What is an ERISA Bond?
The Employee Retirement Income Security Act of 1974 (ERISA) requires that every person who handles funds or property assets as well as every employee benefit plan fiduciary to post a surety bond.
Called ERISA Bond, this type of surety bond aims to safeguard employee benefit plans from losses incurred due to fraudulent or dishonest acts committed by the person “handling” plan assets.
To comply with the bonding requirement, plan sponsors are obligated to conduct annual reports on the IRS Form 5500 whether the retirement plan (which also includes ESOPs) was covered by an ERISA Bond and the amount of coverage for that particular plan.
What is “ERISA”?
The Employee Retirement Income Security Act (ERISA) is a set of rules, standards, and provisions of conduct for private sector employee benefit plans and those that handle their assets. The U.S. Department of Labor administered the provisions of ERISA to address public concerns that funds of private pensions and other employee benefit plans were being “mishandled” and abused. One of ERISA’s requirements is that people who handle these plan funds and other real property assets must be bonded to protect the plan from losses caused by fraudulent or dishonest actions.
Is an ERISA Bond the same as Fiduciary Liability Insurance?
An ERISA Bond is not the same thing as a Fiduciary Liability Insurance. The ERISA bond required under ERISA explicitly insures a plan against losses due to theft or misrepresentation by persons who handle plan funds or real property. Fiduciary liability insurance, on the other hand,
On the other hand, fiduciary liability insurance insures fiduciaries. Also, in some cases, it insures the plan against losses due to a violation of fiduciary duties. Fiduciary liability insurance covers various plan fiduciaries, but it is not required and does not meet the bonding requirements of ERISA.
Who needs to get an ERISA Bond?
Section 412 of ERISA indicates that persons who “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” are required to be bonded.
The bonding requirement is not limited to plan fiduciaries, plan trustees, employees of the plan, and employees of the plan sponsors. The ERISA bond covers other persons, such as plan service providers, whose responsibilities include having access to plan funds or being authorized to make decisions that can enable potential risks of loss through fraudulent or dishonest actions.
ERISA’s bonding requirements mostly cover natural persons or persons who “handle” the funds.
According to USDOL, ERISA’s criteria for defining “handling” include:
- Physical contact with cash, checks, or similar property;
- Power to transfer funds from the plan to oneself or a third party;
- Power to negotiate plan property (e.g. mortgages, title to land and buildings or securities);
- Disbursement authority or power to direct disbursement;
- Authority to sign checks or other negotiable instruments; or
- Supervisory or decision-making responsibility for activities that require bonding.
Do ERISA’s surety bond requirements cover all employee benefit plans?
No. ERISA Bond requirements apply to most ERISA retirement plans and other funded welfare benefit plans. But the bond requirements do not cover unfunded employee benefit plans (benefits paid directly out of an employer’s assets). It also does not apply to plans that are not subject to Title I of ERISA (these are plans maintained by governmental entities, churches, or plans maintained to comply with unemployment or disability laws).
Who is exempted from ERISA’s bonding requirements?
The USDOL’s regulations grant exemptions for regulated financial institutions. These institutions cover certain banks, insurance firms, and registered brokers and dealers. If the financial institution satisfies the conditions for the exemption, the institution and its employees do not require to be covered by an ERISA Bond even if their services include handling a plan’s funds or property assets.
How much does an ERISA Bond cost?
According to USDOL, each person handling funds must be bonded in an amount equal to at least 10% of some funds he or she has dealt with in the previous year.
However, the bond amount should not be less than $1,000. Also, the Department cannot require a plan official to post a bond for more than $500,000 or $1,000,000 for plans that manage employer securities. These bond amounts apply for each plan named on a bond.
To fit the ERISA requirement, bonds that cover more than one plan may be required to meet the amount of over $500,000 because persons covered by a bond may handle funds or other property for more than one plan.
What happens if I fail to maintain adequate bonding coverage?
Failing to uphold adequate bonding coverage can pose organizational risks. Although there are no specific monetary penalties, persons handling the funds can be held personally liable under ERISA’s general fiduciary duty rules for any losses to the plan that should have been but was not covered by an ERISA Bond.
As a rule, USDOL investigators examine ERISA bonds during plan audits or reviews.
How long is the term of the ERISA Bond?
ERISA Bonds may be written for more than one year providing that the bond insures the plan for the required amount each year.
For multiple-year bonds, an “inflation guard” provision may be applied to extend the amount of coverage under the bond. This provision is set to equal the amount required under ERISA at the time a plan determines a loss.
How do I obtain an ERISA Bond?
First, you need to find a reputable surety bond company that issues this type of bond.
You will need to fill out and submit an application form, as well as financial documents to the Surety.
ERISA bond forms are allowed, including the following:
- Name schedule (covers several named persons)
- Position schedule (covers persons holding certain positions listed on a schedule)
- Blanket (officers and employees without a specific list)
- Combination of forms
As an applicant, you must also be able to demonstrate the three C’s of bonding: capacity, capital, and character. A surety underwriter will review your credentials, and if you qualify, you will be provided the bond.