Benefit Plan and ERISA Fidelity Bond

Section 412 of the Employees Retirement Income Security Act of 1974 (“ERISA”) requires that everyone who manages funds or other property of a plan be bonded (except certain persons exempt). These persons include the Trustees of the Plan, but may also include any director, officer or employee of the Trustee. This is called the bonding requirement of ERISA. The ERISA Fidelity Bond, also known as the Employee Dishonesty Bond, is a legal requirement arising from ERISA to protect plans against losses resulting from an act of fraud or dishonesty by persons managing the assets. of a plane.

The Department of Labor (“DOL”) notes that: “In a typical ERISA fidelity bond, the plan is the named insured and a bonding company (insurer) is the party providing the bond. The persons covered by the bond are the persons who manage the funds or other property of the plan. 1It is important to note that the plan must be named as the insured in the bond. In some cases, the insured is named as the plan sponsor, and it should be noted that there should be a provision that covers any ERISA plan sponsored by the insured. As an insured party, the plan may make a claim on the bond if a plan sponsor causes a covered loss to the plan due to fraud or dishonesty.

There are prescribed minimum and maximum limits for the value of the ERISA Fidelity Bond, with a minimum bond value requirement of $1,000 and a maximum bond value of $500,000 (or $1 million). dollars if the plan has investments in the securities of an employer). Each person who must be bonded as described above must also be covered for at least 10% of the amount of plan assets they have handled or had access to during the previous year. Coverage must be measured on the first day of the plan year. Deductibles or other similar features are prohibited for loss coverage.

As a general rule, the duration of a fidelity obligation cannot be less than one year. However, bonds of longer duration are permitted.

According to the DOL: “Anyone who ‘manages funds or other property’ of an employee benefit plan must be bonded, unless covered by an exemption under ERISA. Generally, this includes the plan administrator or employees of the plan or plan sponsor who manage the funds or other property of a benefit plan.2 It may also include others such as plan service providers who are involved in accessing plan funds or decision-making authority who may cause losses through fraud or dishonesty. If a person “receives, manages, pays, or otherwise exercises custody or control of plan funds or property” without being properly bonded, it is considered an unlawful act under ERISA.

The Department of Labor also notes that: “ERISA fidelity bonds must be obtained from a surety or reinsurer named on the Treasury Department’s list of approved sureties, except under certain conditions, where bonds may also be obtained from underwriters at Lloyds of London.3 The list of Treasury Department approved bonds, Departmental Circular 570, is available here. Because ERISA fidelity bonds are typically obtained from a guarantor or reinsurer, the difference between an ERISA bond and other types of insurance coverage obtained by the plan administrator or plan sponsors (usually a fiduciary liability policy) is often confusing.

ERISA Fidelity Bond versus fiduciary liability insurance

Companies can also purchase fiduciary liability insurance, in addition to an ERISA fiduciary bond, to protect company pension plan assets against inadvertent actions by an employee that result in losses to plan assets. This is additional coverage obtained to reduce the increased risk of breach of fiduciary duty. The important feature to note here is unintentional acts, which are not covered by ERISA fidelity obligations. For example, an employee acting in good faith may err in administering the plan in accordance with plan documents or failing to monitor third-party service providers, which may result in penalties or losses to the plan. Because these acts were done in good faith and are not acts of dishonesty or fraud, they are not covered by an ERISA bond.

Fiduciary liability insurance policies can be purchased from many insurance companies; there is no specific list of guarantor or reinsurer, as in the case of the ERISA guarantor. Also, there are no minimum or maximum limits on the value of the policy as these are not legal requirements.

As we can see from the above discussion, there are significant differences between ERISA fidelity bonds and fiduciary liability insurance. Both serve to protect the various stakeholders of employee benefit plans. Failure to meet ERISA bonding requirements could lead to compliance issues, whereas fiduciary liability insurance is voluntary protection and no compliance issues are involved.

Reporting and compliance:

In Part IV of Form 5500 Appendix H compliance questions, the DOL requires plan sponsors to indicate whether the plan was covered by an ERISA fidelity bond and the amount of that bond.

Based on our analysis of the 2020 5500 plan years, almost 10% of plans were insufficiently covered by their fidelity obligations.

While there are no specific penalties associated with inadequate fidelity bond coverage, there are several risks associated with not meeting the requirements, including, but not limited to, the following:

  • Failure to report sufficient bond on Form 5500 may trigger a plan audit.
  • It is considered an illegal act under ERISA if a person “receives, manages, pays, or otherwise exercises custody or control of plan funds or property” without being properly bonded.
  • Plan trustees can be held personally liable for losses that could have been covered by a fidelity guarantee.

It is strongly recommended that each plan sponsor frequently assess bond coverage to comply with requirements and prevent any associated risk. ERISA does not require fiduciary liability insurance, however, it should be viewed as protection against fiduciary breaches. Fiduciary liability insurance is designed to cover defense costs and applicable damages in the event of an actual or alleged breach of fiduciary duty. Unlike fidelity bonding, fiduciary liability insurance provides plan trustees with protection of personal property.

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