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Plan Insight

SEPTEMBER 2010 Newsletter

ERISA Fidelity Bonds – What to Think About, What to Look For. . .

The Employee Retirement Income Security Act of 1974 (“ERISA”) requires that all persons who “handle” funds of retirement and welfare plans be bonded. The purpose of the bond is to cover losses that a plan incurs as a result of a fraudulent or dishonest act of a “plan official”—someone who handles plan funds. The bond is typically required to have limits equal to 10% of the value of the plan’s assets, with a maximum of $500,000. There are exceptions to this general rule, including the situation where more than 5% of the plan’s assets are “non-qualifying” assets, such as real estate limited partnerships. In that situation, the bond limits must be 100% of the value of the plan’s non-qualifying assets.

As a practical matter, most plan sponsors are referred to a surety company (perhaps by a third party administrator or another service provider). The bond company then sends out a relatively simple application and, when it receives answers to the questions on that application, issues a bond. Perhaps more often than not, the plan fiduciaries never read the bond and have no idea what losses the bond covers or whether the persons who caused the loss are covered by the terms of the bond.

Fiduciaries who take such a hands off approach are making a mistake. One of the functions of a fiduciary is to be sure that the plan is properly bonded. If a plan secures a bond on the fiduciary’s watch, then sustains a loss that the bond—by its terms—doesn’t cover, the fiduciary could be on the hook for the amount that the plan would have received if the fiduciary had obtained a bond that covered all of the persons and losses that it needed to cover. Consequently, plan fiduciaries should not simply take it for granted that a bond will cover everything and everyone that it needs to cover. Since ERISA requires that fiduciaries act prudently in carrying out their duties, one of the things that fiduciaries should put on their “must do” list is implement a process to evaluate the bond.

As part of that evaluation process, fiduciaries should get answers to the following questions:

Who Is “Handling” Plan Funds?

ERISA requires every person who “handles” plan funds to be bonded. A person is considered to be “handling” plan funds if he has the ability to cause a loss to the plan through a fraudulent or dishonest act. For example, any person who has the ability to sign checks on a plan account is “handling” plan funds in doing so (and this may include independent contractors). If a fiduciary has not thought through who may handle the plan’s funds, he may not be in position to determine whether a bond offers the necessary coverage.

Whose Acts Are Covered By The Bond?

Once the fiduciary determines all of the persons who are handling or may handle plan funds, he needs to review the bond itself to determine whether, by its terms, the bond will cover losses caused by all of those persons. In this regard, a good starting point may be to determine whether the bond covers losses caused only by persons specifically identified in a schedule attached to the bond (a so-called “name schedule” bond), or rather, whether the bond covers losses caused by all persons—subject perhaps to certain excluded classes of persons—regardless of whether they are specifically identified on the face of the bond or not. This latter bond is often referred to as a “blanket bond.”

Keep in mind that while a blanket bond may cover losses covered by a broader group of people, it is possible that a “name schedule” bond may offer a plan greater protection. (This may occur, for instance, if the name schedule bond provides coverage for losses the plan incurs due to the dishonest acts of two persons identified in the bond acting in concert with each other. Depending on the terms of the bond, in this example, the bond may cover losses up to the bond’s limits with respect to the acts of each of the dishonest plan officials.)

Are Other Bonds Available That Provide Greater Coverage?

There is more than one bond company that offers bonds to ERISA-governed plans and not all bond forms are alike. Fiduciaries should consider reviewing multiple bond forms and seeing whether and how they differ with respect to the scope of the coverage they provide.

Are Persons Who Are Not Covered By the Bond Covered By A Separate Bond?

Gaps in coverage may exist under a plan’s bond, particularly in the context of a “name schedule” bond. For example, a plan may delegate discretionary investment management to a third party who is not employed by the plan sponsor, but who has control over plan assets. If that person is not identified on the bond’s “name schedule,” losses he causes may not be covered by the bond. In that case, the plan sponsor has at least two alternatives. First, it can try to get the bond company to cover the investment manager’s acts. Second, the plan fiduciaries may inquire of the investment manager whether he has secured or will secure a separate bond that covers him if he causes losses to the plan due to fraud or dishonesty. Fiduciaries are within their rights to ask those persons to secure an appropriate bond to cover their actions with regard to the plan.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

Material in our newsletter may have been extracted in whole or in part from the IRS Employee Plans publication, and the presence of IRS material does not constitute or imply the endorsement, recommendation, or favoring by the IRS of any opinions, products, or services offered by the sponsor of this web page or document.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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