FAQ: ERISA’s Fidelity Bonding Requirement¹

Multnomah Group, Inc.

 

What is a fidelity bond?

A fidelity bond is a form of insurance protection that covers the bondholding employer for losses incurred as a result of fraudulent or dishonest acts by the individuals specified under the bond. Funded retirement and welfare plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) must obtain a fidelity bond covering at least 10% of the plan’s assets, up to a maximum of $500,000 per loss. Additional coverage may be required for plans offering employer stock as an investment option. The cost of the bond may be paid from plan assets.

A fidelity bond is different than fiduciary liability insurance, which is an optional form of coverage. A fidelity bond protects the plan from losses attributable to the fraudulent or dishonest actions of those with access to the plan’s assets, whereas fiduciary liability insurance generally protects the fiduciary from losses due to a breach of fiduciary duty.

Who must be bonded?

ERISA requires that every person who handles plan assets be covered by a fidelity bond. This may include the plan’s fiduciaries, employees, and the natural persons employed by the plan’s servicing vendors that handle plan assets. If the employer’s fidelity bond does not cover the natural persons employed by the plan’s servicing vendors, the employer is advised to ensure that the servicing vendor has obtained a fidelity bond or similar insurance covering the employer’s plan assets.

An individual "handles" plan funds or property if he or she has the authority to transfer funds, negotiate property for value, or disburse or direct disbursement of cash or property.

How does the Department of Labor know if my plan is covered by a fidelity bond?

A plan is required to report on its Form 5500 whether the plan is covered by a fidelity bond, making it easy for the DOL to monitor compliance with the bonding requirements. A plan fiduciary who fails to ensure that those persons who handle plan assets are properly bonded may be personally liable for any losses to the plan attributable to the fraud or dishonesty of others.

Where can I find additional information?

Your consultant at the Multnomah Group can assist you with any fidelity bond questions you may have. You may also refer to the DOL’s Field Assistance Bulletin 2008-04, which contains 42 fidelity bond related questions and answers.

 

¹ This FAQ is not intended to be legal advice and should not be construed as such. Information relayed herein is representative of the Multnomah Group’s current understanding of the law. While the Multnomah Group has made every reasonable effort to ensure that the information contained herein is factual, we do not warrant its accuracy. Additionally, this FAQ does not embody a comprehensive legal study, but rather reflects the information most often sought by our clients. As the information contained herein is general in nature, you are urged to contact your legal adviser with questions related to the specific application of these rules to your plan.