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Fidelity bonding requirements were established with The Employee Retirement Income Security Act of 1974 (ERISA) “to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who “handle” plan funds or other property.”  The U.S. Department of Labor (DOL) released Field Assistance Bulletin No. 2008-04 on November 25, 2008 to provide guidance on the plan bonding requirements.  Since ESOPs are subject to ERISA, they must comply with the fidelity bonding requirements as well.   

To comply with ERISA, plan sponsors must understand the bonding requirements and ensure the bond they purchase satisfies them.  There are a couple key items regarding fidelity bonds that should be understood before purchasing the bond:

  • The bond must provide coverage in an amount equal to 10% of the assets handled in the trust in the previous plan year.  The bond amount cannot be less than $1,000 and does not need to be more than $500,000 (or $1 million for plans that hold employer securities).

  • The bond must list the plan as the insured entity, not the corporation sponsoring the plan.

  • Bonds 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. Under certain conditions, bonds may also be placed with the Underwriters at Lloyds of London.

  • The bond can insure more than one plan as long as the bond coverage is equal to an amount would have been required for each plan under separate bonds.

  • ERISA requires the bond insure the plan from the first dollar of loss up to the maximum amount for which the person causing the loss is required to be bonded.  As a result, the bond cannot have a deductible on the required coverage amount.

  • A plan can be insured on its own bond or can be added as a named insured to an existing employer bond or insurance policy if the bond or policy satisfies ERISA’s requirements.

  • An ERISA fidelity bond is not the same thing as fiduciary liability insurance.  Fidelity bonds insure a plan against losses due to fraud or dishonesty whereas fiduciary liability insurance insures the plan against losses caused by breaches of fiduciary responsibilities.  

While there are no specific monetary penalties for having a plan inadequately bonded, plan fiduciaries can be held personally liable for any losses to the plan that would have been covered by a fidelity bond.  The DOL requires that the plan sponsor indicate the fidelity bond coverage on the IRS Form 5500 filed for the plan each year, which could trigger an audit of your pension plan if adequate bond coverage is not being maintained.

 

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