As benefit plan auditors, common questions we receive from clients are – what does my ERISA fidelity bond cover? Who does it cover? And is the amount appropriate? The Employee Retirement Income Security Act of 1974 (“ERISA”) requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan, be bonded.
ERISA bonding requirements can often be confusing, so it is important that all plan fiduciaries understand the requirements in order to make sure their current fidelity bond is in compliance with the current rules and regulations. Plans should have ERISA fidelity bond coverage from an approved provider as of the beginning of the plan reporting period with a coverage amount in accordance with the regulations.
As mentioned above, every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan must be bonded. Examples include- plan fiduciaries, certain officers, employees, plan committees, service providers and plan vendors. It is important that plan sponsors and fiduciaries understand the parties involved and the functions which they perform, so that appropriate bonding can be obtained. Once it is determined who needs to be covered, it is important to identify what the permissible forms of bonds are.
A fidelity bond is required under section 412 of ERISA. Often, fidelity bond insurance and fiduciary liability insurance are thought of as the same, yet they are very different in that one is required under ERISA rules and the other is optional.
Fidelity Bond Insurance – A fidelity bond is a requirement under ERISA which protects the participants of the plan from any loss by reasons of fraud or dishonesty (including theft, larceny, embezzlement, forgery and misappropriation) that are incurred as a result of the mismanagement of funds by persons employed at the plan sponsor or are plan fiduciaries. The retirement plan should be listed as a covered entity on the policy or there should be reference to the fact that the bond covers any ERISA plans that are sponsored by the employer, so long as each plan can recover the amount required by ERISA.
Fiduciary Liability Insurance – This coverage is neither required by nor subject to section 412 of ERISA. Fiduciary liability insurance protects the plan fiduciaries against losses caused by breaches of fiduciary responsibility and is not a substitute for a fidelity bond.
Per Form 5500 instructions, on Line 4e, plans must check “yes” and enter the aggregate amount of fidelity bond coverage for all policies. The instructions require that “the plan itself (as opposed to the plan sponsor or administrator) is a named insured under a fidelity bond from an approved surety covering plan officials and that protects the plan from losses due to fraud or dishonesty as described in 29 CFR Part 2580”. The instructions also go on to state that plans are permitted under certain conditions to purchase fiduciary liability insurance, however these fiduciary liability insurance policies are not written specifically to protect the plan from losses due to dishonest acts and cannot be reported as fidelity bond coverage on line 4e.
The amount of the bond per 29 CFR Part 2580, subpart C, states that the bond limit required for each person must be at least equal to 10% of the plan assets handled in the previous year, subject to a minimum of $1,000 or maximum of $500,000. The maximum amount increases to $1,000,000 for plans that hold employer securities, unless those investments are part of a “pool” such as mutual or index funds.
There is an exemption allowing plan officials to purchase bonds from surety companies authorized by the Secretary of the Treasury as acceptable reinsurers on federal bonds, see 29 CFR 2580.412-23. For a list of approved sureties and reinsures, see Department of the Treasury’s Listing of Certified Companies, here.
As you can see, ERISA bonding requirements are quite voluminous and complex, so it is important that all plan sponsors and fiduciaries understand the rules in order to make sure their most recent fidelity bond is in compliance with the current rules and regulations. We recommend that all plan sponsors and fiduciaries review their coverage on an annual basis to make sure that they have ERISA fidelity bonding in effect from by approved provider as of the beginning of the plan reporting period and for the proper amount. Additional information on the fidelity bonding requirements can be found in the DOL’s Field Assistance Bulletin 2008-04, at www.dol.gov/ebsa.