ERISA Bond

The “Employee Retirement Income Security Act” of 1974 ERISA Bond Rule requires that fiduciaries of employee benefit and retirement investment plans be bonded to the full amount of the plan. With recent reforms imposed by the U.S. Department of Labor (DOL), new guidelines to ERISA following enactment of the Fiduciary Rule, March 10, 2017, make all financial professionals with few exceptions, fiduciaries. Most fiduciaries are now classified under Section 3(21) investment fiduciaries (advisors); including advisors providing pension consulting to employers.

The Fidelity Bond Rule provides insurance coverage of employee benefit plan losses. Election of a 401k Plan by an employer will continue to be a source of contribution for company and employee funds, but without the risks formerly assigned to the retirement plan sponsor. The new rule also outlines the role of 3(38) investment fiduciaries (advisors), responsible for making discretionary fund decisions for investor clients. The purpose of the bonding requirements is to protect plan sponsors (employers) from liability.

ERISA rule implementations now cover protection of employee benefit plans from losses associated with dishonesty or fraud on the part of professionals responsible for ”handling” plan assets. Plan sponsors are required to file annual IRS Form 5500 regardless if a retirement investment plan was covered by a fidelity bond to the full amount of the plan.

Exemptions of ERISA Bond Rule and Fiduciary Rule guidelines, are persons responsible for handling plan funds must be bonded and the special increased bond maximum if a plan holds employer securities. Although not every financial professional who handles plan funds needs to be bonded, the rules have expanded the number of roles assigned fiduciary status, as well as bonding rules. Prior to the Fiduciary Rule, most banks, trust companies, insurance companies and broker dealers are not required to have an ERISA bond.

As a practical matter, “plan funds” should be understood to mean all plan assets. Plan funds includes assets held directly by the plan and assets held indirectly, such as investment assets held by a common or collective trust or an investment fund that is deemed to hold plan assets under ERISA. Conversely, mutual funds and other investment funds that do not hold plan assets under ERISA are not required to be bonded. ERISA bonds can only be issued by a surety company that is listed by the U.S. Department of the Treasury as an “approved surety.”

There is no required form of the bond, and the bond can cover a specific individual (e.g., the CEO of the plan sponsor) or groups of people (e.g., all employees of the investment manager). Bonds can also cover multiple plans; as each plan is eligible to receive the maximum payment. The DOL has stated that a plan can pay for bonds, including bonds that cover employees of the plan sponsor or service.

What coverage amount is required?

A fund official must be bonded for at least 10 percent of funds handled. The maximum bond amount in most cases under ERISA is $500,000 for plan officials. Higher limits are possible with purchase. Effective for plan years commencing on or post 1 January 2008, the maximum bond amount required is $1,000,000 for plan officials of employer securities.

Employee Benefit Plans holding above 5 percent in non-qualifying plan assets held in limited partnership entities, mortgages, real estate or securities, or artwork of companies held external to regulated institutions (i.e. banks, insurers, registered broker-dealers, or other authorized entity) acting as a trustee of individual retirement accounts recognized by the U.S. federal Internal Revenue Service IRS Code §408.

The Plan sponsors are obliged to perform one (1) of two (2) responsibilities to ensure a bond amount is equal to 100 percent of the value of “non-qualifying” assets; or arrange for an annual financial audit by a Certified Public Accountant qualified to confirm the tangible assets held at Q1 and at the end of Q4 as itemized in the annual report. While general rules to the bond requirements of plan officials are clear, depending on amount and asset types held by an issuer of the debt, certain aspects may be more complex.

The Complexities of ERISA fidelity bonds

SEC-registered broker dealers need not have an ERISA bond if they are bonded pursuant to rules established by FINRA or another self-regulatory organization. Although most of these types of service providers are exempt from ERISA’s bond requirement, plan fiduciaries may wish to obtain a representation from the service provider to that effect. Some fiduciaries are also exempt.

Although ERISA arguably requires every fiduciary to be bonded, the DOL treats fiduciaries like all other persons, requiring a bond only if the fiduciary handles plan funds. Perhaps the most common example of an exempt fiduciary is a fiduciary that provides non-discretionary investment advice but does not manage plan assets.

Individuals required to be covered by ERISA bond

Section 412 of ERISA requires every person handling plan funds be bonded, unless the person falls under one of the exemptions from the bonding requirement. Generally, bonding is required for any person (called a plan official) whose activities create a risk that plan assets could be lost in the event of fraud or dishonesty by that person acting alone or in collusion with others.

Bonding is required to individuals who are directly responsible for receiving plan contributions or making distributions from the plan. For example, if an employee in the plan’s administrative office who routinely issues plan checks steals plan funds, the bond is intended to reimburse the plan for the loss. Bonding is also required for persons providing discretionary investment management services to the plan. Since the enactment of the Fiduciary Rule in 2017, it is now required for individuals conducting investment advisory services.

Applicable exemptions from ERISA bond

Unfunded employee benefit plans are exempt from the bonding requirement. Unfunded employee benefit plans are not subject to ERISA’s bonding requirements. An unfunded plan is one that pays for benefits out of the employer’s general assets.  The assets cannot be segregated from the employer’s general assets until benefits are distributed. Except for plans described in Department of Labor (DOL) Technical Release 92-1 (relating to the trust and reporting requirements for cafeteria plans and certain other employee welfare benefit plans), an employee benefit plan that receives employee contributions is usually not considered to be unfunded.

Employee benefit plans not subject to Title I of ERISA are exempt from the bonding requirement. Title I of ERISA does not apply to Governmental plans, Church plans that do not elect to be covered by certain sections of the Internal Revenue Code (IRC) under IRC section 410(d) plans maintained solely to comply with workers’ compensation, unemployment compensation or disability insurance laws, plans maintained outside the US primarily for the benefit of persons substantially all of whom are nonresident aliens and excess benefit plans.

  • Most banks are exempt from the bonding requirement.
  • Insurance companies are exempt from the bonding requirement.
  • Registered brokers and dealers are exempt from the bonding requirement.

Unfunded employee benefit plans are not subject to ERISA’s bonding requirements. An unfunded plan is one that pays for benefits out of the employer’s general assets.

Title I of ERISA does not apply to Governmental plans, Church plans that do not elect to be covered by certain sections of the Internal Revenue Code (IRC) under IRC section 410(d), plans maintained solely to comply with workers’ compensation, unemployment compensation or disability insurance laws, plans maintained outside the US primarily for the benefit of persons substantially all of whom are nonresident alien and Excess benefit plans.

The bond provisions required to comply with ERISA

An ERISA fidelity bond, must meet several requirements to comply with ERISA. ERISA allows flexibility in bond forms. A plan can be insured on a separate bond or can be integrated to an existing employer bond or insurance policy if meeting ERISA’s requirements. ERISA requires bonds to provide coverage from the first dollar of loss. DOL ERISA Bond rules are as follows:

  • "Bonds that require a deductible or include similar features that place a portion of the risk of loss on the plan do not satisfy ERISA."
  • "The bond can include a deductible for the portion of coverage that exceeds the maximum amount required."
  • "Bonds also cannot exclude coverage for situations where an employer or plan sponsor knew or should have known that a theft was likely."
  • "A plan must have a one-year period after termination of a bond to discover losses that occurred during the term of the bond.
  • "Therefore, if a bond is being terminated, both the terminating bond and the replacement bond must be examined to make sure that the plan is insured properly against losses that were incurred during the terminating bond’s term but not discovered until after the bond terminated."
  • "The bond must name specifically the plan as the insured or at least identify the plan in a way that allows the plan’s representatives to make a claim under the bond directly against the insurer in the event of a loss."
  • An omnibus clause such as “all employee benefit plans sponsored by [a] company” is acceptable to identify multiple plans as the insured on one bond."

Employers should review carefully their general corporate fidelity bond as expressly exclude ERISA.

The difference between fiduciary liability insurance and fiduciary bonding

Fiduciary liability insurance insures a plan against losses caused by breaches of fiduciary responsibilities. Fiduciary liability is not required by ERISA and deciding whether to purchase fiduciary liability insurance is itself a fiduciary act subject to ERISA’s fiduciary duty rules.

A plan can pay for fiduciary liability insurance either for her its fiduciaries (Section 401, ERISA), however, any policy paid for by the plan must permit recourse by the insurer against the fiduciary if a fiduciary breach occurs. A fiduciary can purchase protection against the insurer’s recourse rights at his own expense. Fidelity bonding protects the plan against loss of funds through theft or fraud. Insurance for fiduciary responsibility does not include fidelity bonding, the two coverages generally are mutually exclusive.

How to pay for a bond?

As with all other ERISA fiduciary violations, a fiduciary is liable for losses to the plan resulting from the breach, i.e., the failure to have a bond. Plan fiduciaries should therefore make sure that there are bonds covering all persons handling plan funds unless an exemption applies.

ERISA bonds have historically been inexpensive and it has been comparatively easy to obtain a bond covering all “inside” persons. Third party service providers have differing approaches to ERISA bonds. Some service providers maintain their own ERISA bonds; others ask that the plan add the service provider to the plan’s bond.

Although compliance with ERISA’s bond requirement is a fiduciary matter, maintaining and paying for the bond is often negotiated. The consequences of failing to have a bond will vary from having to obtain a bond to a court order to pay the plan for losses resulting from failing to have a bond.

If you have inquiries about ERISA bond rules, post your legal needs on the UpCounsel marketplace. UpCounsel lawyers represent the top 5 percent attorneys in the United States, graduating from top law schools such as Harvard Law School and Yale Law School. UpCounsel attorneys have an average 14 years of legal experience, and have represented corporate clients like Google and Stripe.