To protect private pension plans and other employee benefit plans from being mismanaged and abused, the Employee Retirement Income Security Act (“ERISA”) set rules and standards of conduct for private sector employee benefit plans and their respective fiduciaries. One of those rules is that is the fiduciaries handling the funds and other property must be covered by a fidelity bond that protects the plan from losses resulting from dishonesty or fraud.

As an employer in the private sector, here is what you need to know about the ERISA bond requirements.

What Is an ERISA Fidelity Bond?

An ERISA Fidelity Bond is an insurance policy for health and retirement plans that protects these plans against losses that result from fraud or dishonesty. These types of losses, as pertains to ERISA Bonds, include but are not limited to, theft, embezzlement, larceny, willful misapplication, forgery, wrongful conversion, and other acts.

Do ERISA Bonds and Fiduciary Liability Provide the Same Coverage?

No. The ERISA Bond protects the actual plans. Fiduciary Liability protects the individuals managing the plans.

Who Issues ERISA Bonds?

ERISA Bonds must be issued by an independent insurance carrier and purchased through an independent insurance broker. The insurance carrier must be on the list of the Department of Treasury’s Listing of Approved Sureties found here. In certain circumstances, an ERISA bond can also be issued by the Lloyd’s of London market. One last criterion regarding the placement is that the insured cannot have a significant financial interest in either the carrier or broker of choice. If there is a financial stake in either, another carrier/broker must be used.

Who is Required to Purchase an ERISA Bond?

Anyone who handles the funds or other property of an employee benefit plan is required to be bonded unless they fall under an exempt category. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded. To help determine if a person is handling funds, the Department of Labor offers the following criteria:

  1. Does/did the person have physical contact with cash, checks, or similar property belonging to the employer-sponsored retirement plan?
  2. Does/did the person have the authority or power to transfer funds from the employer-sponsored plan to themselves or a third-party?
  3. Does/did the person have the authority or power to negotiate plan property? The Department of Labor provides examples such as taking out a mortgage on a piece of real estate, holding the title to land or buildings, or physically possessing stock certificates.
  4. Does/did the person have some other disbursement authority or authority to direct disbursement?
  5. Does/did the person have the authority to sign checks or other negotiable instruments drawn against the funds in the employer-sponsored plan?
  6. Does/did the person have “[s]upervisory or decision-making responsibility over activities that require bonding”?

If the answer is “yes” to any of the questions above, then that individual is handling funds and their duties or actions could potentially cause a loss of plan funds or property because of dishonesty/fraud.

Who is Exempt from Carrying an ERISA Bond?

The ERISA Bond does not apply to all employee benefit plans. The following are exempted plans:

  • Organizations that are included in the Title 1 section of ERISA. These may include church employee plans and plans offered by government entities
  • Some regulated financial institutions, including “certain banks, insurance companies, and registered brokers and dealers”
  • Employer-sponsored retirement plans that are “completely unfunded,”. For example, a union would fall under this category.

How Much Coverage Do I Need to Purchase?

Typically, the limit should be no less than 10% of the plan assets handled in the prior year. Note that bonds cannot be less than $1,000. However, the Department cannot require a bond greater than $500,000 or $,1000,000, the latter of which applies to plans that hold employer securities.

You can find full details on the ERISA Bond here. All Sequoia clients are assigned a Sequoia Risk Advisor. For questions, please connect with them directly in HRX.

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2021 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Maria Small – As a Client Service Consultant for Sequoia, she helps provide our clients with property and casualty consulting services to protect their assets, scale in the marketplace, and manage risk. When she is not working, Maria enjoys hiking, trying new restaurants and spending time with her family.