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Frequently Asked Questions
common answers regarding ERISA bonds
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- How do I know if I need an ERISA bond?
- Who needs to be covered under an ERISA bond?
- How much of an ERISA bond do I need?
- What does First Dollar of Loss Mean?
- What does Per Occurence Mean?
- How is an ERISA bond different than an insurance policy?
- How do I apply for an ERISA Bond?
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How do I know if I need an ERISA bond?In 1974, the Employee Retirement Income Security Act (ERISA) was enacted to regulate most types of employee benefit plans. This Act requires that a fidelity bond be in place to cover the fiduciary (those responsible for managing the plan) and those persons who handle funds or other property of such a plan. These bonds are intended to protect the plans from dishonesty and fraud committed by individuals who are associated with them. Please see the "Federal Bond Regulations" to help you find the current requirements. If you can't find the answers you're looking for, contact one of our customer service representatives to help you complete your application.
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Who needs to be covered under an ERISA bond?
ERISA requires the bond to provide coverage for every person who "handles" plan funds
within the meaning of detailed DOL regulations. Generally, bonding is required for any person
whose activities with respect to plan funds create a risk that plan assets could be lost in the event
of fraud or dishonesty on the part of that person acting alone or in collusion with others. For
example, bonding would generally be required for persons who are directly responsible for
receiving plan contributions or making distributions from a plan. Bonding is also required for
persons providing investment management services, but, under the bonding regulations, advisory
services do not need to be covered.
Plan sponsors typically obtain a bond to cover a plan's fiduciaries and other employees
handling plan assets. ERISA does not require a plan sponsor or the plan to pay for bonds
covering outside service providers; nonetheless ERISA does requires service providers who "handle" plan assets to be appropriately bonded. Investment
managers and other plan service providers should obtain their own bonds. A plan sponsor should
seek evidence or representations from service providers that they are appropriately bonded.
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How much of an ERISA bond do I need?
ERISA requires a bond to provide coverage for persons handling plan funds in an amount no less that 10 percent of the amount of funds handled by such person, up to $500,000. The $500,000 limit applies on a per plan basis. Often a plan sponsor will secure one bond that is intended to cover several or all of the sponsor's ERISA-covered plans. ERISA permits the use of bonds covering multiple plans but requires that any recovery to one plan must not decrease the amount of required coverage available to another plan covered under the same bond. Because insurers frequently place a maximum limit on the amount of coverage available, a careful review of the bond's limit of liability provisions is necessary to ensure that this requirement is met.
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What does First Dollar of Loss Mean?
ERISA requires bonds to provide coverage from the first dollar of loss. Bonds that require the payment of a deductible, or include exceptions to a general rule that no deductible will apply, will not satisfy ERISA's standards.
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Most bonds provide coverage on a "per occurrence" basis. This means that the bond's
limit of liability applies anew to each loss sustained by the plan during the bond's term, unless
the same individual or individuals are implicated in the loss. Because of this, most bonds include
a provision that effectively cancels coverage for any individual known to the plan's officials to
have engaged in a dishonest or fraudulent act. Sometimes coverage is voided if a plan official
has knowledge of any dishonest act committed by the individual at any time prior to his or her
relationship with the plan. For this reason, plan sponsors should consult counsel or have
procedures in place to remove individuals from handling functions where an individual is known
to have engaged in dishonest conduct.
There are risks associated with failing to comply with ERISA's bonding requirements.
Although no specific monetary penalty applies in the case of inadequate bonding coverage, the
plan's fiduciaries can be held personally liable under ERISA's general fiduciary rules for any loss
to the plan that should have been, but was not, covered by a bond. Moreover, DOL investigators
routinely review ERISA bonds in the context of a plan audit or investigation. For these reasons,
plan fiduciaries should have counsel periodically review whether the plan's fiduciaries and others
handling funds are properly bonded and whether appropriate representations have been obtained
from outside plan service providers.
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How is an ERISA bond different than an insurance policy?
Unlike an insurance policy, the bond does not step in and pay losses for you. The bond guarantees that you will be able to pay any losses up to the face amount of the bond. The bond will only pay in your stead in the event that you are financially unable to meet your obligations.
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How do I apply for an ERISA Bond?
AZERISAbonds.com is the easiest and most affordable method to securing your bond. Let us show you how our streamlined process will reduce the cost and help you avoid the confusion. Click here to start the process: Apply Now
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