ERISA Tips: ERISA Fidelity Bonds

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The following information is taken from the Department of Labor’s (DOL) “Protect Your Employee Benefit Plan With An ERISA Fidelity Bond.”

What an ERISA Fidelity Bond Is

An ERISA fidelity bond is a type of insurance that protects the plan against losses due to fraud or dishonesty. Fraud or dishonesty includes, but is not limited, to:

• larceny;

• theft;

• embezzlement;

• forgery;

• misappropriation;

• wrongful abstraction;

• wrongful conversion; and

• willful misapplication, and other acts.

Deductibles or other similar features are prohibited for coverage of losses within the maximum amount for which the person causing the loss is required to be bonded. In addition, the DOL says, it is important to make sure that the plan is named (or otherwise specifically identified) as an insured party on the bond so the plan can recover losses the bond covers.

Who Must Be Bonded

Every person who handles funds or other property of an employee benefit plan is required to be bonded unless covered under an exemption under ERISA. ERISA says it is illegal for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.

Fidelity bonding is usually necessary for the plan administrator and officers and employees of the plan or plan sponsor (employer, joint board, or employee organization) who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds.

The bonding requirement is not limited to just plan trustees, employees of the plan and employees of the plan sponsor. Bonding may also be required for others such as service providers to the plan, whose duties involve access to plan funds or decision-making authority that can give rise to a risk of loss through fraud or dishonesty. When a plan administrator, service provider or other person who must be bonded is an entity such as a corporation or association, ERISA’s bonding requirements apply to the natural persons or person who “handles” the funds.

The term “funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to plan participants or beneficiaries. This includes:

• all plan investments, including land and buildings, mortgages and securities in closely held corporations;

• contributions from any source, such as employers, employees and employee organizations that are received by the plan; and

• cash, checks and other property held for the purpose of making distributions to plan participants or beneficiaries.

A person is deemed to be “handling” funds or other property of a plan whenever his or her 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 determining “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; or

• supervisory or decision-making responsibility over activities that require bonding.

Do ERISA’s Bonding Requirements Apply to all Employee Benefit Plans?

No. Although the bonding requirements generally apply to most ERISA retirement plans and many funded welfare benefit plans, the ERISA bonding requirements do not apply to employee benefit plans that are completely unfunded or to plans that are not subject to Title I of ERISA, such as church plans and governmental plans.

Other Exemptions from ERISA’s Bonding Requirements

The law and the DOL’s regulations provide exemptions for some regulated financial institutions, including certain banks, insurance companies and registered brokers and dealers. If the financial institution meets the conditions in the exemption, the institution and its employees do not need to be covered by an ERISA fidelity bond even if their activities include handling your plan’s funds or property.

Must all Fiduciaries Be Bonded?

No. Most fiduciaries have roles and responsibilities that involve handling plan funds or other property, and generally will need to be covered by a fidelity bond, unless they satisfy one of the exemptions in ERISA or the DOL’s regulations. However, an ERISA fidelity bond would not be required for a fiduciary who does not handle funds or other property of an employee benefit plan.

Must Service Providers to the Plan Be Bonded?

The DOL says that It depends. A service provider, such as a third-party administrator or investment advisor, must be bonded if the service provider or its employees handle funds or other property of an employee benefit plan.