ERISA Bonds Guide

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that aims to prevent mismanagement and abuse of funds in employee benefit plans and private pensions. The U.S. Department of Labor (DOL) sets the rules and standards for this act.

This includes responsibilities for those managing plan assets, a requirement for plans to have a grievance and appeals process, and the right for participants to sue for benefits due to breaches of fiduciary duty.

Lastly, they require any person or business that handles these funds (fiduciaries) to be bonded with a fidelity bond, known as an ERISA bond.
 

ERISA bonds are a type of fidelity bond that protect participants and beneficiaries of employee benefit plans. It helps guard against acts of fraud, dishonesty, and general mismanagement of plan funds by the fiduciary. 

This includes—but isn't limited to—theft, embezzlement, larceny, forgery, misappropriation, wrongful abstraction, wrongful conversion, and willful misapplication.

These bonds are sometimes referred to as ERISA bond insurance since it is in fact a type of insurance.

ERISA bonding requirements outline that anyone who handles funds or other property of an employee benefit plan needs an ERISA bond. This commonly includes employers, as well as plan administrators, plan officials, service providers, joint boards, and employee organizations. 

However, some exemptions apply for regulated financial institutions—select banks, financial institutions, and registered brokers and dealers. Members of these institutions don't require bonding to handle a benefit plan's funds or properties.

What qualifies as "handling a benefits plan"? Controlling, dispersing, exercising custody over, or otherwise managing plan assets. According to the U.S. Department of Labor, this specifically includes:

• Physical contact with cash, checks or similar property
• Power to transfer funds from the plan to oneself or to a third party
• Power to negotiate plan property (e.g., mortgages, title to land and buildings or securities)
• Disbursement authority or authority to direct disbursement
• Authority to sign checks or other negotiable instruments
• Supervisory or decision-making responsibility over activities that require bonding

Do plan fiduciaries that don't handle funds need to be bonded? No. Bonding is only required if fiduciary responsibilities include handling the plan's funds, real estate, or other assets (as outlined above). It is imperative that plan sponsors and fiduciaries understand who needs to be bonded to obtain the correct bond coverage

As outlined in the Employee Retirement Income Security Act, ERISA bonds are required by law for employers with employee benefit plans to protect the plan participants (beneficiaries). 

Every person that handles funds must be bonded at least 10% of the amount of funds they handled in the preceding year. The bond amount cannot be less than $1,000, or more than $500,000. The maximum amount increases to $1,000,000 for plans that hold employer securities.

This applies to:

• Defined-benefit plans and retirement plans such as 401(k) plans, 403(b) plans, employee stock ownership plans (ESOPs), and profit-sharing plans.
• Select private-sector health plans, including health maintenance organization (HMO) plans, flexible spending accounts (FSAs), disability insurance, and life insurance.

This bonding requirement does not apply to:

• Unfunded plans where benefits are directly paid from an employer's or union's assets.
• Church plans, government plans, and any other plans exempt from Title I of ERISA.

While other types of coverage protect the people and businesses in charge of these funds, an ERISA bond covers the plan itself. It is a surety bond put in place to protect plan beneficiaries. 

Is an ERISA Fidelity Bond the Same as Fiduciary Liability Insurance?

No. ERISA fidelity bonds and fiduciary liability insurance are not the same. Much confusion between the two comes from people commonly misusing the terms interchangeably. 

An ERISA fidelity bond protects the plan itself against losses caused by persons handling plan funds. For example, misusing or mishandling funds. If this happens, the fidelity bond pays out to replace lost funds. The person handling the fund is then responsible for paying back the bond. There are no deductibles with ERISA bonds, so the person bonded is required to pay back the full amount. 

In contrast, fiduciary liability insurance protects the people/business in charge of handling the plan's funds. It insures against claims of mismanagement and legal liability associated with the task. For example, if fraud or dishonesty occurs that is not the fault of the business handling the fund. In this case, the insurance policy pays out and the person handling the funds is not legally or financially responsible—unlike an ERISA fidelity bond. 
 

The first step for applying for an ERISA bond is to find a qualifying insurance company or bonding company, such as JW Surety. This type of bond must be obtained from a surety or reinsurer from the Department of the Treasury's Listing of Approved Sureties, Department Circular 570. Note that this list is updated annually. 

From there, you will need to fill out an ERISA bond application. You will need basic information such as:

• Legal name of plan 
• Number of trustees
• Any prior loss history
• Address
• Contact information
   

Bonds under $500,000 are typically issued the same day that they are purchased—showing up in your email inbox within a few hours. Note that bonds with a coverage amount above $500,000 are subject to an underwriting process, so will take slightly longer. 

An ERISA bond costs a small percentage of the total bond amount. 

Costs are determined by your class of business, the dollar amount of coverage (which must be at least 10% of the amount of employee benefit plan funds held), and the number of employees that need coverage. Without having your specific information and knowing your exact bonding needs it's impossible to provide an idea of pricing. 

You can get a precise quote by filling out our ERISA bond application.

The ERISA bond limit is $500,000. This increases to $1,000,000 for plans that hold employer securities.