The Employee Retirement Income Security Act (ERISA) has rules and regulations in place to protect private sector employee benefit plans from risk of loss. ERISA section 412 and related regulations (29 C.F.R. § 2550.412-1 and 29 C.F.R. Part 2580) require that fiduciaries and any person who “handles funds or other property” of an employee benefit plan be covered by appropriate ERISA fidelity bonds. Let’s look at a few of these requirements and get a basic understanding of ERISA fidelity bonds.
What is an ERISA fidelity bond?
The Department of Labor (DOL) defines an ERISA fidelity bond as “a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty,” which includes but is not limited to the following: larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts. This bond helps protect the participants and beneficiaries of the plan from the fiduciary who handles the plan’s assets. There are specific entities that are exempt from these requirements so you will want to make sure that your entity is not one of the following:
- Unfunded employee benefit plans – a plan that pays for benefits from the employer’s assets
- Employee benefit plans not subject to Title I of ERISA
- Government plans
- Church plans with certain IRC elections
- Plans maintained with workers’ compensation, unemployment, or disability laws
- Plans maintained outside of the U.S. primarily for nonresident aliens
- Excess benefit plans
- Most banks
- Insurance companies
- Registered brokers/dealers
Who are the parties of the bond?
Typically, the benefit plan is named as the insured and a surety company provides the ERISA fidelity bonds. As the insured party, the plan has the ability to make a claim on the fidelity bond if the plan sustains a loss due to one of the acts of fraud or dishonesty listed above. A fidelity bond cannot be obtained from any insurance company. The Department of Treasury website has a link to a Listing of Certified Companies. The fidelity bond must be placed with a surety or reinsurer that is named on this list which you can find here.
What type of coverage does my plan need?
Each person who “handles funds or other property” must be bonded in an amount equal to at least 10% of the amount of funds handled in the preceding year. However, a bond cannot be less than $1,000 and greater than $500,000. These amounts apply to each plan named on a fidelity bond. An exception to the maximum bond coverage does apply if the plan holds employer securities and this exception increases the maximum bond to $1,000,000.
For example, let’s say your benefit plan has funds totaling $3,000,000, and the plan trustee has access to handle the funds. Under ERISA, the trustee must be bonded for at least 10% or $300,000, but can be covered up to the maximum of $500,000 per plan (assuming no employer securities).
What happens if my plan does not have an ERISA fidelity bond?
Under ERISA Section 502(I), a 20% fiduciary penalty may be assessed if there is a fiduciary breach, even if no plan losses have occurred. Although there is no specific monetary penalty amount provided by ERISA, fiduciaries and other individuals who should have been bonded, can be held personally liable for acts against the plan. Fidelity bonds are generally inexpensive, and can be paid for using plan assets, and leaving the plan unprotected against dishonesty or fraud can leave the door open to substantial financial burden.
John Caillouette, CPA