ERISA requires every person who handles funds for an employee benefit plan to be bonded. Read on to find out what kind of bond you need, for how much, and how to save money on it.
The Employee Retirement Income Security Act (ERISA) requires that every employee benefit plan fiduciary and every person who handles funds or other property for the plan to 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.
Is an ERISA fidelity bond the same thing as fiduciary liability insurance?
No. Section 412 of ERISA neither requires nor pertains to fiduciary liability insurance. This type of professional liability insurance specifically covers plan fiduciaries, or those who hold the funds of others under their “care, custody or control.” Fiduciaries have a legal obligation to act in the best interests of plan participants; fiduciary liability insurance covers the plan for losses that occur when a fiduciary breaches those responsibilities.
Although Section 412 of ERISA requires a “fidelity bond,” the insurance industry now calls this type of coverage an employee dishonesty or employee theft bond.
This type of coverage specifically insures a plan against losses due to fraud or dishonesty on the part of persons (including, but not limited to, plan fiduciaries) who handle plan funds or other property. “Fraud or dishonesty” include, but are not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts where losses result. The bond must cover losses even when the person committing the act receives no gain and even if the act is not subject to punishment as a crime or misdemeanor, if a bond providing protection against fraud or dishonesty would afford recovery according to the law of the state in which the act is committed.
How much coverage do we need?
ERISA refers to persons who handle funds or other property of an employee benefit plan as “plan officials.” ERISA requires a plan official to be bonded for at least 10 percent of the amount of funds he or she handled in the preceding year, with a minimum bond amount of $1,000 per plan for which the plan official has handling functions. In most instances, ERISA requires a maximum bond amount of $500,000 per plan for any one official. However, effective for plan years beginning on or after January 1, 2008, plans that hold employer securities have a maximum required bond amount of $1 million for plan officials. Bonds cannot have deductibles or other risk-transfer features.
Who needs coverage?
Employers that sponsor plans should ensure they have coverage for employees who have duties relating to the receipt, safekeeping and disbursement of funds. You should also make sure that others who handle plan funds have coverage, such as service providers whose functions involve access to plan funds or decision-making authority that could lead to risk of loss through dishonesty or fraud.
Many employers buy separate coverage to meet the ERISA requirement. However, if you already have employee dishonesty or theft coverage, you can add coverage for ERISA plans, which will likely cost less than buying coverage separately. For more information, please contact us.