Fidelity Bond Coverage for your ESOP
When preparing or reviewing your ESOP’s Form 5500 annual return, you may notice that Line 4e on Schedule H for large plans and Schedule I for small plans asks the following: “Was this plan covered by a fidelity bond?” It is important to not only make sure that your ESOP is covered by a fidelity bond, but that you have the required amount of coverage each year and that you relay this information to your third-party administrator or the party responsible for completing your Form 5500.
What Is Fidelity Bond Coverage?
A fidelity bond is required plan coverage under Section 412 of the Employee Retirement Income Security Act of 1974 (ERISA) that protects the ESOP from losses due to fraud or dishonesty. 29 CFR 2580.412-9 defines “fraud or dishonesty” as “all those risks of loss that might arise through dishonest or fraudulent acts in handling of funds.” Therefore, generally every administrator, officer, and employee that handles funds of the plan must be bonded. Whether a person is deemed to be “handling funds” is further described in 29 CFR 2580.412-6 as anytime there is a risk that such funds or other property could be lost in the event of fraud or dishonesty on the part of such person. This can include persons with either access to or decision-making powers over plan assets.
What is the Required Amount of Coverage?
The fidelity bond coverage should be determined based on the assets held by the plan at the beginning of the year and shall be at least 10% of plan assets (with a minimum coverage amount of $1,000). However, no bond shall be required in an amount over $500,000 (or $1 million for plans that hold employer securities). For example, a calendar year ESOP holds $4 million in assets as of January 1, 2016. The required fidelity bond is at least $400,000. Assume the ESOP then holds $6 million in assets as of January 1, 2017, the plan would be required to increase the fidelity bond coverage to at least $600,000.
There are certain exemptions to fidelity bond requirements that are described further in ERISA section 412 and include an exemption for unfunded plans, certain banks and insurance companies.
How Do I Find Coverage?
The fidelity bond must be obtained from a corporate surety company which holds a grant of authority from the Secretary of the Treasury, as an acceptable surety. A list of the companies holding the necessary Certificates of Authority is published annually online at:
www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm.
When securing fidelity bond coverage it is important to remember the following:
- The plan itself must be the named insured under the fidelity bond (not the plan sponsor).
- Fidelity bonds and fiduciary liability insurance are not the same type of coverage. Fidelity bonds insure the plan against losses due to fraud or dishonesty whereas fiduciary liability insurance insures the individual or plan against losses caused by breaches of fiduciary responsibilities.
