What plan sponsors need to know about ERISA bonds

The Employee Retirement Income Security Act of 1974 in Section 412 requires that 401(k) plan fiduciaries maintain a fidelity bond to "provide protection to the plan against loss by reason of acts of fraud or dishonesty". Despite these bonding requirements, many plan sponsors are not adequately bonded. In order to help plan sponsors understand and comply, we have answered the questions that we hear most frequently.

Who needs to be bonded?

 Any fiduciary or administrator that handles plan funds or plan property should be included on the bond. This includes any individual who has contact with plan assets, can buy or sell on behalf of the plan, or has the power to disburse funds or sign checks, and anyone who has decision making authority over such individual.  It doesn't necessarily include those whose role is purely clerical in nature. Knowing who to bond isn't always black and white, so a good rule of thumb to live by is that it is better to cover anyone that may fall into a gray area.

How much coverage must the bond provide?

As long as the plan doesn't include employer stock or non-qualifying assets, the bond must cover no less than 10% of plan assets up to a maximum of $500,000. For small plans, a minimum bond of $1,000 is required. So, as an example, a plan with $4,000,000 in plan assets should have a bond that is at least $400,000. Even though the minimums are as listed here, higher coverage can be obtained and should be considered.

What happens if the plan is not properly bonded? 

One of the fields on the Form 5500 indicates whether or not the plan is bonded. If the plan is not bonded at all, it can be a red flag to the Department of Labor. If the plan is under bonded, it can also be a red flag. But, in some cases, a plan may have a bond for the required amount but it may not cover all fiduciaries. In that event, the DOL may never know, but if a fraudulent action ever occurred the bond provider could deny a claim and fiduciaries could be liable for the losses.

Do plan providers issue ERISA bonds?

In general, ERISA bonds are purchased directly from insurance companies or indirectly through an insurance agent. The Department of the Treasury has a list of approved providers, and most insurance companies are included on that list. Many plan providers, such as a recordkeeper, can often refer you to an insurance company, but cannot issue the bond and will not do the work for you. Determining coverage, finding a provider, and applying for a bond every year can be quite a hassle.

HealthEquity Retirement is different from other providers in that we do the work of procuring and maintaining the bond for each client. As the named plan fiduciary, we ensure that each plan is bonded properly. We go through the process of bonding ourselves as fiduciaries, but we also do it for our clients so that they don't have to go through the hassle. So if you are confused about your bond or if you are tired of having to bond your own plan, it may be time to find a provider who will do it for you.

This article was produced in collaboration with HealthEquity Retirement Services, LLC. HealthEquity Retirement Services, LLC is a wholly owned subsidiary of HealthEquity, Inc. Nothing in this communication is intended as legal, tax, nancial or medical advice.