ERISA fidelity bonds ensure your plan assets are well administered, and those handling them are held accountable.
They are among the most crucial tools for ensuring that employee retirement plans are managed responsibly and honestly. They protect plan assets from theft, fraud, or misuse by fiduciaries who handle the funds.
Let’s dive into understanding what it is, who needs it, why it is required, how much it would cost you, and how to obtain it.
What is an ERISA Fidelity Bond and Why is It Required
An ERISA fidelity bond is a critical legal requirement under section 412 of the Employee Retirement Income Security Act of 1974.
It protects employee benefits plans from risks arising from fraud or dishonesty by individuals who handle plan funds or property. This bond protects the plan’s financial interests.
Who Must Be Bonded Under ERISA Requirements
ERISA requires every person who handles assets of an employee benefits plan (the plan’s funds or property) to be bonded.
These include:
- Plan fiduciaries such as the administrators, members of the investment committee, trustees, and sponsors.
- Individuals who receive, transfer, disburse, and negotiate plan funds.
- Third-party service providers with discretion authority to handle plan assets.
- Anyone with defined access or authority over your employees’ benefits plan.
ERISA Fidelity Bond Requirements
Fidelity bonds must meet several ERISA bond requirements to be compliant.
These are:
- Coverage Amount: You’re obliged to bond not less than 10% of the plan assets you actually handled, and ERISA requires a minimum bond value of $1,000 up to $500,000 per plan or $1,000,000 for plans holding the employer’s stock.
- Insured Party: The bond must specify to whom the payout is payable. That ensures the claim payments go directly to the right loss payee. In this case, the plan itself is the insured party.
- Covered Individuals: The bond must specify the bonded persons (individuals who handle the plan assets or property).
- Surety Provider: The bond must be obtained from an approved surety or reinsurer listed under the Department of the Treasury.
- Coverage Period: The bond must specify the timeframe (usually a year) during which it remains active.
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What is Covered
The bond must also indicate what the plan is protecting against: losses arising from the dishonesty or fraudulent actions of individuals who handle the plan assets.
This includes forgery, misappropriation, embezzlement, theft, etc.
ERISA Fidelity Bond Cost
The cost of your ERISA fidelity bond is often relative to the value of your employee benefit plan, but that’s not the sole ruling factor.
Other elements come into play when pricing your ERISA fidelity bond, such as:
- ERISA Bond Premiums: Premiums are determined by the bond amount, the surety’s underwriting criteria, and your plan’s claims history.
- Type of Plan and Industry Risk: Generally, plans and industries with high fraud risk will attract higher bond pricing than those with low fraud risk.
- Employer’s Internal Control Systems: Insurance companies perceive companies with stronger internal controls as lower-risk. Hence, their bond costs are usually lower than those of their counterparts with weak or no internal controls.
What ERISA Fidelity Bonds Cover (and Don't Cover)
ERISA fidelity bond covers direct losses to plan assets resulting from acts of misconduct, including:
- Theft or embezzlement of plan assets
- Forgery or unauthorized withdrawals
- Fraudulent electronic transactions, such as unauthorized wire transfers
- Misappropriation of contributions
Generally, the bond reimburses the plan up to the specified coverage limit.
However, it does not cover stemming from:
- Deliberate administrative errors
- Bad investment decisions
- Actions by third- party providers who do not meet ERISA requirements
- Uncovered individuals
Note: An ERISA fidelity bond primarily protects plan assets from theft or dishonest acts by covered individuals.
ERISA Fidelity Bond vs. Fiduciary Liability Insurance
Like most self-insured medical plan benefits sponsors, you probably confuse ERISA fidelity bonds and fiduciary liability insurance. Note that both are distinct coverage plans.
Below is a detailed comparison table to help you understand the key differences between the two:
| Feature | ERISA Fidelity Bond | Fiduciary Liability Insurance |
|---|---|---|
| Purpose | Covers dishonesty and fraudulent acts | Covers fiduciary breaches (unintentional errors, mismanagement, or oversights) |
| Required by Law? | Yes, under ERISA section 412 | No, but highly recommended |
| Who Does it Cover | The plan, naming people as bonded parties | Fiduciaries |
| Who is the Payout Recipient | The plan | The covered fiduciaries |
| Coverage Amount | Not less than 10% of the plan assets handled (the minimum value must be $1,000 per plan) | Flexible- varies depending on the plan’s size and risk level |
| Obtained From | Certified surety bond provider | Insurance providers |
How to Obtain an ERISA Fidelity Bond
Here are simple steps to securing an ERISA fidelity bond. The process is very straightforward, provided you are conversant with the key requirements:
Step 1: Determine Your Coverage Amount
Typically, the coverage should be 10% of the plan assets handled.
Remember, the least amount expected per plan is $1,000, while the maximum is $500,00, and $1 million if your plans hold employer securities.
Step 2: Document Your Calculations
Ensure you document your coverage amount and the calculations.
This will serve as the basis of your premium contributions and compliance during employee benefits plan audits (by DOL).
Step 3: Find a Surety Provider
Choose a provider who is certified and approved by the U.S. Department of the Treasury. Verify their claim-paying ability rating and financial strength.
You want to be sure that they can pay if a claim occurs.
Step 4: Apply
Complete your application form and ensure you enter all required details correctly. The form will require you to indicate your details (plan sponsor), details about the plan, and the total number of individuals who are handling the plan.
It may also require you indicate your financial details, previous claims, and your internal controls.
Step 5: Review the Policy (Bond Document)
Once approved, the surety provider will issue you the bond and a policy. Take time to review it carefully. Ensure it meets your requirements, from the coverage scope, amount, to duration. Ask for clarification where required.
Note: Obtaining an ERISA fidelity bond is not a one-off activity. It is renewed annually, creating an opportunity to review your provider’s performance. If they do not have the capacity to accommodate your plan’s growth, consider a different provider.
Consequences of Non-Compliance with ERISA Bonding Requirements
The Department of Labor (DOL) monitors if your plans are ERISA governed, and not meeting ERISA bonding requirements carries multiple consequences, including:
Significant Penalties
Under Section 502(1) of ERISA, the DOL can impose penalties of up to 20% of the recovery amount for bonding violations.
In addition, not being properly bonded can expose you to audits, which may lead to recovery for other costly compliance issues.
Personal Liabilities
Should a loss of plan assets occur without the proper ERISA bonding, you and any other persons who handle the plan funds or property may be held responsible.
This may have significant financial implications. Simply put, if plan assets worth $400,000 are lost due to a fiduciary’s failure to obtain adequate coverage, then the specific fiduciary will likely reimburse the plan for the loss.
Prohibited Transactions
When bonding is inadequate, your transactions are likely to be restricted.
The DOL views such transactions as improper dealings intended to benefit certain individuals who handle plan assets. Thus, it will prohibit certain transactions to protect your plan.
Plan Disqualification
Failure to meet the bonding requirements can result in your plan being disqualified. This could mean losing tax benefits that qualified plans enjoy under the Internal Revenue Code (IRC).
As an employer, your contributions may be non-deductible, and participants may have to pay taxes on their retirement benefits.
Reputational Damage
Plan participants, employees, and other stakeholders will lose trust in you if they discover that you failed to comply with ERISA bonding requirements.
They may even pursue a lawsuit against you, even if there are no actual losses incurred on their side. However, it will leave you exposed not only to reputational harm but also to legal liabilities.
Frequently Asked Questions (FAQs)
Here are some common questions that most plan sponsors have raised in the past:
Is an ERISA Fidelity Bond Required for All Retirement Plans?
No, an ERISA fidelity bond is not required for all retirement plans. It is required for all private-sector retirement plans subject to ERISA, such as 401(k), profit-sharing, and 403(b) plans.
Plans sponsored by federal, state, and local government entities are exempt from the ERISA fidelity bond. Similar to those sponsored by the church.
What Happens If an Employer Fails to Maintain a Bond?
An employer who fails to maintain will likely be held responsible for plan losses resulting from fraud or dishonesty by individuals handling the plan assets.
Besides, this oversight can lead to legal consequences once discovered by the DOL.
How Long Does ERISA Fidelity Bond Coverage Last?
Typically, ERISA bond coverage is renewed every year. This means you should set an annual renewal to ensure your plan stays protected throughout the year.
Do not wait until your bonding expires, as any lapse can leave you exposed, and losses that occur during coverage gaps won’t be covered.
Can a Third-Party Administrator be Covered Under the Bond?
Yes, third-party administrators who handle your plan assets should be covered under an ERISA fidelity bond.
Conclusion
An ERISA fidelity bond is a fundamental compliance requirement for employer-sponsored plans, such as 401(k) plans. It ensures that losses caused by the dishonest or fraudulent acts of people you entrust to handle plan assets do not derail your employees’ financial future.
At Ethos Benefits, we offer employee benefits administrative services. We use a fiduciary approach to proactively review your compliance requirements during your plan design and renewal. We operate on a flat-fee model; you can be sure there won’t be any surprise fees.
Does your plan meet ERISA bonding compliance? Schedule a discovery call now.
