The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in West Virginia is representative of a common question related bonding requirements for retirement plans. The advisor asked:
“Can you summarize the fidelity bond requirements under the Employee Retirement Income Security Act of 1974 (ERISA)?”
Highlights of Discussion
The following represents a high-level summary of ERISA fidelity bonds. In Field Assistance Bulletin (FAB) 2008-4, the DOL answers 42 frequently asked questions related to the ERISA fidelity bonding requirements. Please refer to the bulletin for complete details.
- Generally, plan officials of an employee benefit plan and every person who handles funds or other property of the plan must be bonded (ERISA Sec. 2580). However, there are some exceptions:
— Employee benefit plans that are completely unfunded (one that pays benefits only from the general assets of a union or employer) or not subject to Title I of ERISA
— Certain banks, insurance companies and registered broker-dealers
- Plan officials include the plan administrator and those officers and employees of the plan or plan sponsor who handle plan funds during the receipt, safekeeping and disbursement of funds. Plan officials may also include service providers whose duties and functions involve access to plan funds or decision-making authority that can increase a risk of loss through fraud or dishonesty. Handling includes, but is not limited to:
— Physical contact or control of cash, checks or similar property of the plan
— Power to transfer funds or other property from the plan to oneself or to a third party, or to negotiate such property for value (e.g., mortgages, title to land and buildings, or securities)
— Disbursement authority or authority to direct disbursement
— Authority to sign checks or other negotiable instruments
— Supervisory or decision-making responsibility over activities that require bonding
- The ERISA fidelity bond must be at least 10% of the amount of funds the individual handles, subject to a minimum bond amount of $1,000 per plan. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. However, the maximum required bond amount is $1 million for plan officials of plans that hold employer securities.
- With respect to each covered person, the bond amount must be fixed annually at the beginning of the plan’s reporting year, based on preceding plan year information. The amount of the bond must be based on the highest amount of funds handled by the person in the preceding plan year. The DOL provides a procedure in ERISA § 2580.412-15 for determining the value of the bond if the plan does not have a complete preceding reporting year (e.g., first plan year).
- ERISA fidelity bonds must be placed with a surety or reinsurer that is named on the Department of the Treasury's Listing of Approved Sureties in Department Circular 570. Under certain conditions, bonds may also be placed with the Underwriters at Lloyds of London (ERISA § 2580.412-25, § 2580.412.26).
- Congress included the bonding requirements in ERISA to provide protection to the plan and its participants against loss as a result of acts of fraud or dishonesty on the part of plan officials, either directly or in collusion with others.
- The primary source of this information is a plan’s annual Form 5500 filing. Through an examination of Forms 5500, the DOL has determined that inadequate ERISA fidelity bond coverage is one of the most common compliance issues among plans.
Conclusion
ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property. Compliance with these rules is a top concern for the DOL.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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©2015 Columbia Management Investment Advisers, LLC. Used with permission.
