ERISA Bonding Requirements

ERISA Bonding Requirements

The KEY ELEMENTS regarding Fidelity Bonding Requirements are as follows:

1. Who Needs to be Bonded?

Every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan must be bonded. A person is deemed to be “handling” funds or other property of a plan whenever his or her duties or activities are such that there is a risk that the funds or other property could be lost in the event of fraud or dishonesty on the part of a person, whether acting alone or in collusion with others. The term “handling” is more than the actual physical contact with the funds or other property of the plan. The general criteria provided by the FAB for determining “handling” include:

• Physical contact or power to exercise physical contact or control with cash, checks or similar property;
• Power to transfer funds or other property from the plan to oneself or to a third party or to negotiate such property for value;
• Disbursement authority or authority to direct disbursement;
• Authority to sign checks or other negotiable instruments; or
• Supervisory or decision making responsibility over activities that require bonding.

Plan fiduciaries, certain officers, employees, plan committees, service providers and plan vendors need to be considered for bonding so it is important that plan sponsors and fiduciaries understand the parties involved and the functions that they perform, so that appropriate bonding can be obtained.

2. What Type Of Coverage Is Required?

The bond, sometimes referred to as a fidelity bond, must protect the plan against any loss by reason of acts of “fraud or dishonesty” on the part of the persons that are required to be bonded, whether the person acts alone or in collusion with others. FAB states that this can include such things as theft, larceny, embezzlement, forgery and misappropriation. It is important to note that fidelity liability insurance, generally insures the plan against losses caused by breaches of fiduciary responsibility. Liability insurance is not required or governed by the ERISA bonding requirements and having liability insurance is not a substitute for a fidelity bond.

ERISA bonding requirements are quite voluminous and complex, so it is important that all plan fiduciaries understand the requirement in order to make sure their current fidelity bond is in compliance with the current rules and regulations.

With a typical fidelity bond, the plan is the named insured and the surety company is the party that provides the bond. The persons covered are those who “handle” the funds or other property of the plan. Bonds need to be purchased from a surety who is named on the Department of the Treasury’s listing of Approved Sureties.

ERISA regulations allow flexibility in the actual form of bonds as long as the bond terms meet the ERISA requirements for the persons and plans involved. FAB has stated that bond forms can include the individual, name schedule (covering a number of named individuals), position schedule (covering each of the occupants of positions listed in the schedule) and blanket (covering the insured’s officers and employees without a specific list or schedule of those being covered). Blanket policies might offer plans more flexibility, with less ongoing monitoring, than policies naming specific individuals.

3. What Amount of Coverage is Required?

The bond limit required for each person that is required to be bonded must be at least equal to 10% of the plan assets handled in the previous year, subject to a minimum of $1,000 or maximum of $500,000.

The maximum amount increases to $1,000,000 for plans that hold employer securities, unless those investments are part of a “pool” such as mutual or index funds.

A bond can insure more than one plan provided the bond allows for recovery by each plan in an amount that would have been required for each plan if they had separate bonds. In addition, ERISA guidance does not preclude a plan from purchasing a bond in excess of the maximum amounts.

4. What Are Exceptions To The Bonding Requirements?

ERISA bonding requirements will apply to most employee benefit plans. There is an exception, however, for employee benefit plans that are “completely unfunded”. A “completely unfunded” plan is one that pays benefits from the general assets of a union or employer and the assets used to pay the benefits must remain in, and not be segregated from the union or employer’s general assets until the benefits are distributed. A plan will not be considered “unfunded” if benefits are paid by an insurance carrier or if contributions are held in and paid out of a trust.

The exception also applies to a fiduciary who is a bank, insurance company or a registered broker or dealer, provided they comply with their own regulatory bonding requirements.

Conclusion

As you can see, ERISA bonding requirements are quite voluminous and complex, so it is important that all plan sponsors and fiduciaries understand the requirement in order to make sure their current fidelity bond is in compliance with the current rules and regulations. We recommend that all plan sponsors and fiduciaries review their coverage on an annual basis to make sure that the proper coverage has been obtained.

NEED MORE INFORMATION?

If you need more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online, follow us on Twitter at WSB_ERISA or contact us at [email protected] to arrange a free consultation today.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.

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