Understanding ERISA Bonds - Bonding Solutions

Understanding ERISA Bonds

Bonding Solutions | Understanding ERISA Bonds

The Employee Retirement Income Security Act (“ERISA”) established regulations and standards of behavior for private sector employee benefit programs and their respective trustees to safeguard private pension plans and other employee benefit plans from being mishandled and misused. One of the regulations is that the fiduciaries in charge of the money and other assets must be protected by a fidelity bond, which protects the plan against losses caused by dishonesty or fraud.

Employee benefit plans are protected by ERISA’s bonding requirements from loss due to fraud or dishonesty on the part of those who “handle” plan assets or other property. Persons who manage funds or other property of an employee benefit plan are referred to as “plan officials” under ERISA. This Act mandates that a fidelity bond be in place to protect the fiduciary (those in charge of the plan’s management) and those who handle the plan’s assets or other property. The purpose of these bonds is to safeguard the plans against dishonesty and fraud perpetrated by those linked with them.

Fidelity Bonds: What Are They?

Every fiduciary of an employee benefit plan, as well as anybody who handles benefit, retirement, or health plan money, is required under ERISA to be bonded. These bonds protect the plan against asset losses caused by fraud or dishonesty. The ERISA bond is necessary to safeguard plan members and beneficiaries against the actions of a fiduciary who is in charge of the plan’s assets. 

What is the minimum quantity of coverage required?

A plan official must be bonded for at least 10% of the funds he or she is in charge of. The highest bond amount that can be needed under ERISA for any one plan official is $500,000 per plan in most cases. Higher limitations, on the other hand, can be purchased. This has been the case since January 1, 2008.

Employee benefit plans with more than 5% of non-qualifying plan assets held in limited partnerships, artwork, collectibles, mortgages, real estate, or securities of “closely-held” companies held outside of regulated institutions such as a bank, an insurance company, a registered broker-dealer, or another organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code 408 must do one of the following: 

  • Ensure that the bond amount is equivalent to 100% of the value of the “non-qualifying” assets, or 
  • Arrange for a yearly full-scope audit, in which a CPA verifies the assets’ existence at the beginning and end of the Plan year.

Is Fiduciary Liability Insurance the same as an ERISA Fidelity Bond?

No. The fidelity bond required by ERISA section 412 protects a plan from losses caused by fraud or dishonesty (e.g., theft) by anyone (including, but not limited to, plan fiduciaries) who handle plan assets or other property. Fiduciary liability insurance, on the other hand, protects the plan from damages resulting from violations of fiduciary duties.

Do all employee benefit plans have to be bonded under ERISA?

No. Employee benefit plans that are totally unfunded or not subject to Title I of ERISA are exempt from the ERISA section 412 bonding requirements. Benefit plan fiduciaries are bank or insurance businesses that are supervised or examined by the state or federal government and fulfill specific capitalization standards. Brokers/dealers who are subject to the fidelity bonding requirements of a self-regulatory body under Section 15(b) of the Securities Exchange Act of 1934.

Who is obligated to buy an ERISA bond?

Unless they fall into an exempt category, anybody who handles the funds or other property of an employee benefit plan is obliged to be bonded. Receiving, handling, disbursing, or otherwise exercising custody or control of plan assets or property without being properly bonded is illegal under ERISA. The Department of Labor provides the following criteria to assist evaluate if someone is handling money: 

  1. Has the person come into personal touch with any cash, cheques, or other comparable property from the employer-sponsored retirement plan? 
  2. Is/was the individual authorized or empowered to transfer monies from an employer-sponsored retirement plan to themselves or a third party?
  3. Is/was the individual authorized or empowered to negotiate plan property? Taking out a mortgage on a piece of real estate, owning the title to land or buildings, or physically having stock certificates are all examples given by the Department of Labor. 
  4. Is there any other disbursement power or authority to direct disbursement that the individual has or had? 
  5. Is/was the individual authorized to sign cheques or other negotiable instruments drawn on the employer-sponsored plan’s funds? 
  6. Is/was the person in charge of “supervisory or decision-making responsibilities over operations that necessitate bonding”?

Who is Exempt from Having to Invest in an ERISA Bond?

All employee benefit programs are not covered by the ERISA Bond. The following plans are exempt: 

  • Organizations that are covered by ERISA’s Title 1 section. These might include church employee plans as well as government-sponsored programs. 
  • Certain banks, insurance firms, and licensed brokers and dealers are among the regulated financial institutions.
  • Completely underfunded employer-sponsored retirement programs. A union, for example, would come within this group.

What is the Employee Retirement Income Security Act?

The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal legislation designed to safeguard plan members by regulating retirement and health programs. 

The legislation requires plan administrators to properly disclose financial information about the retirement plan, establishes regulations for the role of the fiduciary, and gives plan participants rights of recovery if they are harmed as a result of the plan administrator’s misconduct or negligence. 

Fiduciaries must acquire and maintain a “ERISA Bond” in order to offer financial security for the requirements laid out by the Department of Labor.

What is an ERISA Bond’s Purpose?

The Department of Labor mandates that retirement plan fiduciaries obtain an ERISA bond. The bond guarantees that plan participants (workers) will be compensated for financial losses caused by the fiduciary’s fraudulent or dishonest activities. 

In a nutshell, the bond is a sort of surety bond that protects employees from plan fiduciaries’ unethical activities. 

What Factors Go Into Determining the Bond Amount?

The Department of Labor mandates that ERISA bonds be worth at least 10% of the employee benefit plan’s total assets. The bond must be at least $1,000 and no more than $500,000. A plan official in charge of a benefits plan with $1,000,000 in assets, for example, must acquire a $100,000 insurance policy.

What Happens if the Plan’s Assets Total More Than 10% of the Bond Amount?

To continue in compliance with the DOL requirement, the bond amount must be raised if the plan assets grow or appreciate to a value more than 10% of the bond amount. Many surety providers, however, incorporate an “inflation guard” plan element that automatically raises the bond amount during the bond term to fulfill the DOL regulation. This inflation protection option is included in all BondExchange ERISA bonds at no additional cost, ensuring that bond principals stay compliant with DOL laws. 

Non-Qualifying Assets (less common) plans must acquire a bond equivalent to the greater of (1) 10% of the total plan value or (2) 10% of the total plan value.

Bonding Solutions is a surety agency that focuses on our customers’ individual needs and tailors bond plans to provide them a competitive advantage in their industry.  We can also help you with understanding ERISA Bonds. We aim to keep satisfying our consumers, educating our personnel, and assisting our partners in their success. Apply online today or contact our team directly for more information. 

published on Friday, April 15th, 2022


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