Understanding ERISA Fidelity Bonds
In 1974, the Employee Retirement Income Security Act (ERISA) was enacted to regulate most types of employee benefit plans. ERISA section 412 and related regulations (29 C.F.R. § 2550.412-1 and 29 C.F.R. Part 2580) generally require that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded.
ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who “handle” plan funds or other property. ERISA refers to persons who handle funds or other property of an employee benefit plan as “plan officials.” This Act requires that a fidelity bond be in place to cover the fiduciary (those responsible for managing the plan) and those persons who handle funds or other property of such a plan. These bonds are intended to protect the plans from dishonesty and fraud committed by individuals who are associated with them.
What are Fidelity Bonds?
ERISA requires that every fiduciary of an employee benefit plan and every person who handles plan funds be bonded. These bonds cover the plan from loss of assets due to fraud or dishonesty. The ERISA bond is required to protect the participants and beneficiaries from dishonest acts of a fiduciary who handles the plan assets.
What coverage amount is required?
A plan official must be bonded for at least 10% of the amount of funds he or she handles. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. However, higher limits can be purchased. Effective for plan years beginning on or after January 1, 2008, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.
Employee Benefit Plans with more than 5% of non-qualifying plan assets that are held in limited partnerships, artwork, collectibles, mortgages, real estate or securities of “closely-held” companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code §408, the Plan sponsors need to do one of two things:
- Make certain that the bond amount is equal to 100% of the value of these “non-qualifying” assets or
- Arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the Plan year.
Is an ERISA Fidelity Bond the same thing as Fiduciary Liability Insurance?
No. The fidelity bond required under section 412 of ERISA specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) on the part of persons (including, but not limited to, plan fiduciaries) who handle plan funds or other property. Fiduciary liability insurance, on the other hand, generally insures the plan against losses caused by breaches of fiduciary responsibilities.
Do ERISA bonding requirements apply to all employee benefit plans?
No. The bonding requirements under ERISA section 412 do not apply to employee benefit plans that are completely unfunded or that are not subject to Title I of ERISA.
Plan fiduciaries that are bank or insurance companies subject to state or federal supervision or examination, and that meet certain capitalization requirements.
Broker/Dealers registered under Section 15(b) of the Securities Exchange Act of 1934 that are subject to the fidelity bonding requirements of a self-regulatory organization under that Act.
How do I apply for an ERISA Fidelity Bond?
We have partnered with Colonial Surety Company, a leading provider of ERISA/Pension Fidelity Bonds. They are a national insurance company licensed in all 50 states and all U.S. territories, providing insurance products since 1930. They are the largest direct seller of ERISA/Pension Fidelity Bonds in the U.S.
We have partnered with Colonial Surety Company. They are a national insurance company licensed in all 50 states and all U.S. territories, and are the largest direct seller of ERISA/Pension Fidelity Bonds in the U.S.