ERISA Fidelity Bonds | Employee Benefit Plan Bonds

Understanding ERISA Fidelity Bonds

ERISA fidelity bonds are a federal requirement under the Employee Retirement Income Security Act of 1974 (ERISA) for employee benefit plans. Unlike traditional surety bonds, ERISA bonds are actually fidelity insurance policies that protect employee benefit plans from losses caused by fraud or dishonesty committed by plan officials who handle plan funds or property.

Section 412 of ERISA requires that every fiduciary and every person who handles funds or other property of an employee benefit plan must be bonded. This federal mandate applies to 401(k) plans, pension plans, profit-sharing plans, and many health and welfare plans, protecting participants' retirement savings and benefits from theft, embezzlement, and other fraudulent acts.

Federal ERISA Bonding Requirements

The Department of Labor (DOL) enforces ERISA bonding requirements, which mandate specific coverage amounts based on plan assets:

• Minimum Coverage: At least 10% of plan assets as of the beginning of the plan year
• Absolute Minimum: $1,000 per plan official, regardless of plan size
• Standard Maximum: $500,000 per plan official for most plans
• Increased Maximum: $1,000,000 for plans holding employer securities
• Annual Review: Coverage must be reviewed and adjusted annually based on plan asset values

For example, a 401(k) plan with $5 million in assets at the beginning of the plan year must maintain at least $500,000 in ERISA bond coverage (10% of $5 million, up to the maximum). If plan assets grow significantly during the year, coverage should be increased at the next plan year to meet the 10% requirement.

Who Must Be Bonded Under ERISA?

ERISA requires bonding for anyone who "handles" plan funds or property. The Department of Labor interprets "handling" broadly to include:

• Plan Trustees: Individuals with authority over plan assets
• Plan Administrators: Those managing day-to-day plan operations
• Plan Officers: Corporate officers with plan responsibilities
• Employees: Staff with physical contact with cash, checks, or property
• Authorized Signers: Anyone who can sign checks or authorize transfers
• Investment Managers: Those with discretion over plan investments

The broad definition of "handling" means that third-party service providers (TPAs, recordkeepers, investment advisors) who have access to plan assets may also need to be covered under the plan's ERISA bond or maintain their own adequate fidelity coverage.

What ERISA Fidelity Bonds Cover

ERISA fidelity bonds protect employee benefit plans against losses resulting from acts of fraud or dishonesty. Covered acts include:

• Theft: Direct stealing of plan assets or property
• Embezzlement: Misappropriation of plan funds for personal use
• Forgery: Fraudulent signing of checks or documents
• Larceny: Wrongful taking of plan property
• Wrongful Abstraction: Unauthorized removal of plan assets
• Misappropriation: Improper use of plan funds

The bond protects the plan itself—not individual participants, fiduciaries, or the plan sponsor. If a plan official commits a dishonest act causing financial loss to the plan, the bond coverage can reimburse the plan for those losses, up to the bond amount.

ERISA Bonds vs. Fiduciary Liability Insurance

It's important to understand the difference between ERISA fidelity bonds and fiduciary liability insurance:

ERISA Fidelity Bonds (Required): Protect the plan from losses due to fraud or dishonesty by plan officials. Coverage is mandatory under ERISA Section 412. Covers intentional criminal acts like theft and embezzlement. Benefits pay to the plan to restore stolen assets.

Fiduciary Liability Insurance (Optional but Recommended): Protects plan fiduciaries from personal liability for breaches of fiduciary duty. Coverage is optional but highly recommended. Covers negligent acts, errors in plan management, and unintentional breaches of duty. Benefits pay defense costs and judgments on behalf of fiduciaries.

Most employee benefit plans should maintain both types of coverage—the ERISA bond is legally required, while fiduciary liability insurance provides essential protection for plan fiduciaries against lawsuits and regulatory investigations.

How ERISA Fidelity Bonds Work

When an employee benefit plan suffers a loss due to fraud or dishonesty by a bonded individual, the plan can file a claim under the ERISA fidelity bond. The claims process typically involves:

1. Discovery: The plan discovers a loss due to fraudulent or dishonest acts
2. Investigation: The plan investigates and documents the loss and identifies the responsible party
3. Claim Filing: The plan files a claim with the bond carrier, providing evidence of the dishonest act and loss amount
4. Carrier Investigation: The insurance carrier investigates the claim to verify coverage and loss amount
5. Payment: If the claim is valid, the carrier pays the plan up to the bond amount to restore the stolen or misappropriated assets

Unlike surety bonds where the principal must reimburse the surety for claims paid, ERISA fidelity bonds function as true insurance—the carrier pays valid claims without seeking reimbursement from the dishonest party (though the carrier may pursue recovery independently).

ERISA Bond Costs and Pricing

ERISA fidelity bond premiums are based on the coverage amount and number of covered individuals, not on credit scores or financial strength of the insured. Typical annual premiums include:

• $50,000 coverage: $100-$200 annually
• $100,000 coverage: $150-$300 annually
• $250,000 coverage: $250-$500 annually
• $500,000 coverage: $500-$1,500 annually
• $1,000,000 coverage: $1,000-$2,000 annually

Blanket bonds covering multiple plans or numerous individuals may have slightly higher premiums but are generally more cost-effective than separate bonds for each plan or person. Multi-year policies sometimes offer modest discounts compared to annual terms.

Blanket Bonds for Multiple Plans

Employers sponsoring multiple employee benefit plans can obtain a single blanket ERISA fidelity bond covering all plans within a controlled group. The bond amount must equal at least 10% of the aggregate assets of all covered plans.

For example, an employer with three plans totaling $10 million in aggregate assets would need a blanket bond of at least $1 million (10% of aggregate assets), but no more than $500,000 or $1,000,000 depending on whether the plans hold employer securities.

Blanket bonds simplify administration, reduce costs, and ensure consistent coverage across all benefit plans. They're particularly valuable for employers with 401(k), pension, and health and welfare plans that share common trustees or administrators.

Carrier Requirements and DOL Approval

ERISA requires that fidelity bonds be issued by insurance companies or surety companies that meet specific federal criteria. The carrier must:

• Be listed on the Department of Treasury's Listing of Approved Sureties (Department Circular 570)
• Be licensed or authorized to do business in the state where the bond is issued
• Have sufficient financial strength to pay potential claims
• Not be a party in interest to the plan (no conflicts of interest)

You can verify carrier authorization on the Treasury Department's list of certified companies. Working with Treasury-approved carriers ensures DOL compliance and guarantees that your ERISA bond will satisfy federal requirements during plan audits.

Common ERISA Bonding Mistakes to Avoid

Plan sponsors and fiduciaries should avoid these common ERISA bonding errors:

• Insufficient Coverage: Not maintaining 10% of plan assets or allowing coverage to lapse as assets grow
• Wrong Type of Bond: Obtaining a surety bond instead of an ERISA fidelity bond (they're different products)
• Unapproved Carriers: Using insurance companies not listed on the Treasury's approved surety list
• Missing Individuals: Failing to cover all persons who "handle" plan funds or property
• No Coverage: Operating a plan without any ERISA bond (a serious DOL violation)
• Infrequent Reviews: Not reviewing coverage annually as plan assets change

Penalties for Non-Compliance

Failing to maintain required ERISA fidelity bond coverage can result in serious consequences:

• DOL Penalties: Civil penalties up to $1,000 per day for each violation
• Personal Liability: Plan fiduciaries may be personally liable for losses that would have been covered by the bond
• Audit Issues: Plan auditors will issue qualified opinions if bonding is inadequate
• Participant Lawsuits: Lack of bonding can trigger class action lawsuits by plan participants
• DOL Investigations: Missing bonds often trigger Department of Labor investigations and corrective action requirements