Everything You Need to Know About ERISA Fidelity Bonds

Created in 1974 by the Employee Retirement Income Security Act (ERISA), this bond is one of the most important pieces of legislation in retirement planning as it sets a regulatory framework for retirement plans sponsored by employers. Understanding the requirements, rules, and standards for ERISA bonds can often be overwhelming for many people, but there are some key elements that employers and plan sponsors need to know about. 

To help you understand more about ERISA fidelity bonds, here is a guide to everything you need to know.

The Definition of ERISA Fidelity Bonds

An ERISA fidelity bond (also known as an ERISA bond) is not a bond for trading. It is a type of insurance designed to protect retirement plans for employees from fraudulent acts and dishonesty. ERISA bonds were created to address public concerns regarding pensions and employee benefit plans. Fraudulent and dishonest acts include embezzlement, theft, forgery, wrongful conversion, wrongful abstraction, misappropriation, and willful misapplication. Any acts that abuse and mismanage retirement plans and employee benefit plans can fall under ERISA’s jurisdiction.

ERISA Bonds Protect Beneficiaries in Three Main Ways

There is a myriad of regulations and rules in place to ensure ERISA can protect the public. The US Congress stated the three official regulatory protections:

1. Employers must disclose certain information such as financial details about their employer-sponsored plans. 
2. ERISA bonds ensure that those who act as fiduciaries of employer-sponsored plans must follow a set of rules for conduct.
3. ERISA grants plan participants and their beneficiaries the right to sue plan sponsors if they are harmed by misconduct under the U.S. federal court system. 

Employee Benefit Plans

Under the provision of ERISA, any employers who offer employee benefit plans such as retirement plans and health insurance will be subjected to a certain set of rules. ERISA is a federal law that covers welfare plans such as unemployment benefits, medical care, benefits for accidents, scholarship funds, retirement plans, and many others in their employee benefit plans and these can all be very welcome perks. It is important that both employers and employees are totally clear on exactly what their plan covers so that there are no unpleasant surprises. 

Bonding Requirements for Plan Administrators and Other Related Parties

Every person who is responsible for handling funds and other property of employee benefit plans must be bonded according to ERISA’s legislation unless he or she is qualified for an exemption under ERISA. It is unlawful for people who have control of funds to receive, disburse or handle funds without being bonded. ERISA fidelity bonds are typically required for plan administrators, employers, joint boards, and employee organizations. 

If a person has been in a position to handle cash, property, or other assets, then they have the power to negotiate or transfer funds from plans, and so they must be properly bonded. Determining who is required to be bonded is not always clear so fiduciaries and administrators should ensure that they are bonded just to be sure. 

Coverage with ERISA Bonds

As a general rule, each individual must be bonded with a minimum amount of 10% of the total amount of funds that were handled the preceding year. Regardless of the case, the bond amount must be higher than $1,000. However, a plan official cannot be bonded for more than $500,000 for plans that hold employer securities. Note that these amounts are applicable for each plan named on a bond. If a person has bonds covering more than one plan, he or she is required to be bonded over $500,000 to meet the requirements from ERISA. 

Issuers of ERISA Bonds

The market for ERISA bonds is highly regulated. Each bond must be issued by an underwriter. An underwriter can be a surety company or a reinsurer, who can be identified by the Department of Treasury’s Listing of Approved Sureties. The bond must be sold through an insurance company that is totally independent. This means that if a person has a significant financial interest in the insurance company or with the insurance broker, he or she cannot buy ERISA bonds through that agency because there may be a potential conflict of interest.

Difference Between ERISA Bonds and Other Types of Coverage

ERISA bonds cannot include any deductible or any feature that is close to a deductible in the insurance contract. Regarding insurance policy, ERISA bonds must name the employer-sponsored benefit plans explicitly as the beneficiary. These differences ensure the plan participants and the plan participants’ beneficiaries can make direct claims on ERISA bonds.

ERISA bonds are created to protect plan participants and their beneficiaries from fraudulent and dishonest acts on employer-sponsored retirement plans. ERISA bonds are fundamentally different from other types of fiduciary liability insurance. Therefore, it is important to understand the basics of ERISA fidelity bonds and meet the requirements.