ERISA Fiduciary Bond Requirement

By Anthony L. Scialabba IV, Esq., QKA

Why Do You Need an ERISA Bond?

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), sets forth rules concerning how fiduciaries must operate and manage retirement plans. A requirement of ERISA is that anyone who “handles funds or other property” (i.e., assets) of a plan must be covered by a fidelity bond (“ERISA Bond”). The Department of Labor (“DOL”) is responsible for enforcing ERISA and has established criteria for determining whether an individual is handling plan funds. In this regard, one handles plan funds if he or she has a realistic opportunity to steal plan funds in the ordinary course of his or her everyday duties.

WHAT IS A FIDELITY BOND?: An ERISA Bond protects a company-sponsored retirement plan from losses due to misuse or misappropriation of plan assets. An ERISA Bond is insurance that protects plan participants from such losses where a plan is named (or otherwise specifically identified) as an insured party on an ERISA Bond.

WHAT IS THE REQUIRED COVERAGE AMOUNT?: Each individual must be bonded in an amount equal to at least 10% of the amount of funds he or she handled in the previous year. The amount of the ERISA Bond cannot be less than $1,000, and it is not required to be greater than $500,000, or $1,000,000 for plans that hold employer securities.

CONSEQUENCES OF NOT HAVING A BOND:  It is important to be aware that the failure to obtain an ERISA Bond is a breach of the fiduciary duty rules under ERISA. A fiduciary can be held liable for losses to a plan resulting from the breach. Since the ERISA bond amount is reported on the Form 5500, failure to have coverage or sufficient coverage can be a red flag resulting in the plan being pulled for a DOL audit.

WHAT PLANS ARE NOT REQUIRED TO HAVE A BOND?: An ERISA Bond is not required for certain types of plans. Plans that are exempt from ERISA are not required and include plans such as single-participant plans, plans sponsored by most church or church controlled-entities, and plans sponsored by governmental entities. This requirement also does not apply to plans that are completely unfunded (benefits are paid directly out of an employer’s general assets such as Executive Compensation and Health and Welfare plans). Some regulated financial institutions, including certain banks, insurance companies, and registered brokers and dealers, are exempt if certain conditions are satisfied.

WHERE CAN I OBTAIN A FIDELITY BOND?: An ERISA Bond must be acquired from a surety or reinsurer that is named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570 (available at: fms.treas.gov/ c570/c570.html). An ERISA Bond may also be obtained from underwriters at Lloyds of London, provided certain conditions are satisfied.