Q-2: Is an ERISA fidelity bond the same thing as fiduciary liability insurance?No. The fidelity bond required under section 412 of ERISA specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) on the part of persons (including, but not limited to, plan fiduciaries) who handle plan funds or other property. Fiduciary liability insurance, on the other hand, generally insures the plan against losses caused by breaches of fiduciary responsibilities.
Fiduciary liability insurance is neither required by nor subject to section 412 of ERISA. Whether a plan purchases fiduciary liability insurance is subject, generally, to ERISA’s fiduciary standards, including section 410 of ERISA. ERISA section 410 allows, but does not require, a plan to purchase insurance for its fiduciaries or for itself covering losses occurring from acts or omissions of a fiduciary. Any such policy paid for by the plan must, however, permit recourse by the insurer against the fiduciary in the case of a fiduciary breach. In some cases, the fiduciary may purchase, at his or her expense, protection against the insurer’s recourse rights.
Few ERISA requirements are more mysterious to the compliant-oriented third party administrator than the bonding requirement. The market for the required bond is specialized and the services of a knowledgable insurance professional are very helpful here.
(a) Requisite bonding of plan officials
Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan (hereafter in this section referred to as “plan official”) shall be bonded as provided in this section . . .
The amount of such bond shall be fixed at the beginning of each fiscal year of the plan. Such amount shall be not less than 10 per centum of the amount of funds handled. In no case shall such bond be less than $1,000 nor more than $500,000, except that the Secretary, after due notice and opportunity for hearing to all interested parties, and after consideration of the record, may prescribe an amount in excess of $500,000, subject to the 10 per centum limitation of the preceding sentence.
DOL Audit Checklist – From the EBSA Enforcement Manual, items on the bond requirement checklist include:
- Does the bond provide for payment to the Plan in the event of loss?
The Plan must be named as an “insured” and the payover rider must be attached unless the Plan is the sole insured under the bond. The definition of employee in the bond must cover all persons who “handle” funds.
- How many Plans are covered by the bond?
- How many non-plan entities are covered by the bond?
- Is the bonding company listed in Treasury Circular 570?
- Is the Plan named as the insured?
- If more than one Plan or Plan(s) and the Plan Sponsor are covered, is a pay-over rider attached?
- If the bond contains a deductible, is an elimination of deductible rider attached with respect to the Plan?
- Does the bond protect against fraud or dishonesty?
- Does the bond cover all persons who “handle” funds?
Without a “Definition of Employee” rider, a bond generally excludes “officers, Directors, and Trustees” from coverage.
- Does the bond have a one-year discovery period?
- Does the Plan have fiduciary liability insurance?
The foregoing questions presuppose a proper determination of which entities and persons “handle” plan assets. Bonding is required for each individual who has this authority.
If a corporate trustee holds the Plans assets, but the Plan trustees can direct the payment of benefits by the corporate trustee or direct the investments to be made by the corporate trustee, the Plan trustees “handle” funds and bonding is required.