The Comprehensive ERISA Bond Guide

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. 

What is an ERISA bond?

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). 

Why is an ERISA bond needed?

ERISA bonds serve several essential functions:

• Safeguarding Plan Assets: The primary objective of ERISA bonds is to protect the assets of employee benefit plans from mismanagement, theft, or embezzlement by individuals responsible for overseeing these plans
• Compliance with Federal Law: ERISA necessitates that all employee benefit plans subject to its provisions have an ERISA bond in place, making it a legal requirement for most plans
• Deterrent Effect: The presence of an ERISA bond can act as a deterrent against fraudulent or dishonest acts by plan officials or fiduciaries, as they may be held personally liable for any losses incurred by the plan.
• Financial Stability: By providing a source of reimbursement for losses, ERISA bonds help maintain the financial stability of employee benefit plans, ensuring that participants receive the benefits they are entitled to. Plan members can feel safe knowing that their pensions are safe even if fraudulent acts were to occur 

Who needs an ERISA bond?

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:

• Plan administrators: These are the individuals responsible for the overall management and operation of the plan.
• Plan trustees: Trustees are responsible for holding and managing plan assets on behalf of the plan participants.
• Investment managers: These professionals manage the investments of the plan, making decisions about asset allocation and investment strategies.
• Custodians of plan assets: These entities hold and safeguard plan assets, often providing reporting and recordkeeping services.
• Service providers with access to plan funds: Examples include payroll processors, third-party administrators, and benefit consultants who have access to plan funds or assets.

To be on the safe side, we recommend any person who “handles” funds or the plan be bonded. The criteria for “handling” includes:

• Physical contact with cash, checks or financial instruments related to the plan
• Having the power or authority to transfer funds from the plan to oneself or to a third party
• Having the power or authority to negotiate plan properties (i.e. mortgages, title to land and building or securities)
• Having the power or authority to direct disbursements 
• Having the power or authority to sign checks and other financial instruments
• Having supervisory authority or decision making responsibility over activities related to bonding

ERISA Bond Amount

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.

Can any insurance company sell ERISA bonds?

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. 

How to get an ERISA Bond?

Obtaining an ERISA bond involves the following steps:

1. Determine the Required Coverage Amount: Calculate the coverage amount needed based on the plan assets. Remember, the bond amount should be at least 10% of the plan assets, with a minimum of $1,000 and a maximum of $500,000 (or $1,000,000 for plans holding employer securities).
2. Choose a broker that works with approved companies: Surety companies don’t sell directly to consumers so you’ll most likely have to work with a surety broker. SuretyNow is a great option that works with over 10 approved carriers. 
3. Complete the Application Process: Fill out the necessary forms and provide any required documentation to the surety broker. Here at SuretyNow, we can instantly approve and process ERISA bonds with a bond amount of $500,000 or less. All we need is the plan name and the business address. For bond amounts over $500,000, we require additional documentation such as proof of financial asset and plan status. 
4. Pay the Premium: For plans under $500,000, you can pay the premium directly online. For plans over $500,000, we will submit your application to the surety company, and once the application is approved, we will send you a payment link for you to pay for the bond. The premium amount will depend on the coverage amount and the perceived risk associated with the plan and its fiduciaries.
5. Obtain the Bond: After paying the premium, the surety company will issue the ERISA bond, which should be kept on file with the plan's records. If you bond with us, we will email you a PDF copy of the bond that you can keep on file. After you receive the bond, one last important step is to ensure that the bond names the employee benefit as the insured party. You can ask the surety broker/company to amend the bond for you if that is not the case. 

Are there exemptions to getting an ERISA bond

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:

• Be supplied by a third party, such as an insurance provider or a service organization
• Be held in a separate trust or entity
• Receive contributions from employees or sources other than the employer
• Be stored in a distinct bank account or managed through separate accounting from the employer's other assets

2. Plans that are exempt from ERISA: The following plans are not subject to ERISA Title I and are thus exempt from ERISA:

• Plans established or maintained by governmental entities
• Plans created by churches or other religious organizations for their employees
• Plans maintained exclusively to comply with workers' compensation, unemployment, or disability laws
• Plans maintained outside the United States primarily for the benefit of nonresidents

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.

Can I pay for an ERISA bond out of a plan’s assets?

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. 

How often should an ERISA bond be reviewed or updated?

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.

Cases where multiple ERISA Bonds are needed

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. 

ERISA Bond vs. Fiduciary Liability Insurance

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. 

Can a plan purchase a bond for a larger amount?

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. 

Who is responsible for ensuring that a plan is ERISA compliant? 

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.