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ERISA Tips: Bonding Requirements for ERISA Plans

If you are working with ERISA plans, you will need to respond to questions from your employer clients about meeting the mandatory bonding requirements which must cover any employee handling assets of the plan, Elllie Lowder writes. In “What Plan Sponsors Need to Know About Bonding Requirements for ERISA Plans,” she cautions that once you tell your employer client that ERISA requires that such employees be covered under a bond, the employer will ask a number of questions, which may include the following.

Where can I get the bond? The employer must obtain Circular 570: Listing of Approved Sureties from the Department of Treasury. The bond must be purchased from one of the listed entities and must cover all of the officials of the plan (the employer).

What is the amount necessary to satisfy the ERISA requirement? The bond must cover at least 10% of the assets handled by the specific employees (or outside service providers if the employer intends that the bond cover such providers), but cannot be less than $1,000. The maximum bond amount required is $500,000 (or $1 million if the plan holds employer securities). The amount of the bond must be based upon the highest amount of funds handled by the specific plan official for the previous year. If there is no previous-year data, the employer must estimate the amount of the bond using procedures contained in DOL Reg. 2580.412-1. Employers can choose to purchase bonds for more than those amounts.

What is the term of the bond? Generally, the term is one year; however, bonds can be purchased for multiple year periods. If the bond covers multiple years, the fiduciary must check the amount of the bond each year to ascertain whether coverage needs to be increased due to growing assets.

The bond must cover losses through:

  • larceny and theft 
  • embezzlement 
  • forgery 
  • misappropriation 
  • wrongful conversion 
  • willful misappropriation

Note that plan fiduciaries are not permitted to have any financial interest in the entity from which the bond is purchased.

Fiduciary Liability Insurance

It is not mandatory that fiduciaries purchase liability insurance; however, the plan sponsor will want to consider protecting against a fiduciary breach that causes losses to plan assets. The plan can purchase the coverage with premium paid from plan assets. The liability insurance does not protect against theft or fraud since the fidelity bond does that — it is simply additional coverage to protect against fiduciary breach. It is likely that the liability insurance can be purchased from the entity providing the mandatory fidelity bond.

A certificate of coverage for both types of insurance should be part of the plan’s permanent file, and the plan fiduciaries should ensure that such coverage remains in force via timely renewal.
Financial advisors can respond to the questions from their employer clients, and can also provide a copy of the Circular 570 previously mentioned when the questions are posed.

Editor’s Note: ERISA Tips is a feature provided with you in mind — to make the newsletter more useful to you! If you have any content for ERISA Tips or the 403(b) Advisor that you would like to contribute or suggest, please contact John Iekel, editor of the 403(b) Advisor, at [email protected].