Do I Need Insurance? ERISA Fidelity Bonds vs. Fiduciary Liability Insurance
Understanding the Employee Retirement Income Security Act (ERISA) requirements surrounding fidelity bonds and fiduciary liability insurance can help plan sponsors determine their insurance needs and know how best to protect their employee benefit plans from loss. The Department of Labor (DOL) has identified several plans lacking the proper bonding and has included as one of their initiatives to ensure plan sponsors are in compliance with these requirements.
Fidelity bonds are required under ERISA section 412 and 29 C.F.R. Part 2580 and protect an employee benefit plan from risk of loss due to fraud and dishonesty (i.e. theft). Any person who handles funds or other property for an employee benefit plan, known as a “plan official,” must be bonded unless exempted. Exemptions include:
- Unfunded plans, which pay benefits only from the general assets of a union or employer;
- Banks or insurance companies organized and conducting business under state or federal laws; subject to state or federal supervision or examination and meets certain capital requirements; and
- Banks or trust companies subject to regulation and examination by certain federal authorities.
The fidelity bond amount is determined at the beginning of each plan year. It cannot be less than 10% of plan assets with a maximum of $1,000,000 per plan official. The individual plan must be named or specifically identified as an insured party on the bond. Fidelity bonds are typically inexpensive. However, bonds must be purchased with a surety or reinsurer named on the Department of the Treasury’s Listing of Certified Companies. Bonds that meet these requirements include:
- Individual – covers a specific individual;
- Name Schedule – covers specifically named individuals;
- Position Schedule – covers specific positions/titles; and
- Blanket – covers all employees; new hires are automatically covered.
Fiduciary liability insurance protects an employee benefit plan from losses caused by breaches of fiduciary responsibilities. As a fiduciary can be held personally liable, these policies protect a fiduciary’s personal assets from exposure to penalties or being seized by the courts. These policies are written to protect fiduciaries from losses resulting from errors, omissions or breach of duty, but not dishonest acts. Fiduciary liability insurance is not required and is normally more expensive.
Simply stated, if the employee benefit plan is the entity insured, coverage is likely provided by a fidelity bond. If the individual fiduciary is being protected, coverage is likely provided by fiduciary liability insurance.
Fidelity bonds are required and amounts are reported on Form 5500, Schedule H, Part IV, line 4e. Fiduciary liability insurance is not required and should not be reported on Form 5500. Plan sponsors should ensure the correct amount is being reported on Form 5500.
Obtaining the proper insurance coverage over employee benefit plans is an important decision and plan sponsors should understand the differences and possible implications of not having the correct coverage. If a plan does not maintain the proper fidelity bond, this could mean tax implications to the plan, as well as potential exposure for the DOL to further investigate. Understanding the differences in coverage is a step in determining insurance needs and mitigating employee benefit plans from possible loss.