BusinessCommon Misconceptions About ERISA Bonds and Why They Matter

Common Misconceptions About ERISA Bonds and Why They Matter

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ERISA bonds (fidelity bonds) are required under the Employee Retirement Income Security Act for anyone who handles benefits, pension, or retirement plan assets. These bonds protect the plans from losses due to fraud or dishonesty by a plan administrator.

These fidelity bonds must be purchased from a surety company or reinsurer on the Department of Treasury’s listing of approved sureties. Prices are based on the business class and the coverage required.

ERISA Bonds Are Fiduciary Liability Insurance

While often confused with fiduciary liability insurance, ERISA bonds serve different purposes. As the name suggests, ERISA fidelity bonds insure your company’s retirement funds against theft and dishonesty by people handling them. On the other hand, Fiduciary liability insurance protects your business against a broad range of exposures that could result from managing your company’s retirement plans.

As a general rule, the Department of Labor requires that any person who handles plan assets be bonded for at least 10% of the amount of money they handle. This bond covers your company against financial loss suffered by plan participants due to the fraudulent, dishonest, or wrongful actions of anyone who manages the plan’s investments, cash, and checks.

Purchasing an ERISA fidelity bond is simple and relatively inexpensive. 

ERISA Bonds Are Not Required

ERISA requires that anyone who handles funds or property of a plan be bonded to cover potential dishonesty and fraud. The bond, also known as a fidelity bond, protects plan assets and other property from theft caused by those who manage the plan’s financial affairs.

However, the law and Department of Labor regulations contain several exemptions. For example, regulated financial institutions (select banks, insurance companies, and registered brokers and dealers) are exempt from having to bond when they handle funds or property of an employee benefit plan.

Similarly, unfunded plans are exempt from bonding requirements if the employer contributions or salary withholding amounts are placed in a separate account that is not subject to the control of the employer’s general creditors. But, if the funds are commingled with general assets or are paid to purchase benefits directly from an insurer, an ERISA bond may be required. 

ERISA Bonds Are Not Required for All Plans

Unlike fiduciary liability insurance, ERISA bonds do not protect companies from legal claims and judgments. While the two policies are similar in some respects, they cover very different exposures.

Generally, ERISA requires that anyone who “handles funds or other property” of an employee benefit plan be bonded. That includes all fiduciaries, anyone who manages a plan’s assets, and individuals who manage cash, checks, or other property used to distribute to plan participants or beneficiaries.

The bonding requirement is intended to protect the plans from losses caused by fraud or dishonesty by those who handle the plan’s assets. The amount required is typically 10% of the total value of the plan assets being handled.

ERISA Bonds Are Not Required for Unfunded Plans

ERISA Bonds protect the assets of tax-qualified retirement plans from losses due to dishonesty or fraud. They’re required for those who handle plan funds or have access to decision-making authority that could expose the company to the risk of loss.

The Department of Labor requires anyone who handles ERISA retirement fund assets (defined-benefit, profit sharing, and 401(k) plans) to obtain an ERISA Fidelity Bond. The bond amount must equal either 10% of the plan assets handled or $1,000,000 for plans holding employer securities.

Typically, ERISA bonds must be purchased through an independent insurance carrier or insurance broker named on the Department of Treasury’s Listing of Approved Sureties published in Department Circular 570. 

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