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Understanding ERISA Fidelity Bonds

One of the Employee Retirement Income Security Act’s (ERISA) requirements is that individuals who handle plan funds and other property must be covered by a fidelity bond to protect the plan from losses due to fraud or dishonesty. Surprisingly though, many plan sponsors are unaware of this requirement and, in fact, do not have a bond at all or do not have a bond in the proper amount. The following are several key questions and answers that will help employers and plan sponsors determine what fidelity bonding arrangement is right for their plan.

What is an ERISA Fidelity Bond?

An ERISA fidelity bond is a type of insurance that protects a plan against losses caused by acts of fraud or dishonesty. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.

Is an ERISA Fidelity Bond the Same Thing as Fiduciary Liability Insurance?

A fidelity bond is different from fiduciary liability insurance, sometimes referred to as a fiduciary bond. The ERISA bond protects plan participants from the acts of fraud or dishonesty described above, whereas fiduciary liability insurance insures plan officials (and sometimes the plan) against losses caused by breaches of fiduciary responsibility. Fiduciary liability insurance is not required, while a fidelity or ERISA bond is mandatory.

Do ERISA’s Fidelity Bonding Requirements Apply to All Employee Benefit Plans?

Although the bonding requirements generally apply to most ERISA retirement plans and many funded welfare benefit plans, the ERISA bonding requirements do not apply to employee benefit plans that are completely unfunded (i.e., the benefits are paid directly out of an employer’s or union’s general assets), or to plans that are not subject to Title I of ERISA (e.g., church plans, governmental plans).

How Much Fidelity Bond Coverage is Required?

Generally, the amount of the ERISA bond must be equal to at least 10% of the amount of funds “handled” in the preceding year. The bond amount cannot, however, be less than $1,000, and, in most cases, is not required to be more than $500,000. However, the plan can purchase a bond for a higher coverage amount, if appropriate.

For the first year of a plan, the amount handled by a plan official must be estimated. The amount is generally the initial amount required to fund or set up the plan, plus the amount of contributions required to be made during the current reporting year. A fidelity bond should be in place by the time a plan is set up.

Can I Get an ERISA Bond from ANY Bonding or Insurance Company?

No. Bonds must be obtained from a surety or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties. Neither the plan nor any interested party may have any control or significant financial interest, either directly or indirectly, in the surety, reinsurer, or in an agent or broker through which the bond is obtained.

What Happens if a Plan Does Not Have a Fidelity Bond?

Plan sponsors are required to report that the plan has a fidelity bond on the annual Form 5500 filing. The Department of Labor (DOL) regularly monitors plans that report no fidelity bond coverage; therefore, if an organization does not have a bond, or the bond they have does not have sufficient coverage for the plan’s assets, they are at risk for triggering a DOL audit. Failure to have a bond is a fiduciary breach, resulting in plan fiduciaries being personally liable for any losses due to fraud or dishonest practices the fidelity bond would have covered.

Please contact us if you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more about our Employee Benefit Plan Audit services by visiting our website.

About the Author

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more

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