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What is a Fidelity Bond

A fidelity bond is defined as "a debt obligation serving to protect an employer from loss in the event that its employees cause damages through dishonest or negligent action."

Bonding Requirements

Every fiduciary and every person who handles plan funds must be bonded per ERISA Section 412(a), 29 U.S.C. Section 1112(a) - Bonding:

  • The amount of the bond must be fixed at the beginning of the fiscal year of the plan and must be for 10% of the amount of the funds handled, with a minimum coverage of $1,000 and a maximum coverage of $500,000.

  • The bond must protect the plan, either by naming the plan as insured or attaching a rider or separate agreement with the surety company.

  • The bonding requirements are separate from any fiduciary insurance purchased by the plan, employer, or the fiduciaries themselves. There is no requirement for fiduciary insurance, but bonding is required.

New ESOP Bonding Requirements

The Pension Protection Act of 2006 (PPA) (Public Law 109–280—Aug. 17, 2006) increased the maximum coverage bonding requirements for ESOPs and other qualified plans holding employer securities to $1,000,000. This change is effective for plan years beginning on or after January 1, 2008:


(a) IN GENERAL.—Section 412(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1112), as amended by section 611(b), is amended by adding at the end the following: ‘‘In the case of a plan that holds employer securities (within the meaning of section 407(d)(1)), this subsection shall be applied by substituting $1,000,000’ for ‘$500,000’ each place it appears.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to plan years beginning after December 31, 2007.

IRS Examination Guidelines

The following excerpt from the EP Examination Process Guide should give you an idea of what the IRS may be looking for during an audit:

Inadequate or No Fidelity Bond

Plans are required to have a fidelity bond equal to at least 10% of the most current handled assets (DOL Regs. 2580.412-11). The maximum bond required is $500,000. Effective for plan years beginning after December 31, 2007, the fidelity bond maximum is increased from $500,000 to $1 million for plans holding employer securities. No deductible is allowed in the bond and it must be in the name of the plan or trust (not the employer) or the bond must specifically state that the plan or plans (by name) are covered and that the general bond deductible doesn't apply per ERISA requirements.

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