Clarity Regarding ERISA Fidelity Bonding Requirements
There is a common misconception among those charged with employee benefit plan governance that the fiduciary liability insurance commonly maintained for plans meets the fidelity bonding requirements of ERISA Section 412 and related regulations. Unfortunately, confusion over this topic has often caused plan administrators to have it pointed out to them amidst a regulatory or compliance review that they are noncompliant, as the ERISA bonding requirement is not satisfied by fiduciary liability insurance.
The U.S. Department of Labor issued Field Assistance Bulletin (FAB) No. 2008-04 to clarify, among other things, this specific issue which reads:
“The fidelity bond required under Section 412 of ERISA specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) on the part of persons (including, but not limited to, plan fiduciaries) who handle plan funds or other property. Fiduciary liability insurance, on the other hand, generally insures the plan against losses caused by breaches of fiduciary responsibilities.”
The FAB stresses that, while fiduciary liability insurance is allowed by ERISA guidelines, it is not required by ERISA and does not meet the requirements for bonding. While fiduciary liability coverage is important, proper ERISA fidelity bonding insures the plan for losses that occur by dishonest means, despite those officials whom have been prudently meeting their fiduciary responsibilities.
The FAB also provides detail regarding the level of bonding required. According to the FAB, every “plan official,” defined as any person who handles the funds or other property of the plan, must be bonded, with exceptions outlined in Section 412 that include certain banks, insurance companies, and registered brokers and dealers. Further, it states that these bonds must cover losses “by reason of acts of fraud or dishonesty on the part of persons required to be bonded, whether the person acts directly or through connivance with others.”
What Does CohnReznick Think?
While there is no direct monetary penalty for not complying with this regulation, it is in the best interest of those charged with governance to ensure the plan is protected and in compliance with ERISA regulations on this matter. Not doing so could cause, at best, increased regulatory scrutiny or, worse, it could effectively make losses due to theft unrecoverable.
To cover such potential losses, the amount of coverage required, as outlined in the FAB, is as follows:
|Minimum Bond Coverage||Required Coverage*||Maximum Bond Coverage for a Plan Official (Most cases)||Maximum Bond Coverage for a Plan Official of a Plan that Holds Employer Securities|
|$1,000 (regardless of the amount of plan assets handled)|
Each plan official must be bonded for at least 10% of the amount of funds handled (as of the beginning of the plan year).
This percentage is required for each plan for which the official handles plan assets.
Each plan must be named on the bond.
Coverage must be updated annually.
|$500,000 (regardless of the amount of plan assets handled)||$1,000,000 (regardless of the amount of plan assets handled)|
*Only bonds secured with companies on the Department of Treasury’s Listing of Approved Sureties (fms.treas.gov/c570/c570.html) meet the requirement. If you have fiduciary liability insurance through a company on this list, you can request fidelity bond coverage from them. Further, plan assets may be used to purchase the ERISA bond coverage.
The full text of the DOL's FAB can be found at http://www.dol.gov/ebsa/pdf/fab2008-4.pdf.
For more information on ERISA fidelity bonding requirements, please contact Mathew Krukoski, Partner, at 860-368-5222.
To learn more about CohnReznick’s Employee Benefit Plan Practice, visit our website.
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