The Employee Retirement Income Security Act or ERISA was established in 1974 to regulate many types of employee benefit plans. Section 412 of ERISA and a few other related regulations require that every fiduciary of an employee benefit plan and all those that handle any funds or property pertaining to an employee benefits plan must be bonded.
These binding requirements are put in place to protect the employee benefit plan from loss as a result of fraud or dishonesty on the part of whoever is handling any plan funds or property. Those who are entrusted to handle funds and property of employee benefit plans are called “plan officials.” The ERISA requires that a fidelity bond is put in effect to cover those responsible for managing a benefits plan and the people who handle the funds and property of a plan. They are formed to protect plans from any possible dishonesty and fraud committed by any individual assigned to work with the plan.
What are Fidelity Bonds?
Fidelity Bonds are a type of insurance policy. It is required that every fiduciary of a plan and every plan official be bonded. The bonds cover the employee benefit plan from loss of assets as a result of fraud and dishonesty on the part of any individual handling the plan. The ERISA bond protects both the participants and beneficiaries from dishonest acts of a trusted person who handles the plan assets.
Coverage Amount Required on Plans
The plan officially needs to be bonded for 10% of the amount they handle at a minimum. The maximum bond amount under ERISA that can be required for one single official is $500,000 per plan, but higher limits can be purchased. Since the beginning of 2008, the maximum required bond amount is $1,000,000 for plan officials of employer securities.
Employee benefits plans that have more than 5% of assets that are non-qualifying held in limited partnerships, artwork, collectibles, mortgages, real estate , and securities of closely held companies that are held outside of a regulated institution such as a bank, insurance company , registered broker, or other authorized trustee organization for individual retirement accounts need to have the plan sponsors: make sure the bond amount is equal to 100% of the value of these assets or have a CPA do a full scope audit annually to physically confirm the existence of the assets.
ERISA Fidelity Bonds are not the Same as Fiduciary Liability Insurance
The bond required under section 412 specifically insures a plan against loss from fraud or dishonesty on the part of plan handlers. Liability insurance generally insures a plan against losses caused by breaches of security in fiduciary responsibilities.