The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for pension and health plans in the private sector. One of ERISA’s requirements is that people who handle plan funds and related properties must be covered by a fidelity bond (aka ERISA bond) to protect employee benefit plans from acts of fraud or dishonesty. In this in-depth guide, we will provide a detailed explanation of what is an ERISA bond, who needs to get one, why they exist, the requirements for obtaining them, and more. Let’s jump right in.
An ERISA bond is a specific type of insurance policy that protects the assets of an employee benefit plan against losses resulting from acts of fraud or dishonesty by plan officials or fiduciaries. It functions as a financial guarantee, reimbursing the plan for any losses incurred due to such acts. ERISA bonds are mandated by federal law for most employee benefit plans (there are a few exemptions which we will get to later).
ERISA bonds serve several essential functions:
Separate ERISA bonds are required for every individual or entity that manages, controls, or has access to the funds or assets of an employee benefit plan. These individuals are often referred to as plan officials or fiduciaries. Examples of such individuals or entities include:
To be on the safe side, we recommend any person who “handles” funds or the plan be bonded. The criteria for “handling” includes:
ERISA requires that the bond coverage amount be at least 10% of the plan assets as of the beginning of the plan year, with a minimum coverage of $1,000 and a maximum coverage of $500,000. However, for plans holding employer securities, the maximum coverage amount is $1,000,000.
No, ERISA bonds must be obtained from a surety company that is named on the Department of Treasury’s Listing of Approved Sureties. Neither the plan or any of the plan officials/beneficiaries can have control or significant financial interest in the surety company through which the bond is obtained. Here at SuretyNow, the carriers that we work with are all approved by the Department of Treasury, so you can be assured that your bond is compliant.
Obtaining an ERISA bond involves the following steps:
Yes, there are two circumstances under which an employee benefit plan may be exempt from ERISA requirements.
1. Entirely unfunded plans: As a general guideline, a plan with employee contributions cannot be considered "unfunded". An unfunded plan is one that disburses benefits solely from the employer's general assets. For funds to qualify as "general assets," they must not:
2. Plans that are exempt from ERISA: The following plans are not subject to ERISA Title I and are thus exempt from ERISA:
Additionally, the Department of Labor specifies exemptions for certain regulated financial institutions, such as select banks, insurance companies, registered brokers, and dealers. Organizations that are exempted do not need an ERISA bond.
Yes, you can pay for an ERISA bond using a plan's assets. The premium for an ERISA bond is typically considered a permissible plan expense, which means it can be paid from the plan's assets without violating ERISA regulations.
An ERISA bond should be reviewed and potentially updated annually to ensure that the coverage amount remains adequate based on the plan's assets. As the plan's assets may increase or decrease over time, it is essential to adjust the bond amount accordingly to maintain compliance with ERISA requirements. Regularly reviewing the bond coverage helps protect the plan and its participants while adhering to federal law.
Bonds are legally required per plan, per fiduciary. What we mean by this is that if a fiduciary or plan official is responsible for multiple employee benefit plans, a separate ERISA bond is required for each plan. Conversely, if a plan has multiple fiduciaries or plan officials, then a separate bond is needed for each fiduciary.
It is crucial not to confuse ERISA bonds with fiduciary liability insurance, as they serve different purposes and are not substitutes for one another.
As mentioned earlier, ERISA bonds protect employee benefit plans from losses due to fraudulent or dishonest acts by plan officials or fiduciaries. They are required by federal law and provide coverage for the plan itself.
On the other hand, fiduciary liability insurance covers plan fiduciaries from personal liability arising from claims related to mismanagement, negligence, or breach of fiduciary duties. Fiduciary liability insurance is not required by ERISA but can be an important risk management tool for plan fiduciaries.
In short, the two differ mainly in who they protect. ERISA bond protects the plan and the employees invested in the plan, while fiduciary liability insurance protects the trustees from the legal liabilities related to the role of being a fiduciary.
Yes, a plan can purchase an ERISA bond for a larger amount than the minimum required by law. While ERISA mandates a bond coverage amount of at least 10% of the plan's assets, a plan can opt to obtain a bond with a higher coverage amount if the plan sponsor or fiduciaries believe it is in the best interest of the plan and its participants. This provides additional protection against potential losses from fraud or dishonesty.
The responsibility for ensuring proper ERISA bond coverage typically falls on the plan sponsor and plan fiduciaries. They are required to ensure that the plan complies with ERISA regulations, which includes getting an ERISA bond with the right bond amount for coverage.
Plan sponsors and fiduciaries should regularly review the ERISA bond coverage to ensure it meets the legal requirements and adequately protects the plan's assets. This includes confirming the bond amount, verifying that the bond is issued by an approved surety company, and ensuring that the bond covers all individuals or entities that have access to the plan's funds or assets.