If you handle employee benefit plan funds, you may need an ERISA fidelity bond

Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA) to protect the interests of employee benefit plan participants and beneficiaries. The Act is administered and enforced by the Department of Labor's Employee Benefits Security Administration, the Treasury Department's Internal Revenue Service, and the Pension Benefit Guaranty Corporation. While ERISA has been amended over the years, the basic mission remains unchanged. Employers are required to ensure that the financial resources funding employee benefit programs are secure from mismanagement and abuse.

ERISA bonding requirements

The operative principle of ERISA is embodied in Section 412, which requires that every fiduciary of an employee benefit plan, and every person who handles funds or other property of such a plan, shall be bonded, unless covered under one of the exemptions of Section 412 for certain banks, insurance companies, and registered brokers and dealers, or by one of the regulatory exemptions granted by the Department of Labor. This is accomplished with an ERISA fidelity bond, which is a type of insurance protecting benefit plans against losses due to acts such as larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.

A plan official must be bonded for at least 10% of the amount of funds handled, subject to a minimum bond amount of $1,000 per plan. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. However, the maximum required bond amount is $1 million for officials of plans holding employer securities.

For example, consider a company plan with funds totaling $1 million. The plan trustee, named fiduciary and administrator represent three different company employees each with access to the full $1 million, and each having the power to transfer plan funds, approve distributions, and sign checks. Under ERISA, each person must be bonded for at least 10% of the $1 million, or $100,000.

ERISA bonds must be obtained from a surety provider or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties. Neither the plan nor any interested party may have any control or significant financial interest, either directly or indirectly, in the surety provider or reinsurer — or in an agent or broker — from which the bond is obtained.

Understanding who must be bonded

A person is deemed to be “handling” funds or other property of a plan whenever the execution of duties or activities could cause a loss of plan funds or property due to fraud or dishonesty, whether acting alone or in collusion with others. The general criteria for handling include:

• Physical contact with cash, checks or similar property
• Power to transfer funds from the plan to oneself or to a third party
• Power to negotiate plan property (e.g., mortgages, title to land and buildings or securities)
• Disbursement authority or authority to direct disbursement
• Authority to sign checks or other negotiable instruments
• Supervisory or decision-making responsibility over activities that require bonding

Some examples of the kinds of fraudulent actions that may be committed against an employee benefit plan may include:¹

• A handler misrepresents the payments a retiree will be paid each month
• An administrator supplies false information about how much an employee has contributed to a retirement fund
• An employee provides false information regarding the transferability of a retiree’s pension rights or benefits

Fidelity bond or fiduciary liability?

ERISA fidelity bonds are sometimes confused with fiduciary liability insurance. The fidelity bond required under ERISA specifically insures a plan against losses due to the acts of fraud or dishonesty by persons responsible for managing plan funds or property. Fiduciary liability insurance insures fiduciaries, and in some cases the plan itself, against losses caused by breaches of fiduciary responsibilities — essentially mismanagement impacting the plan and participants. While it is a good idea for plan fiduciaries to be covered by fiduciary liability insurance, it is not required and does not satisfy the fidelity bonding required pursuant to ERISA.

Zurich can help satisfy ERISA fidelity bond mandates

As an approved provider under program guidelines, Zurich can help companies achieve compliance for employee benefit programs with a two-track approach to the delivery of ERISA fidelity bond requirements.

• Zurich’s Fidelity Bond Select Application track is designed to provide more comprehensive and flexible coverage options for complex union, employee stock ownership (ESOP) plans and/or multiple plans requiring limits greater than $1 million.
• For single, non-labor union ERISA plans seeking liability limits up to $1 million, the Zurich ERISA Fidelity Bond Express Application can offer rapid issuance of the necessary bonds.

Depending on the needs of a particular group, Zurich ERISA Fidelity Bond Underwriters will work with employers to arrive at the most economical and expeditious solutions available.

1. Wishnia, Jaclyn. “Pension fraud.” LegalMatch. 31 March 2020.