Disclaimer: This article is intended to help employers understand their ERISA bonding obligation and identify potential compliance gaps. It is not meant to replace legal counsel or recommend specific insurance products.
ERISA bonds exist to meet a legal requirement while helping you protect plan assets from misuse or dishonest handling.
In this article, you will learn what an ERISA fidelity bond is, how fidelity bond premiums are calculated, the average cost of ERISA fidelity bonds, how to choose a suitable bond, and ways to reduce your bond costs.
Let’s get started.
What is an ERISA Fidelity Bond?
The Employment Retirement Income Security Act (ERISA) fidelity bond is an insurance policy that protects employee benefits, such as 401(k) plans, from fraudulent activities, including theft, embezzlement, and dishonesty by those who handle these funds. Think of it as a safety net for protecting your workers’ benefit plans.
Basically, it was created to ensure employers comply with stringent ERISA bond regulations and protect their employees’ benefit plans from dishonest acts.
It’s prudent that you understand what an ERISA fidelity bond covers to ensure you’re compliant with the regulations. The fidelity bond covers:
- Fiduciaries’ misappropriation of the plan’s funds.
- Dishonest acts, such as larceny.
- Alteration of the plan’s documents, leading to loss of funds.
- Embezzlement by the plan handlers.
How ERISA Fidelity Bond Premiums are Calculated
ERISA fidelity bond premium is calculated in two steps:
1. Determining the Bond Amount
The employee’s benefits plan amount determines the amount of ERISA fidelity bonds. ERISA rules require the bond to cover at least 10% of the plan’s total cost from the previous year, setting the bond amount.
For example, if your employee’s benefits plan is $1,000,000, your fidelity bond would be $100,000.
ERISA laws mandate the 10% rate and don’t vary with the insurer.
2. Applying the Premium Rate
Insurance companies charge an annual premium of approximately 0.5% to 2%, depending on the provider and risk profile.
For example, a $100,000 bond with a 0.5% premium rate attracts an annual premium of $500.
Factors that Drive ERISA Fidelity Bond Premiums
You should understand the factors influencing ERISA fidelity bond premiums to remain compliant and avoid overpaying for bond costs.
Key factors include:
1. Bond Coverage Amount
Your ERISA bond coverage amount rises as the employee benefit amount increases, leading to higher premiums. Knowing the size of your workers’ benefits plan is essential, especially during periods of rapid business growth.
Your previously bonded plan may trigger higher premiums the following year due to an increase in the benefits plan.
2. Number of Fiduciaries
The number of people managing the employee benefits plan is part of the risk assessment.
Insurers will charge higher premiums if more fiduciaries are handling the benefits plans.
3. Previous Claims History
A history of fraud or dishonesty triggers higher premiums, as it indicates a likelihood of future fraudulent activity.
This underscores the importance of maintaining a clean employee benefit plan audit history and having no prior fraud cases.
4. Internal Security
Plans with robust internal security, such as thorough vetting of fiduciaries, are considered low risk.
This may lead to lower premiums compared to companies with inadequate security measures.
5. Plan Type
The plan type determines your annual premium amount. For instance, pension plans hold much more money than standard welfare benefits.
This results in higher premiums because the amount to be bonded is high.
6. Plan Structure
How you structure your plans determines your ERISA fidelity bond premiums. Single plans lead to lower premiums because you’re dealing with a single pool of assets, meaning one bond calculation is needed.
Having multiple plans increases your premium cost, especially if each plan must be bonded separately.
Therefore, complex plan structures require broader coverage, which increases your premium.
7. Bond Term
While ERISA fidelity bonds are paid annually, some insurers offer multi-year deals. Annual bonds are flexible because the insurer adjusts your premiums the following year based on your plan’s asset growth.
Conversely, multi-year deals can be a cost-saving measure, but your insurer may adjust your premium mid-term, especially if your plan assets rise significantly. As such, the bond term you choose depends on your business’s growth rate.
Average ERISA Fidelity Bond Cost
The minimum amount the ERISA bond covers is $1,000 per plan, and the maximum is $500,000 per plan. However, the bond coverage rises to $1,000,000 if the benefits plan includes employee securities.
Additionally, the bond coverage remains $1,000 if 10% of your plan doesn’t exceed the $1,000 minimum threshold. While premium rates often range between 0.5% to 2% of the bonded amount annually, depending on your insurer.
As such, the average ERISA fidelity bond cost for most businesses is between $100 to $500 for a three-year term limit, depending on your bond amount.
Here is an example of what a small enterprise can expect to pay when dealing with an insurer charging a 1% premium rate for a 1-year term limit. It’s important to understand that each insurer offers different premium rates and term limits, so the average costs may vary.
| Plan Value | ERISA Fidelity Bond Amount (10%) | Bond Cost (1-year term limit at 1% premium rate) |
|---|---|---|
| $10,000 | $1,000 | $10 |
| $100,000 | $10,000 | $100 |
| $250,000 | 25,000 | $250 |
| $500,000 | 50,000 | $500 |
| $1,000,000 | $100,000 | $1,000 |
While the table above illustrates approximate figures, other factors besides your plan value can slightly affect your average bond cost:
- Different Plan Assets: Companies with multiple plans typically pay higher bond costs.
- Plan Type: Plans holding employee securities have higher requirements, resulting in higher bond costs.
- Previous Claim History: Businesses with fraud or dishonesty histories may face higher costs than those with clean records.
- Bond Term: Some insurers offer discounted bond costs for businesses with multi-year bond terms, such as a 3-year term.
ERISA fidelity bond costs are typically low-cost measures that keep you compliant without increasing your business expenses.
At Ethos Benefits, our employee plan advisory team can help you navigate the process of selecting the appropriate ERISA fidelity bond while keeping premiums low.
Our fiduciary-focused team reviews your bond coverage, verifies provider legitimacy, and ensures you’re getting your money’s worth.
Schedule a discovery call today to see how we can help simplify ERISA fidelity bonding while protecting your plan and employees.
How to Choose the Right ERISA Fidelity Bond
The best ERISA fidelity bond isn’t the one with the lowest premium. Choose the bond offering maximum protection and ensure you’re compliant after the Department of Labour audit.
Follow these steps to select the best fidelity bond:
1. Determine Who Should be Bonded Under ERISA
Anyone who handles the employee benefit funds must be bonded under ERISA, unless they are exempted by law.
Examples of people who should be bonded include:
- Plan Administrators or Trustees: Individuals involved in the plan’s management and administration.
- Company Officers: specifically, officers with access to and control over the employee benefit funds.
- Plan Committee Members: Those who make final decisions on the employee benefit plan, such as disbursements.
2. Calculate the Bond Coverage
ERISA laws require that bond coverage be 10% of your plan assets at the start of the fiscal year.
Calculate your coverage to determine your bond amount, but remember the minimum required coverage is $1,000, while the maximum is $500,000 unless your plan contains employee securities.
3. Pick a Reputable Bond Provider
Choosing the right bond provider can be overwhelming, especially given the numerous insurers that offer this service. When selecting a good provider, don’t rely on the insurer offering low premium rates. Focus on the one that offers maximum protection.
Follow these tips when selecting the right bond provider:
- Confirm whether the US Department of the Treasury has listed the provider.
- Ensure the insurer is licensed.
- Look for recommendations from an experienced ERISA bond expert.
- Check whether the insurer’s terms met the ERISA bond recommendations.
- Confirm the provider’s reputation.
4. Complete the Application Process
Once you have selected your preferred bond provider, complete the ERISA bond application process by providing the following information:
- Business name
- Number of employees to be bonded
- Preferred bond amount
- Employee benefits plan amount
Based on the information you provide in the application process, the insurer will advise you on a suitable ERISA fidelity bond and calculate the premium amount.
5. Name Plan as Insured
The bond should have the specific employee benefits plan name, not the insurer’s or the fiduciaries’ names. For example, the insured name can be listed as XYZ company 401 (k) profit-sharing plan.
This ensures compliance because, under ERISA regulations, proper identification is required to ascertain that the bond covers the intended employee benefits plan.
6. Renew to Keep It Current
Once you have received your ERISA fidelity bond, renew it annually to reflect changes in the plan’s asset value. Additionally, you can adopt a multi-year deal at the end of the year, especially if you have separate plans that must be bonded.
Keeping the fidelity bond current protects the plan’s assets and ensures compliance with the law.
Ways to Reduce Your ERISA Bond Costs
Even though ERISA bond costs are relatively low, the right cost-saving strategy can further reduce costs for businesses with complex employee benefit plans.
The following strategies will help you minimize your bond costs:
- Look for Multiple Providers: Get quotations from different bond providers and select the one offering the lowest premium to maximize protection.
- Bundle the Bonds: Some providers may offer discounts to businesses purchasing multiple bonds together.
- Choose Multi-year Deals: A multi-year term, such as a three-year payment structure instead of annual payments, may reduce your premium costs.
- Have Good Security Measures: Insurers will assess your internal security measures during the risk assessment. Having robust security measures, such as thorough fiduciary training, may help minimize your premium bond costs.
- Consult Experts: ERISA bond experts can help you navigate different cost-saving options while ensuring you remain compliant with the regulations.
Frequently Asked Questions (FAQs)
Here are frequently asked questions to help you understand ERISA fidelity bond costs:
Can a Bond be Transferred if a Company Merges or Restructures?
No. An ERISA bond cannot be transferred even if a company merges or restructures, because it is tied to the specified employee plan.
As such, if a company merges or restructures, the new organization must ensure continuous bond coverage.
So the plan sponsor has a legal responsibility to ensure there’s bond coverage for all fiduciaries and individuals who handle plan assets. They should also carry out an ERISA bond review to remain compliant.
Are ERISA Fidelity Bonds Tax-Deductible for Employers?
Yes. ERISA fidelity bonds are tax-deductible because employers treat them as a business expense.
This enables businesses to deduct these ERISA bond premiums from their taxable income, thereby minimizing their tax liability.
How Fast Can an ERISA Fidelity Bond Be Issued?
ERISA Fidelity bonds are typically issued within 24 hours, while some may take a few minutes, especially for minimal amounts.
However, complex bonds may take a few days to ensure all the regulations are followed.
Are Online-Only ERISA Bond Providers Legitimate?
Yes. Online-only providers are legitimate, provided they are listed with the US Department of the Treasury and comply with various ERISA regulations.
The providers must follow these ERISA fidelity bond rules to be legitimate:
- Issue bonds through a surety on the U.S. Treasury Circular 570 listing
- The plan is named as the insured party on the bond
- No deductibles for coverage of losses, with the maximum for which the person causing the loss is bonded.
Conclusion
The ERISA fidelity bond is mandatory because it protects employee benefit plans against fraud and dishonesty. The average bond cost can be high for large companies, but there are numerous cost-saving strategies, like accepting multi-year coverage, that further reduce the expense. Additionally, you are required to renew your bond annually to ensure it reflects your current plan asset value.
Given the complexity of ERISA fidelity bonds, we recommend partnering with an employee benefits consultant to help you verify your bonding is compliant, sufficient, and documented.
At Ethos Benefits, we have a decade of experience providing fiduciary-focused, data-driven consulting to employers looking to deliver high-value benefits to their teams without increasing expenses.
Additionally, we help our clients set up proactive renewal strategies to ensure continuity and keep their fidelity bond costs manageable.
Schedule a one-on-one call today to see if we are a good fit.
