Protect Your Employee Benefit Plan from Fraud with an ERISA Bond
As an employer, it is a must to ensure your financial security while protecting your company employees. If you were to discover at the end of the year that the funds in your company's retirement plans had been misappropriated or embezzled, what recourse would you have? Would your business have the coverage to ensure that you have sufficient retirement savings?
What is an ERISA bond?
"ERISA" stands for the "Employee Retirement Income Security Act of 1974" or simply, "Employee Retirement Income Security ACT". ERISA bonds are a type of insurance that provides an employer coverage against loss resulting from dishonest or fraudulent acts. This surety bond covers incidents that result in the loss of assets, such as theft, larceny, embezzlement, misappropriation, forgery, wrongful abstraction or conversion, and willful misapplication.
ERISA surety bonds are administered by the U.S. Department of Labor.
Benefits of ERISA bonds
ERISA's surety bonds were established by the U.S. Department of Labor to address the concerns of business owners and workers regarding the mismanagement and/or the abuse of the funds in 401 k plans, as well as other employee benefit plans.
Because of these concerns, the U.S. Department of Labor mandated that the Employee Retirement Income Security ACT must provide coverage for those who handle general assets such as 401 k plan funds and other related property. The insurance protects the plan from loss of assets due to dishonesty and/or fraud.
Why obtain ERISA bonds?
An ERISA surety bond is required for benefit plan administrators, as well as company officers and employees of the benefit plan or plan sponsor who may be tasked with handling plan assets based on their job descriptions. These duties may include the receipt, the safekeeping, and/or the disbursement of plan funds.
This type of surety bond is also required for those assigned as service providers of benefit plans, as well as those who have decision-making authority over benefit plans.
What do ERISA bonds cover?
ERISA insurance provides coverage that can protect your employee plan against acts of fraud or dishonesty. Such acts typically cover one or more of the following:
- Willful misapplication
- Wrongful conversion and / or abstraction
*Note that an ERISA surety bond does not provide coverage for plan deductibles and other similar features.
In most cases, the bond amount provided by the surety company is equal to 10% or more of funds handled by the plan official during the previous year. There is a minimum limit of $1,000 and a maximum limit of $500,000. The maximum limit for plans holding employer securities is $1,000,000.
These amounts are applicable to all the plans included in a bond. If your company’s assets amount to more than $1,000,000, for example, it is assumed that access to the full amount is granted to the trustee, the fiduciary, and the administrator.
Each of these entities is considered a different employee, with the power to transfer funds, approve distributions, and to sign checks. Under the Employee Retirement Income Security ACT ERISA guidelines, each of these employees has to be bonded by the surety company for at least $100,000, which represents the minimum 10% of the $1 million.
Are ERISA bonds required by law?
ERISA bonds are required for everyone who is tasked with handling plan assets such as funds or company properties. Employee benefit plans are subject to insurance as well, unless they are covered under an ERISA mandated exemption.
Under the guidelines set by the U.S. Department of Labor, it is illegal for anyone to receive, handle, disburse, or exercise control or custody funds or properties associated with a plan without the purchase of the proper surety bond.
A company employee is said to be handling the plan or property if their official functions or responsibilities could result in the loss of these funds or properties. These could occur due to fraud or dishonesty, and may involve actions that the employee performs alone or with other people.
The following actions or functions constitute the “handling” of plans or properties:
- Direct physical contact with cash, checks or other monetary properties
- Having the authority to transfer plan s assets and plan funds to his or herself or to a third party
- Having the authority to perform negotiations or purchase transactions involving plan properties such as land titles, mortgages, securities, or buildings
- Having the authority to perform or direct disbursements
- Having the authority to sign negotiable instruments such as checks
- Having supervisory authority over bonding-related activities
Difference between a fidelity bond and an ERISA bond
ERISA fidelity bonds and fidelity bonds both provide businesses with coverage against the harmful actions of their workers. These surety bonds protects companies against previous action that may cause legal or financial harm.
The main difference is that an ERISA fidelity bond covers employees that manage retirement funds for a company that has fiduciary responsibilities for these funds. On the other hand, a fidelity bond protects workers that aren’t able to receive bonds because of issues with their backgrounds or previous employment.
Another important distinction is that an ERISA fidelity bond is a legal need for workers that have access to the retirement plans fund in an administrative capacity. A fidelity bond isn't usually a required purchase for such workers.
Difference between fiduciary liability insurance and an ERISA bond
An ERISA bond is not the same thing as fiduciary liability insurance. A fiduciary liability insurance plan can protect a fiduciary, and in some cases, the plan itself, against losses caused by a breach of fiduciary responsibility. But an ERISA bond will specifically insure or protect your employee plan against losses resulting from dishonesty or fraud committed by registered brokers and dealers.
In addition, while fiduciary liability insurance coverage is important, it is not a requirement. An ERISA bond, however, is required for every person who handles funds or other property of an employee benefit plan. In fact, it would be unlawful for one individual to receive, handle, disburse, or otherwise exercise custody or control of a plan or properties, unless that person is covered by the proper bonding.
What are requirements for ERISA bonds?
Without ERISA bonds, an employer and his or her employees could face the loss of retirement plans savings. The good news is that ERISA has rules and standards of conduct that apply to private sector benefit plans and for those who are in charge of investing and managing those assets. This includes the ERISA bonding requirements.
When purchasing an ERISA bond, you need to ensure that the plan is specifically identified as an insured party on the bond. This ensures that the employee benefits plan can recover the losses that are covered by the ERISA bond.
ERISA bonding requirements also govern the coverage amount. For example, a person that is subject to the ERISA requirement for a given year must be bonded in an amount that is equal to at least 10% of the amount of funds that they handled in the previous year. However, the amount of the bond must not be less than $1,000.
It is also not necessary for such a person to be bonded for more than $500,000, or $1,000,000 for employee plans that hold employer securities.
Your search for an ERISA Bond Advisor ends at VANTREO!
With VANTREO, you no longer have to search for any other ERISA Bond advisor. By working with us, your company benefits from of a dedicated team of experts that can help address your every insurance need. So, Contact Us at (800) 967-6543 for more information on how our range of world-class services can be of value to your company this year and the next.
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