The Employee Retirement Income Security Act of 1974 (ERISA) requires that every fiduciary of an employee benefit plan and every person who handles funds of the plan be bonded. The purpose of the bonding requirements is to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who ”handle” the plan assets. To monitor this requirement, plan sponsors are required to report annually on the IRS Form 5500 whether the retirement plan, including ESOPs, was covered by a fidelity bond and the amount of coverage for that respective plan.
While there are no specific penalties for failure to satisfy the appropriate bonding requirements, this is one step not to overlook. Plan fiduciaries can be held personally liable for any losses incurred by the plan that should have been covered by a fidelity bond. In addition, U.S. Department of Labor (DOL) investigators routinely review ERISA fidelity bonds during plan audits and investigations.
As part of a review of an existing fidelity bond or researching the purchase of a new fidelity bond, below are ten facts one should know:
- Bond coverage. The amount of the bond must be fixed at the beginning of each plan year in an amount that is not less than 10% of the amount of funds being handled. The bond amount cannot be less than $1,000 and need not be greater than $500,000 ($1,000,000 for plans that hold employer securities).
- Insured party. The plan is the insured entity and a surety company is the party that provides the bond. To ensure proper coverage, the plan either must be specifically named in the bond or otherwise identified on the bond in such a way as to enable the plan’s representatives to make a claim under the bond in the event of a covered loss.
- Covered losses. The types of losses that must be covered by a fidelity bond includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, and willful misapplication.
- Deductibles. ERISA requires the bond insures the plan from the first dollar of loss. Therefore, bonds cannot have deductibles or similar features whereby a portion of the risk required to be covered by the bond is assumed by the plan. However, nothing in ERISA prohibits application of a deductible to coverage in excess of the maximum amount required under ERISA.
- Not fiduciary liability insurance. A company might believe their fiduciary liability insurance meets the ERISA bonding requirements, but it does not. Fidelity bonds insure a plan against losses due to fraud or dishonesty by any person handling plan funds, regardless of whether such person is a fiduciary. Fiduciary liability insurance generally insures the plan against losses caused by breaches of fiduciary responsibilities.
- Form of bond. ERISA allows substantial flexibility regarding bond forms. Examples of bond forms include: 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). A combination of such forms may also be used. A plan may be insured on its own bond or it can be added as a named insured to an existing employer bond or insurance policy as long as the bond or policy satisfies the requirements of ERISA.
- Permissible surety companies. A fidelity bond must be placed with a surety or reinsurer that is named on the Department of the Treasury's Listing of Approved Sureties, Department Circular 570 (available at www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm). Under certain conditions, bonds may also be placed with the Underwriters at Lloyds of London.
- Multiple plans. ERISA allows multiple plans to be insured on one bond. The bond must allow for a recovery by each plan in an amount at least equal to that which would have been required for each plan under separate bonds. In addition, a claim by one plan cannot reduce the amount of coverage available to other plans insured by the bond.
- “Omnibus clause”. Bonds can be written to identify multiple plans being covered under the bond without specifically naming each individual plan. The omnibus clause must clearly identify the insured plans in a way that it would enable the plan’s representatives to make a claim under the bond (e.g., “all employee benefit plans sponsored by ABC Company”).
- Term of bond. Bonds may be written for a period longer than one year as long as the bond insures the plan for the required amount each year. To accomplish this requirement with a multiple year bond, an “inflation guard” provision can be included to automatically increase the amount of coverage under the bond to equal the amount required under ERISA at the time a plan discovers a loss.