Who is Responsible for Fidelity Bonding?

Darlene Finzer | October 26th, 2012

When it comes to following the ERISA requirement of fidelity bonding, the devil, as they say is in the details.

The Employee Retirement Income Security Act of 1974 (ERISA) requires that fidelity bonding be obtained to cover each person who “handles” plan assets.  The general rule is the bond amount be ten percent (minimum of $1,000) of plan assets as of the beginning of the plan year, not to exceed $500,000, or one million dollars if the plan holds employer securities.

While this requirement seems relatively straightforward, we find plan sponsors are sometimes unclear about their fidelity bond responsibilities when we are performing  benefit plan audits.   Following are some of the commonly asked questions.

Who “Handles” Plan Assets?

First, it is important to understand what is meant by “handling” of plan assets.  While ERISA’s bonding definition includes physical contact or the power to exercise physical contact or control, it also means much more.  “Handling” of plan assets is considered to occur when there is risk that plan assets could be lost in the event of fraud or dishonesty.  Other than physical contact, common examples would include the power to transfer funds or other plan property, disbursement authority or authority to sign checks.

Individuals with such ability may include plan fiduciaries, such as the plan administrator, officers or employees of the plan sponsor and plan service providers.  In the event the handler of plan assets is an entity, such as a corporation or association, ERISA’s bonding requirements apply to the “natural persons” of the entity who are involved in the function.

Is Anyone Exempt from Fidelity Bonds?

ERISA provides exemption from fidelity bond coverage for certain banks, insurance companies and registered brokers and dealers.  The criteria for exemption are based in part on these entities being subject to certain supervision or examination procedures.  If a service provider does not meet the exemption criteria, then the bonding must cover that entity also.  This does not mean that a plan needs to obtain the bonding that covers that service provider, but rather ensure that coverage exists.

How Do Fidelity Bond vs. Fiduciary Liability Insurance Differ?

A common misconception is that a fidelity bond and fiduciary liability insurance are one and the same.  The fidelity bond specifically insures a plan against losses due to fraud or dishonesty.  Unlike regular insurance, a deductible or other similar feature that transfers risk to the plan is not allowed for the minimum required amount of coverage.

Fiduciary liability insurance generally insures the plan against losses caused by breach of fiduciary responsibility.  A claim made for a wrongful act, such as a violation of the responsibilities, obligations or duties imposed on fiduciaries by ERISA, as well as acts, errors or omissions in the performance of duties related to the plan are items that are potentially covered under fiduciary liability insurance.  Fiduciary liability insurance is not required by ERISA, whereas a fidelity bond is.

How Do I Purchase A Fidelity Bond?

Fidelity bonds are readily available and are fairly easy to purchase.  The best starting point to inquire of fidelity bond coverage is your business insurance agent.  An ERISA bond must be placed with a surety or reinsurer that is named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570.

Should the Plan Sponsor or the Plan Be Named as the Insured?

A common error is naming the plan sponsor as the insured versus the actual plan(s.)  It is common for the ERISA bond coverage to be included with the employer bond or insurance policy, such as a commercial crime policy.  This is allowed as long as all of the ERISA bond requirements are met.  A plan that is insured on an employer’s (plan sponsor’s) commercial crime policy may contain an ERISA rider to ensure that the plan’s bonding coverage complies with the regulations.

ERISA Compliance Help

ERISA requirements, including fidelity bonding, can be confusing.  If you’re a plan fiduciary, you’re often met with difficult-to-understand rules that must be followed.  Unfortunately, while the rules are forthcoming, explanations about how to implement them aren’t.  As a plan fiduciary, you’re responsible for meeting ERISA requirements, but you don’t have to do all the work yourself.  Contact Rea & Associations.  With benefit plan administration and benefit plan audit services, our Ohio Retirement Plan Services team can help you do your fiduciary duty.

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