ERISA requires that every fiduciary of an employee benefit plan, or other person who handles any property of that plan, be bonded. Note that this requirement is not just for retirement plans, but also for health and welfare plans. Plans that are completely unfunded or not subject to ERISA are exempt from this requirement. A fidelity bond is purchased from a DOL-approved insurer (see the DOL Listing of Approved Sureties, Department Circular 570), and may cover multiple employee benefit plans, not just a single plan.
What is a fidelity bond for?
A fidelity bond protects the plan against fraud or dishonesty such as theft or embezzlement of plan assets. The bond must name the plan as an insured party. Keep in mind that an ERISA-required fidelity bond is not the same thing as fiduciary insurance, which generally protects the plan against losses caused by breaches of fiduciary responsibilities. Unlike a fidelity bond, fiduciary insurance is not required, but may be helpful coverage to cover costs arising from compliance failures or other loss.
How much coverage is required?
The bond must be in an amount equal to at least 10% of the plan’s assets at the beginning of the plan year, with a minimum amount of $1,000 and a maximum amount of $500,000 ($1,000,000 for plans with employer securities) per plan. This means that the plan administrator should keep an eye on the amount of assets in the plan, and adjust the ERISA bond accordingly. Some fidelity bond contracts provide for an automatic adjustment of the bond amount as plan assets increase, but not all contracts have this provision, so it is important to know whether this is a provision in the contract or whether it will need to be monitored and adjusted each year.
What are the consequences if there is no fidelity bond or the fidelity bond is not in a sufficient amount?
The most obvious consequence of having no bond, or an insufficient bond, is the uncovered risk of loss to the plan. But also note that the Form 5500 has a specific question as to whether the plan has a fidelity bond and what the amount of coverage is. As with all information on the Form 5500, that question must be answered truthfully, under penalty of perjury. If the Form 5500 indicates no bond, or a bond of insufficient amount, this can, and, in our experience, likely does trigger a DOL audit. And you can be sure that a DOL audit will not be just about the fidelity bond…
What should a plan administrator do if there is no fidelity bond, or if the fidelity bond is not sufficient?
The good news is that there is a quick, simple fix: get a fidelity bond, or increase the amount of an existing fidelity bond, right away. Don’t wait for an audit. Fidelity bonds are generally not expensive and getting a sufficient bond in place can avoid a lot of headaches. Your business insurance broker should be able to assist you in getting a bond.
For more detailed information on this requirement, see FAB 2008-04 or contact a KLB Benefits Law Group attorney.