If you handle employee benefit plan funds you may need an ERISA fidelity bond

Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA) to protect the interests of employee benefit plan participants and beneficiaries. The Act is administered and enforced by the Department of Labor's Employee Benefits Security Administration, the Treasury Department's Internal Revenue Service, and the Pension Benefit Guaranty Corporation. While ERISA has been amended over the years, the basic mission remains unchanged. For employee benefit plans that are subject to ERISA, employers are required to help ensure that the financial resources funding those programs are secure from mismanagement and abuse.

ERISA bonding requirements

The operative principle of ERISA is embodied in Section 412, which generally requires that every fiduciary of an employee benefit plan, as well as every person who handles funds or other property of such a plan, be bonded. This requirement is typically satisfied through an ERISA fidelity bond, which is a type of insurance protecting benefit plans against losses due to acts such as larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts.

A plan official must be bonded for at least 10% of the amount of funds handled the prior year, subject to a minimum bond amount of $1,000 per plan. Typically, the maximum bond amount required under ERISA with respect to a plan fiduciary is $500,000 per plan. For fiduciaries of plans holding employer securities, however, the maximum required bond amount is $1 million.

As an example, consider a company plan with funds totaling $1 million. Under ERISA, each fiduciary or person handling plan funds must be bonded for at least 10% of the $1 million, or $100,000.

ERISA bonds must be obtained from a surety provider or reinsurer named on the Department of the Treasury’s Listing of Approved Sureties. Neither the plan nor any interested party may have any control or significant financial interest, either directly or indirectly, in the surety provider or reinsurer — or in an agent or broker — from which the bond is obtained.

Understanding who must be bonded

A person is deemed to be “handling” funds or other property of a plan whenever the execution of duties or activities could cause a loss of plan funds or property due to fraud or dishonesty, whether acting alone or in collusion with others. The general criteria for handling include:

• Physical contact with cash, checks or similar property
• Power to transfer funds from the plan to oneself or to a third party
• Power to negotiate plan property (e.g., mortgages, title to land and buildings or securities)
• Disbursement authority or authority to direct disbursement
• Authority to sign checks or other negotiable instruments
• Supervisory or decision-making responsibility over activities that require bonding

Fidelity bond or Fiduciary liability?

ERISA fidelity bonds are sometimes confused with fiduciary liability insurance. The fidelity bond required under ERISA specifically insures a plan against losses due to the acts of fraud or dishonesty by persons responsible for managing plan funds or property. In general, fiduciary liability insurance, which does not satisfy ERISA’s bonding requirements, covers legal defense costs, settlements, and judgments against businesses and individuals for alleged mismanagement of employee benefit plans. Such coverage insures against breaches of duty under ERISA, including negligent investment advice, improper plan administration, errors in reporting, and wrongful denials of benefits.

Benefit plans are vulnerable to theft and dishonesty.

Even with stringent oversight and redundant control mechanisms, employee benefit plans can remain vulnerable to various forms of theft and dishonesty.

 In one scenario, the administrator of a defined contribution retirement plan was alleged to have used the plan’s corporate credit card to pay for personal expenses over several years, with the improper charges identified through a review of credit card statements and confirmed by an independent audit.

Another loss scenario involved a union’s former chief financial officer who pleaded guilty to embezzling nearly $1 million from the union’s benefit plans and hiding his thefts by making them appear to be legitimate plan expenses.

Losses not covered by the Fraud or Dishonesty insuring agreement are becoming more common. Recently, benefit plans have faced emerging cyber-enabled theft risks. For example, one retirement plan suffered over $1 million in losses due to a computer fraud incident, where unidentified threat actors used stolen personal information to submit unauthorized withdrawal requests from beneficiaries’ accounts. This example highlights that employee benefit plans may face exposures beyond traditional fraud or dishonesty risks.

These scenarios highlight the importance of strong internal controls and demonstrate the financial protection an ERISA fidelity bond can provide against covered losses, including those that may fall under optional additional insuring agreements such as Computer Fraud, Funds Transfer Fraud, and Fraudulent Impersonation.

Zurich can help satisfy ERISA fidelity bond mandates

As a long-time Department of Treasury approved provider, Zurich can help companies achieve compliance for employee benefit programs.  Depending on the needs of a particular group, Zurich ERISA Fidelity Bond Underwriters will work with brokers to arrive at the most economical and expeditious solutions available.

Learn more about Zurich ERISA Fidelity Bonds.