An ERISA bond, also called an ERISA fidelity bond, protects the plan for which it’s purchased against fraud and dishonesty committed by company employees who handle funds or property associated with the benefit or pension plan.
Uses Of An ERISA Bond
The Department of Labor requires those handling retirement plan assets to purchase ERISA bonds. However, many choose to obtain fiduciary liability insurance, which provides broader coverage than an ERISA fidelity bond.
1. Prevents Fraud
ERISA bonds, also known as fidelity bonds, protect employee retirement and benefit plans from theft or fraud committed by the people in charge of managing them. These bonds are required by federal law for anyone who handles a company’s employee retirement plan assets. If stolen, lost, or otherwise mishandled, beneficiaries can file a claim with the bond to recover their losses.
Typically, these bonds cover up to 10% of the total assets handled by any person required to be bonded by ERISA. However, the Department of Labor can require more coverage in appropriate cases.
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ERISA bonds should not be confused with fiduciary liability insurance, which covers unintentional breaches of fiduciary duty that can still result in financial losses to the plan.
2. Prevents Dishonesty
An ERISA bond is a fidelity bond that protects the beneficiaries of employee retirement and benefit plans from financial loss caused by dishonesty or theft by the persons in charge of managing the plan. The bond is purchased from a surety company on the Department of Treasury’s list of approved sureties.
The Department of Labor requires people who handle retirement and benefit plan funds or property to be covered by an ERISA bond. This bond prevents crime against the plan’s assets. It covers losses that result from fiduciary dishonesty or fraud, such as theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, and willful misapplication.
The bond must be named (or identified) as the insured on the policy. This differs from fiduciary liability insurance, which protects against breaches of responsibility and is not required by ERISA. The fidelity bond must be paid using money from the pension or benefit plan, not from any available business assets.
3. Relieves Fiduciaries from Liability
ERISA requires that anyone who handles funds or property associated with a plan be bonded. While fiduciary liability insurance covers fiduciaries for losses from breach of duties, this coverage does not satisfy the fidelity bond requirement.
Fortunately, there is an alternative. The ERISA fidelity bond is explicitly designed to cover plan assets in the event of fraud, theft, or dishonesty. If the beneficiary of a plan experiences a loss due to the actions of a fiduciary, the beneficiaries can file a claim against the bond to receive financial compensation.
Unlike other types of bonds, an ERISA bond does not require a deductible. Every loss from fraud, dishonesty, or theft covered by the bond is paid out of the bond’s total face amount.
4. Requires Compliance
Most plans and third-party service providers require that any person who handles funds or other property for the plan must be bonded. This refers to individuals who come into physical contact with cash, checks, or other property belonging to the employer-sponsored retirement plan. It also includes those with the authority to sign cheques or other negotiable instruments from the plan’s funds.
ERISA fidelity bonds safeguard the plan from losses caused by fraudulent or dishonest handling of funds or property. They are different from fiduciary liability insurance, which is a voluntary safeguard that covers a variety of fiduciary activities and does not cover theft.