Generally, anytime an employee or contractor is hired to a position that handles any aspect of a company’s finances – from cashiers to CFOs – are required to be bonded by their employer. In such cases bonds are purchased as protection against fraud, theft, or other instances of dishonesty that result in financial loss to the company. Such is the case for fiduciaries of employee benefit plans who handle the plan funds. In fact, it is an ERISA requirement that plan sponsors acquire a fidelity bond with minimum.
Although most employer-sponsors adhere to this requirement, some may not realize that their fidelity bond protection is not nearly sufficient to cover losses and/or expenses associated with recovering losses. Then there are those employer-sponsors who simply aren’t aware of the requirement, at least until the Department of Labor comes snooping around and decides to put their entire plan administration under close scrutiny (you want to avoid that like the plague).
A thorough review of your potential fiduciary liabilities and the protections in place should be conducted at least every three years as part of your regular plan review.
What is the ERISA Fidelity Bond Requirement?
The Department of Labor has mandated that all plan officials with fiduciary responsibilities for employee benefits be bonded. This includes anyone who has physical contact with cash, checks or other plan property. It also includes officials who have the authority to negotiate fees, disburse funds, sign checks, or has the ultimate authority for make decisions on any of the above.
At a minimum, a fidelity bond must be purchased to cover at least 10 percent of the plan’s assets, for no less than $1,000 up to a maximum of $500,000. If your plan primarily holds employer stock, the maximum is increased to $1 million. Plans in which employer stock represents only a portion of a broadly diversified portfolio of investments are not subject to the higher requirement.
For plans that hold “non-qualifying assets,” such as limited partnerships, mortgages, real estate of securities of closely-held companies, the bond amount must cover 100 percent of the value of the assets, or the plan sponsor must allow for an annual audit by a third-party to attest to the existence and value of these assets.
Generally, employee benefit plans of small businesses comprised only of family members or “common law” employees are exempt.
Are You Sufficiently Covered?
Because of the reporting requirements on Form 5500, it’s tough to get around the minimum requirements of fidelity bonding. But, most companies recognize the need for it and comply, at least at the minimum. However, failure to consider all contingencies, and/or, review coverage in light of changing circumstances, could leave the company vulnerable to significant losses or costs. How might this happen? There are a few circumstances that, if not addressed, could leave you vulnerable.
- Failure to cover all plan officials – For example, say the plan sponsor decided to form an outside investment committee to oversee plan investments (which we recommend). The members would be considered to be plan officials if they make final investment decisions for the plan and must be bonded.
- Failure to obtain a bond through a carrier listed on the Treasury Department’s Listing of Approved Sureties.
- Failure to make necessary adjustments to coverage on bonds purchased for multiple years.
- Failure to purchase fidelity liability insurance to cover claims and losses arising out of claimed breaches of fiduciary duty.
Additional Advantages of a Fiduciary Bond (AKA, Fiduciary Insurance)
The last item, although not required by ERISA, is critical to the protection needs of a company. More specifically, it covers plan officials who intentionally or inadvertently breach their fiduciary duties. Fidelity bonds provide protection against losses occurring within the plan; however, they do not provide coverage for costs associated with claims against the plan officials who performed the breach. Many plan fiduciaries are equally unaware that their personal assets can be at risk if a fiduciary breach occurs, even when the company is a corporation or other limited liability entity. This is due to ERISA §409 which recognizes that while the company can be named the trustee of the plan, it is the individuals that are directing those actions. In extreme cases of theft, or misappropriations of funds the courts have even upheld that the debt to the plan cannot be forgiven through bankruptcy proceedings. As serious as these consequences can be for the fiduciaries of the plan, companies may want to consider including fiduciary insurance as part of their executive’s (those with fiduciary duties) compensation plan. This is particularly true for larger plans due additional complexity, and additional liability from increased participants and assets at risk.