ERISA Bond – Protecting an Employee Benefit Plan
The Employee Retirement Income Security Act of 1974 (ERISA) is a law that has different rules and regulations for company benefit plans and those that manage the assets of those employee benefit plans, especially with regard to the investments of those plans. The Department of Labor oversees the implementation of ERISA. The reason that ERISA was passed if that there was public concern that the retirement ability of employees were being jeopardized due to abuse and mismanagement of employee’s retirement funds.
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ERISA bond requirements for 401(k) Plans
The most common type of fidelity bond is an ERISA bond. ERISA bonds are the only type of fidelity bond that are obligatory. However, these are only required when an employer offer an ERISA (the Employee Retirement Income Security Act) based employee benefit plan. This protects employees who participate in the plan from being harmed by the mishandling of funds or fraud by the employer. One of the key provisions of ERISA is a requirement that for those that manage the assets of the retirement fund to have a fidelity bond issued on them. This ERISA bond is a type of a fidelity bond, which protects the plan beneficiaries (the employees) from losses due to dishonesty or fraud by the persons managing the fund.
What is an ERISA Bond?
An ERISA bond is a type of fidelity surety bond. A surety bond is a three party contract between the Obligor, Obligee and Surety. The surety is the company that guarantees that there will not be problems. In the U.S., most sureties are large insurance companies. The Obligor is the person being bonded and the Obligee is the person that gets the benefit of the bond if there is any sort of problem by the Obligor. In the case of an ERISA bond, the Obligor is the person that manages the assets of the ERISA pension fund and the Obligee are the beneficiaries of the fund. So, the ERISA fidelity bond acts like insurance in that it is protection against losses in the fund assets that are caused by the dishonesty or fraudulent acts of the manager of the fund. Some of the most common types of acts that occur are theft, forgery, larceny, embezzlement, misappropriation, wrongful conversion, wrongful abstraction, etc One interesting note about ERISA bonds is that there are no deductibles for the coverage of losses, which means that all of the liability is on the surety for making the plan whole. This is why the pension plan itself needs to be named as a specific beneficiary of the surety bond so that the plan is fully able to any funds lost due to the fraud or dishonesty.
How Does an ERISA Fidelity Bond differ from Fiduciary Liability Insurance?
The fidelity surety bond needed under ERISA specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) by persons who handle plan funds or property. Compare that with fiduciary liability insurance, which insures the plan against mismanagement of funds through negligence. Many plan fiduciaries are covered by both private fiduciary liability insurance as well as an ERISA fidelity bond. However, an ERISA bond is the only thing that meets the requirements of the statute.
Can I get an ERISA bond from any bonding or insurance company?
You must get your bond from a surety that is listed on the Department of the Treasury's Listing of Approved Sureties, Department Circular 570 (available at fiscal.treasury.gov). Neither the plan nor any interested party may have any control or significant financial interest, either directly or indirectly, in the surety or reinsurer, or in an agent or broker, through which the bond is obtained.
Understanding ERISA Fidelity Bonds
Every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered under an exemption under ERISA. 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. Fidelity bonding is usually necessary for the plan administrator and those officers and employees of the plan or plan sponsor (employer, joint board, or employee organization) who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds.
ERISA Bond FAQs
The bonding requirement is not limited to just plan trustees, employees of the plan and employees of the plan sponsor. Bonding coverage may also be required for other persons, such as service providers to the plan, whose duties involve access to plan funds or decision-making authority that can give rise to a risk of loss through fraud or dishonesty. Where a plan administrator, service provider, or other person who must be bonded is an entity, such as a corporation or association, ERISA’s bonding requirements apply to the natural persons or person who “handles” the funds. The term “funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to plan participants or beneficiaries. Plan “funds or other property” includes all plan investments including land and buildings, mortgages, and securities in closely-held corporations. It also includes contributions from any source, such as employers, employees, and employee organizations that are received by the plan, and cash, checks and other property held for the purpose of making distributions to plan participants or beneficiaries. A person is deemed to be “handling” funds or other property of a plan whenever his or her duties or activities could cause a loss of plan funds or property due to fraud or dishonesty, whether acting alone or in collusion with others. The general criteria for determining “handling” include: Physical contact with cash, checks or similar property; Power to transfer funds from the plan to oneself or to a third party; Power to negotiate plan property (e.g., mortgages, title to land and buildings or securities); 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. Click for surety bond application Click here to apply online