ERISA Fidelity Bonds and Fiduciary Liability Insurance
It’s about to be the time of year when the Form 5500 tax filing for corporate retirement plans is being prepared.
In conjunction with this, since the Form 5500 itemizes it, a question we often get is, “What is an ERISA fidelity bond?” (The implied follow up question is, “And why does it matter to me?”)
According to DOL's website, an ERISA fidelity bond is:
…a type of insurance that protects the plan against losses caused by acts of fraud or dishonesty. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts. Deductibles or other similar features are prohibited for coverage of losses within the maximum amount for which the person causing the loss is required to be bonded. In addition, it is important to make sure that the plan is named (or otherwise specifically identified) as an insured party on the bond so that the plan can recover losses covered by the bond.
In short, it’s needed to protect the assets in the plan in case a plan sponsor or other fiduciary steals the money. Additionally, Every person who “handles funds or other property” of an employee benefit plan is required to be bonded unless covered under an exemption under ERISA. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded.
The required amount that is needed is an amount equal to at least 10% of the amount of funds the fiduciary handled in the preceding year. The bond amount cannot, however, be less than $1,000, and DOL cannot require a plan official to be bonded for more than $500,000, or $1,000,000 for plans that hold employer securities.
We turned to our property and casualty and business insurance friend, Scott Jefferson at Clark and Sampson, Inc. in Alexandria, VA for more info.
“As long as your plan doesn’t include employer stock or non-qualifying assets, the ERISA bond must have a minimum limit equal to at least 10% of the plan’s assets, subject to a $1k minimum and a $500k maximum. Remember this is simply a legally required minimum limit. Higher limits of coverage are encouraged. The good news is that this coverage is inexpensive and easy to obtain when you’re partnered with the right professionals.”
Now, it’s important to note that this is different than Fiduciary Liability Insurance. The fidelity bond insures the plan against loss due to fraud or dishonesty (e.g., theft) by persons who handle plan funds or property.
Fiduciary liability insurance insures fiduciaries, and in some cases the plan, against losses caused by breaches of fiduciary responsibilities. This is an optional insurance, often added as a rider to a Directors and Officers liability insurance policy, and it is not a bonding required by ERISA. Fiduciary liability insurance is designed to protect the business from claims of mismanagement and the legal liability arising out of their role as fiduciaries. A fiduciary liability policy covers associated legal costs to defend against claims of errors and a breach of fiduciary duty.
Here are some examples of what fiduciary liability insurance would cover:
Errors in administering plans, such as improper enrollment or terminations, resulting in lost or incorrect benefits;
Improper advice or counsel
Wrongful denial or improper change in benefits;
Imprudent selection of and/or monitoring or third-party service providers.
Failure to administer the plan according to plan documents
Penalties and fees levied by the DOL and IRS under a voluntary settlement program
Your fiduciary liability policy will usually cover all your legal defense costs, all settlements negotiated, damages awarded by the court when there’s a finding of wrongdoing, and investigations into the alleged wrongdoing. So, while not required, depending on your plan size and complexity, something to consider!
Your property and casualty / business insurance broker will be able to assist you with both a fidelity bond as well as fiduciary liability insurance.