What is an ERISA Bond?
Fidelity Bonds Protect Retirement Plans from Losses Due to Malfeasance
Key Takeaways:
- ERISA requires plan sponsors to secure a fidelity bond to protect workplace retirement plans from losses due to fraud or dishonesty.
- Fidelity bonds must cover at least 10% of plan assets, with maximum coverage of $500,000 for most plans and $1 million for employee-owned companies (ESOPs).
- Failure to maintain adequate fidelity bond coverage can lead to DOL audits, personal liability or lawsuits, even though there are no direct penalties for noncompliance.
While the prospect of malfeasance in the management of a workplace retirement plan is something no one wants to think about, it’s important for plan sponsors and participants alike to know the federal law requires that plan assets be protected from such a scenario.
A provision under the Employee Retirement Income Security Act (ERISA) requires that plan sponsors obtain a fidelity bond to protect plan assets against losses caused by acts of fraud or dishonesty. Such acts may include theft, embezzlement, forgery, misappropriation and other acts.
Generally, all workplace retirement plans are subject to the fidelity bond requirement regardless of the size of their assets, with the exception of the following exempt plans:
- Most “church plans” – those held by religious organizations
- Certain banks and trust companies
- Certain brokerage and broker-dealer firms
- Owner-only 401(k) plans
How to Buy an ERISA Bond
When you implement a 401(k) plan for your business, your plan advisor should explain the fidelity bond requirement and guide you to an insurer that provides the bonds, or to the U.S. Department of the Treasury website, which lists more than 250 insurers nationwide that provide them.
A plan sponsor must carry bond coverage totaling at least 10% of the plan’s assets or a minimum of $1,000 coverage. The maximum required coverage is $500,000, except in the case of employee-owned companies (ESOPs), which are subject to a maximum coverage requirement of $1 million.
Alternatively, plans that invest in non-qualified assets such as real estate, limited partnerships, private stock or other non-publicly traded securities must carry a bond worth the greater of 10% of plan assets or 100% of the value of the non-qualifying assets.
While the cost of buying a fidelity bond fluctuates depending on the level of coverage required, premiums are typically below $1,000.
ERISA Bond Requirements
While the legal requirement for fidelity bonds is clearly part of the ERISA law, there are no penalties if a plan’s coverage falls below the required benchmarks. However, the amount of bond coverage must be reported on the plan’s annual Form 5500 filing with the U.S. Department of Labor, so deficiencies will likely raise red flags and could trigger a DOL audit.
Nonetheless, it is surprisingly common for plan sponsors to have insufficient coverage or no bond at all.
Through examinations of Forms 5500, the IRS has determined that not having adequate ERISA fidelity bond coverage is one of the two most common compliance issues among plans.
It is not unusual to find Forms 5500 (which are public record) with no fidelity bond coverage listed.
This level of noncompliance is more likely due to plan sponsors not being aware of the fidelity bond requirement than deliberate efforts to evade the law. The fact that there are no penalties for noncompliance may contribute to the level of noncompliance.
However, plan sponsors must bear in mind that failure to carry a fidelity bond can expose a plan to enforcement action by DOL – most commonly a plan audit, but personal liability and lawsuits are also possible.
ERISA Bond Liability
A separate type of coverage for ERISA plans covers fiduciary liability, which protects against losses that occur because of errors or breach of fiduciary duty. It’s a subtle difference but important to understand:
- A fidelity bond protects against loss from fraud or dishonesty by an individual or individuals involved in managing the plan.
- Fiduciary liability coverage protects against loss that stems from the way the plan is run. For example, fiduciary liability coverage may cover losses in the event that employees file a lawsuit against the plan for charging exceedingly high expenses.
Another key difference between the two types of coverage is that fiduciary liability coverage is not required by law, while the fidelity bond is required by the ERISA law.
Questions?
If you do not have a fidelity bond to protect your plan, or you think your bond may no longer be sufficient as the plan assets have grown, contact an Adams Brown Wealth Consultant.
AdamsBrown Wealth Consultants, LLC and Private Client Services do not offer tax or legal advice. Always consult a professional regarding your specific situation.