February 19, 2018
There are many rules and regulations that need to be followed when managing your company’s retirement plan. Under the Employee Retirement Income Security Act (ERISA), plan sponsors are required to follow specific reporting and compliance guidelines imposed by the Internal Revenue Service (IRS) and the Department of Labor (DOL). These rules are designed to protect the interests of participants and establish guidelines for plan operations, fiscal management and reporting. One of the important requirements for most ERISA retirement plans is that plan sponsors must have fidelity bonds to protect and insure the plan in the event of fraud, embezzlement or other illegal activities. To help clients, prospects and others understand ERISA fidelity bonds, Wilson Lewis has provided a summary of key information below.
A fidelity bond is designed to protect the plan against losses resulting from fraud, embezzlement or dishonesty. This may include larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion and misapplication. It’s important to note that this type of bond is not the same as fiduciary liability insurance. Fiduciary liability insurance protects the fiduciaries, and in some cases the plan, against losses caused by a breach of fiduciary responsibility. This type of insurance is not required by ERISA and does not satisfy the requirement for a fidelity bond.
Although most plans are required to have a bond, there are some exceptions. According to ERISA, plans that are completed unfunded (where the benefits are paid out of the employer’s general assets) are exempt from the requirement. Plans that are not subject to Title 1 of ERISA, such as church and governmental plans, are also exempt. Finally, certain regulated financial intuitions such as certain banks, insurance companies and broker/dealers may also be exempt.
Every person who handles funds or other plan property is required to be bonded unless an ERISA exemption exists. It’s against the law to receive, handle, disburse or otherwise exercise control of a plan’s funds or property without being properly bonded.
A person is considered to be “handling” funds or plan property whenever their responsibility could cause a loss due to fraud or dishonesty. Examples of this may include:
This typically means that plan administrators, officers and employees of the plan sponsor who handle plan funds should be bonded. Other individuals, such as service providers who have duties that involve access to plan funds or decision-making authority, are also included in the requirement. Where a plan administrator, service provider or other person who must be bonded is an entity, such as a corporation or association, ERISA’s bonding requirements apply to the natural persons or person who “handles” the funds.
The rules require that each person be bonded in an amount equal to 10% of the funds they handled in the prior year. The bond cannot be less than $1,000 and cannot exceed $500,000, or $1,000,000 for plans that hold employer securities. These amounts apply to each plan named on the bond.
In short, the answer is no. Bonds must be purchased from a provider that is included on the Department of Treasury’s list of approved sureties.
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Ensuring your plan has the correct bonding and insurance is essential to maintaining plan compliance. The regulations governing bonding can be complex, and it’s best to consult with an experienced provider to guide you through the process. If you have questions about ERISA fidelity bonds or need assistance with your benefit plan audit, Wilson Lewis can help. For additional information, please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.