fiduciary of an ERISA plan should consider getting liability insurance coverage obtaining coverage.
Do I Need a Lawyer?
ERISA is a fairly complex statute that places many requirements on employee benefit plans. An employment lawyer experienced with pensions and benefits can help determine whether your employee benefit plan is subject to ERISA bonding requirements, the person that must be bonded, and how much the bond should be.