ERISA Bond Frequently Asked Questions (FAQs)

Understanding the intricacies of employee benefits plans can be challenging, particularly when ensuring the right protections are in place for plan participants. 

One vital element is the ERISA bond, a government-mandated form of insurance that safeguards plan participants from losses that could arise from dishonest or fraudulent acts committed by those who control the plan.

This article answers some frequently asked questions (FAQs) about ERISA bonds. If you need help determining how ERISA and related laws might apply to your situation, consider speaking with an employment law attorney. 

What Is an ERISA bond?

An ERISA bond is a type of insurance that protects employee benefit plans against losses resulting from dishonesty or fraud by the person handling plan funds and assets. The ERISA bond, also called a fidelity bond, stems from the Employee Retirement Income Security Act of 1974 (ERISA). This federal law requires ERISA bonds from all individuals and entities handling plan funds or assets.

What Are the Benefits of an ERISA Bond?

ERISA aims to protect employees enrolled in private industry plans and set responsibilities for those managing these plans. ERISA bonds, or ERISA fidelity bonds, are a kind of insurance developed to protect employee benefit plan participants against losses resulting from:

• Embezzlement
• Forgery
• Larceny
• Theft
• Misappropriation
• Wrongful abstraction
• Wrongful conversion
• Willful misapplication of funds
• Other acts

Who Are the Parties in an ERISA Fidelity Bond?

In a standard ERISA fidelity bond, three key parties are often involved: 

The insured is the employee benefit plan itself. 

The principal is the plan fiduciary or the person who handles general assets and plan funds. They are the people “covered" by the bond and are the entities that the bond insures against dishonesty or fraud. 

The surety company issues the bond. They guarantee compensation for losses up to the maximum of the bond's coverage.

Does the Law Require ERISA Bonds?

Yes. Title I of the Employee Retirement Income Security Act of 1974 (ERISA) requires all individuals who handle funds or other property assets of an employee benefit plan to have ERISA bonds. 

This requirement extends to those who have physical contact with securities or currency (such as checks, cash, or banknotes) and those who have the authority to transfer, manage, or negotiate plan assets. 

For instance, the following roles are required to be bonded:

• Plan administrators
• Plan sponsors
• Trustees
• Service providers
• Accounting firms 
• Third-party administrators
• Investment advisors

However, the following plans are exempt from the ERISA bonding requirement:

• Government plans
• Church plans
• Workers' compensation, disability, and unemployment plans
• Unfunded employee benefit plans

Certain entities regulated by the Department of Labor are also exempt from the bonding requirement, even if they also manage plan assets and funds. These include insurance companies, banks, and registered brokers.

Do Service Providers to the Plan Need To Be Bonded?​

As mentioned above, only those who handle plan funds or assets must secure bonding. This rule also applies to service providers of an ERISA plan, including third-party administrators or investment advisors. If you handle or manage plan funds or assets as a service provider, you likewise need to secure a bond.

However, not all service providers need to be bonded. The bond requirement depends on your role and level of access to the plan funds and assets. Bonding is crucial for those who manage the fund or have certain authority over it. It is likewise enforced to secure the plan against financial misconduct.

Is an ERISA Fidelity Bond the Same as Fiduciary Liability Insurance?​

No. ERISA fidelity bond and fiduciary liability insurance are not the same. 

An ERISA fidelity bond protects plans against losses caused by dishonesty or fraud by those managing plan funds or property.

Fiduciary liability insurance protects fiduciaries and the plan itself against losses resulting from a breach of fiduciary duties. In addition, fiduciary liability insurance is not required by law nor subject to ERISA.

What Are the Bonding Requirements of Section 412 of ERISA?​

ERISA bonds have several requirements as outlined by the statutory provisions of  29 U.S.C. § 1112 (also called Section 412):

• The bond must have a minimum payout of at least 10% of the plan assets. The minimum payout is $1,000, and the maximum is $500,000 or $1,000,000 for bonds that hold employer securities.
• The bond cannot have a deductible.
• The bond must identify the plan, such as the name of the retirement plan or trust, so that representatives can make a claim under it.
• The bond amount must be fixed annually for each fiduciary, depending on the plan asset total.
• The plan must be placed with a U.S. Department of the Treasury-approved surety or reinsurer. The plan fiduciaries have no control or interest in the surety or reinsurer.
• The bond must cover ERISA regulation criminal losses.

The U.S. Department of Labor (DOL) provides additional information about bonding requirements. 

Who Is Responsible for Ensuring That the ERISA Plan Has Enough Bonded Coverage?​

Several people are concurrently responsible for ensuring that the plan has enough bonding coverage. Every person who manages plan funds or other assets should meet the bonding requirements personally. In addition, anyone who allows another to manage these plan funds and assets should also ensure that the person managing them secures proper bonding.

What Happens if There's No ERISA Bond Coverage for the Plan?​

If a loss occurs due to a fiduciary's criminal act, such as fraud or theft, the person with fiduciary responsibilities will have to pay out-of-pocket for the losses. In other words, they will become personally liable for the losses. 

There's Already Insurance on My Pension Plan. Does That Mean an ERISA Bond Is Unnecessary?​

No. Pension plan insurance covers plan participants if their company becomes insolvent. Insolvency insurance will pay the plan participants up to a defined maximum. Although ERISA does not require a pension plan, it does require fiduciaries to meet specific requirements and disclose certain information to eligible plan participants.

What Are the ERISA Bond Coverage Limits?​

The coverage amount of an ERISA bond should be at least 10% of the plan assets managed by the fiduciary. In general, the minimum coverage amount required is $1,000, and the coverage limit is $500,000. 

For plans that also have employer-issued securities, such as company stock, the coverage limit increases to $1 million.

Is an ERISA Bond Expensive?​

No. The premiums for ERISA bonds are relatively low-cost. The price depends on the total plan assets, but most insurance companies charge between $100 and $300 per year for ERISA bond coverage.

Seek Legal Advice from an Employment Attorney

If you are trying to understand the complexities of ERISA bonds and employee benefit plans, seeking the legal advice of an employment attorney is often helpful. They can clarify the questions that you have related to your defined benefit plan and ERISA bonds. 

An employment attorney can also help you assess your current plan's coverage and guide you through the bonding process. Do not hesitate to contact an employment attorney near you to secure your interest and the interests of your plan participants.