ERISA Fidelity Bond Requirement

By Stacey L. Spencer, QKA and Tim Ayler, CPA | Team Members of the Employee Benefit Services Group

A fidelity bond is a form of insurance protection that covers the employer for losses incurred as a result of fraudulent or dishonest acts by the individuals specified under the bond. The fidelity bond provides protection to the plan (not the employer) against loss of assets by reasons of acts of fraud or dishonesty.

A fidelity bond is different than fiduciary liability insurance, which is an optional form of coverage. A fidelity bond protects the plan from losses attributable to the fraudulent or dishonest actions of those with access to the plan’s assets, whereas fiduciary liability insurance generally protects the fiduciary from losses due to a breach of fiduciary duty.

The Department of Labor requires bond coverage for a fiduciary or other person who has:

1. physical contact with the plan assets;
2. authority to exercise control or contact with the plan assets;
3. authority to transfer plan assets to oneself or a third party;
4. negotiate acquisition or disposition of property for value;
5. authority to disburse plan funds or property;
6. authority to sign or endorse checks or other negotiable instruments;
7. authority over any person who has any responsibilities described in 1 through 6.

The amount of the fidelity bond is determined by the account balance of the plan at the beginning of the year. The bond cannot be less than 10% of the funds being handled within the plan. In addition, the bond may not be for less than $1,000 and need not be more than $500,000. Effective for plan years beginning after 2007, the Pension Protection Act increases the maximum bond amount to $1 million for a plan that holds employer securities.

There are three types of bonds: an individual bond, schedule bond or a blanket bond. The individual bond covers a named individual. A schedule bond covers a number of named individuals. A blanket bond covers all the insured’s officers and employees. A combination of forms may be used.

Bonding is not required when the plan covers only an owner, or the owner and the owner’s spouse. Furthermore, if a partnership’s qualified retirement plan covers only partners (or partners and their spouses), the qualified plan is not subject to the bonding requirements.

A plan is required to report on its Form 5500 whether the plan is covered by a fidelity bond, making it easy for the DOL to monitor compliance with the bonding requirements. A plan fiduciary who fails to ensure that those persons who handle plan assets are properly bonded may be personally liable for any losses to the plan attributable to the fraud or dishonesty of others. The cost of the bond is relatively inexpensive compared to the exposed risks of a bond not being in place.

If you would like more information on this, please contact Stacey Spencer or Tim Ayler. You may also refer to the DOL’s Field Assistance Bulletin 2008-04, which contains fidelity bond related questions and answers.

Contact Information:

Stacey L. Spencer, QKA | Manager, Employee Benefit Services Group | sspencer@greenwaltcpas.com | 317-260-4421 |

Tim Ayler, CPA | Partner, Team Leader of the Employee Benefit Services Group | tayler@greenwaltcpas.com | 317-260-4401