ERISA Bonds are needed to cover the person administrating a business's plan. Fidelity bonds aren't required though, but they offer protection against employee’s misbehavior.
The fundamental of ERISA Bonds
- ERISA stands for the Employee Retirement Income Security Act of 1974, which was implemented to safeguard employee retirement plans.
- It ensures a company must have a bond amounting to no less than 10 percent of the value of the plan, up to a maximum bond amount of $500,000 on every employee who handles a retirement plan.
- This bond secures from acts of dishonesty or fraud by those who administer the plan.
Addition of Fidelity Liability Insurance to ERISA Bonds
- A fidelity bond also protects a company from fraudulent activities of its employees, but is not specifically related to the company's retirement plan.
- This insurance policy is purchased by a company to protect against internal losses such as theft of cash or other valuable assets.
- This bond can defend against losses of up to $25,000, and gives the company assurance from the employee's first day on the job that their risk of hiring an employee is minimized.
- These bonds usually expire after six months, but they can be renewed.
- Companies often purchase fidelity insurance policy in addition to an ERISA bond, to secure the assets of the company's retirement plan against an employee's actions that inadvertently may cause damage to the plan's assets. This is then called as ERISA Fidelity Bond.
What do ERISA Bonds require?
ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan is required to be bonded. The purpose is to protect employee benefit plans from risk of loss due to fraud or acts of dishonesty on the part of persons who “handle” plan funds or other property.
These individuals are referred to as “plan officials” and include anyone who has:
- Physical contact with cash, cheque or other Plan property.
- Power to transfer or negotiate Plan property for a price value.
- Power to disburse funds, sign cheque or produce negotiable instruments from the Plan assets.
- Decision making authority over any individual mentioned above.
Repercussions of Not Maintaining the ERISA Fidelity Bond
There can be thoughtful consequences for not purchasing and maintaining a sufficient ERISA bonds.
- It can be a red flag to the DOL that they require to take a closer look at the plan.
- In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application.
- This happens because non-qualifying assets carry a higher level of risk factor.
- If the non-qualified assets are not listed, the underwriter would have cause to deny insurance coverage if there was a loss owing to misuse by a fiduciary.
- Under these circumstances, the loss may be denied and the trustees could be liable for the apparent losses to the plan.
