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ERISA Bond for Beginners

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What is an ERISA bond? Do I need one? What are the requirements? Where do I get one? What kind of coverage do I need?

These are some of the questions you may be asking yourself as a new plan administrator or as a fiduciary of your Company’s employee benefit plan. There is a great deal of responsibility that a plan administrator or fiduciary consumes when accepting their role, so it is important to keep up with the current events of the industry to make sure their Company’s employee benefit plan remains in compliance with federal laws and regulations.

So, do you need an ERISA bond? The first step is to determine if your plan falls under the Employee Retirement Income Security Act of 1974 (“ERISA”), a federal law designed to protect health and benefit plans under the Department of Labor (“DOL”).  If your plan falls under the protection laws of ERISA then your plan is most likely required to have an ERISA bond. Most plans fall under ERISA law, but you may be exempt, if you have a church plan or governmental plan or an unfunded plan. If you are still unsure, best practice is to consult with an ERISA attorney to confirm if your plan requires one or not so that as a plan administrator or fiduciary, you are doing your due diligence to ensure the plan remains in compliance with the DOL’s laws.

Now you’ve determined you need an ERISA bond. So what is it and what do you need to know? An ERISA bond is a type of insurance bond that protects the plan against losses due to fraud or dishonesty by persons who handle plan funds or property. If you’re keeping up with current events, you may be hearing a lot about fiduciary liability insurance. But these are two completely separate types of insurance. An ERISA bond protects against fraud, while fiduciary liability insurance protects fiduciaries from claims of mismanagement by failing to do their due diligence by not properly overseeing and managing the Plan in the participant’s best interests. Though fiduciary liability insurance is highly recommended, it is not required under federal law like the ERISA bond.

Okay, let me get back to the ERISA bond. Unless exempted under ERISA, the bond should be insured in the plan’s name and cover every person who handles funds or other property. Typically these persons include the plan administrator, employees of the plan, the trustees of the plan, etc. However, depending on how your plan is administered, if third party service providers have access to plan funds, or decision making authorities, then they may be required to be covered under your ERISA bond as well.

  1. You now may be asking yourself, what does “handling” funds mean? Well, this is how the DOL defines handling funds:
  2. Having physical contact with cash, checks, or similar property
  3. Power to transfer funds from the plan to oneself or to a third party
  4. Power to negotiate plan property
  5. Having disbursement authority or authority to direct disbursements
  6. Authority to sign checks or other negotiable instruments
  7. Supervisory or decision-making responsibility over activities that require bonding

 

 

 

 

 

 

Remember before when I said those in charge of the plan have a lot of responsibility? Well it is the responsibility those persons who handle funds to ensure that the Plan has a proper ERISA bond to protect themselves.

So here’s some quick facts you need to know:

  1. Bonds must be obtained from a surety or reinsurer approved by the DOL’s Treasury listing of approved sureties. The Plan must be independent (no direct or indirect control or significant financial interest) from the surety or reinsurer, or in an agent or broker, through which the bond is obtained.
  2. The bond coverage should be the lessor of 10% of plan assets at the beginning of the year, or $500,000 ($1,000,000 if the plan holds employer securities) and should not be written for less than $1,000.
  3. Typically bonds are written for a one year period, however they can be written for longer than a one year period. It is important to reevaluate the bond amount at the beginning of every plan year to ensure it meets the criteria noted above, or else adjustments should be made.
  4. Bonds can have an inflation guard that automatically increases the bond coverage depending on how much your plan requires your bond to be at the beginning of the year.
  5. Deductibles, or similar features, are prohibited for coverage of losses within the maximum amount for which the person causing the loss is required to be bonded.
  6. Bonds can either be paid by the Plan, or by the Plan Sponsor.

 

 

 

 

 

Although there is no prescribed amount for a failure to have an ERISA bond, the DOL can determine that a failure to have a bond is an ERISA violation. ERISA violations are subject to various penalty amounts. By raising a red flag and not having an ERISA bond, you are inviting the DOL in to review your plan to investigate all areas to ensure you are in compliance with other DOL rules and regulations. Not only is the lack of an ERISA bond an ERISA violation, but a fiduciary can be held liable as well. Remember that fiduciary liability insurance I mentioned?

In the end, as management, a plan administrator, or fiduciary or trustee, it is important to evaluate your plan to ensure your keeping up with current laws and regulations. A lot of responsibility falls on these persons and you don’t want to get caught with noncompliance by the DOL. Think about your plan participants and make sure you are doing everything you can to act in their best interests.

Jamie Polak, CPA
Sobel & Co.

Liz Harper, CPA
Sobel & Co.

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