Required ERISA Fidelity Bond

Understanding the ERISA Fidelity Bond

The information detailed below is provided to help you, the Plan Sponsor, better understand your obligations regarding the safeguarding of retirement plan assets. It is our desire to assist you as you guide and direct your retirement plan to meet the required guidelines.

The Employee Retirement Income Security Act of 1974 (ERISA) requires that every person who handles retirement plan assets be covered by a fidelity bond. Plan Sponsors and Plan Administrators of 401(k) and 403(b) retirement plans that are subject to the provisions of ERISA need to be aware of this statutory bonding requirement and need to assure that their retirement plan is covered by a fidelity bond. Provided below are the basics of ERISA Fidelity Bonds. All retirement plans that are subject to ERISA are required to carry an ERISA Fidelity Bond.

If you are not sure if your retirement plan is subject to ERISA, check your Plan Document. As a general rule:

1. ERISA Plans are 403(b)(7) Non-Church Plans with employer contributions. All 401(k) plans are subject to ERISA. These plans are required to carry an ERISA Fidelity Bond.
2. Non-ERISA Plans are 403(b)(9) Church Plans that have not affirmatively elected to be covered by ERISA. (Few church plans self-elect to be covered by ERISA.) Non-ERISA Plans also include 403(b)(7) Non-Church Plans that do not include employer contributions and have “limited employer involvement” as defined by the Internal Revenue Code. Non-ERISA plans are not required to carry an ERISA Fidelity Bond.

ERISA Plans

ERISA Section 412 requires that every fiduciary of a retirement plan who “handles” the funds of the plan be bonded. ERISA’s bonding requirements are intended to protect the retirement plan against the risk of loss due to fraud or dishonesty on the part of persons who “handle” the plan funds or other property.

A fiduciary must be bonded for at least 10% of the plan’s assets at the beginning of the plan year. For example, if the plan’s balance on the first day of the plan year is $1,000,000, the bonding requirement for that plan year is $100,000. Bonding requirements change from one plan year to the next based on the plan year’s opening balance. The maximum bond amount that can be required under ERISA for any one fiduciary is $500,000 per plan. This amount increases to $1,000,000 if the plan includes the employer’s own securities.

Not all fiduciaries need to be bonded. Only those who “handle” funds or other property of the retirement plan are required to be bonded. For example, a payroll clerk who processes the retirement plan’s contributions would need to be bonded.

The Fidelity Bond must protect the plan against loss by acts of fraud or dishonesty on the part of persons required to be bonded. In the bond, the plan is the named insured. The persons “covered” by the bond are the fiduciaries. As the insured party, the plan can make a claim on the bond if an individual who handles the plan’s assets causes a loss to the plan due to fraud or dishonesty.

The ERISA Fidelity Bond must be obtained by the Plan Sponsor. The Service Provider (i.e. Third Party Administrator or Recordkeeper) cannot obtain the bond on the Sponsor’s behalf. Service Providers have like bonding and/or insurance requirements.

Both the existence of and the amount of the ERISA Fidelity Bond in place during the plan year are required to be reported on the plan’s annual Form 5500 filing. In the event of an IRS or Department of Labor audit of the plan, a copy of the bond will likely need to be provided.

Most property and casualty insurance carriers are able to provide the Fidelity Bonds. Bonds must be placed with an insurance provider that is named on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570, which can be obtained at fms.treas.gov/c570/c570.html.

Non-ERISA Plans

Non-ERISA retirement plans are not subject to this requirement. No Fidelity Bond is required. The Plan Sponsor may elect to have a bond in place to safeguard the plan’s assets, however, most Non-ERISA Plan Sponsors do not.

The Department of Labor has issued detailed information on the ERISA Fidelity Bond Requirements in their Field Assistance Bulletin 2008-04. The bulletin is available in Question and Answer format and can be accessed at http://www.dol.gov/ebsa/regs/fab2008-4.html.

For questions regarding Fidelity Bonds, please contact our Third Party Administration Department at (888) 879-1376, option 4 or by email.