Plan sponsors often ask, “Is an ERISA fidelity bond the same thing as fiduciary liability insurance?”
The answer is no, they are not the same. The two insure different people and have different requirements under the terms of ERISA.
Purchasing a Fidelity Bond
Generally, every fiduciary and anyone who handles funds or other property of the plan must be bonded unless one of the exceptions under ERISA Section 412 applies. The bond must cover at least 10% of the amount handled by the bonded individual. The bond may or may not be for less than $1,000 and need not exceed $500,000. Effective for years beginning on or after January 1, 2007, however, the maximum bond amount $1,000,000 for plans holding employer securities.
To qualify for the small retirement plan audit waiver, any person who handles non-qualifying plan assets must be bonded in an amount at least equal to 100% of the value of the non-qualifying assets if they constitute more than 5% of total plan assets.
The bonding requirements do not apply to plans that are completely unfunded (i.e., benefits are paid from the employer’s general assets) or plans that are fully insured.
NOTE: A fidelity bond specifically protects the plan against losses due to fraud or dishonesty on the part of individuals (e.g., plan fiduciaries) who handle plan funds or other property. Should the plan experience losses due to a covered employees’ fraud or dishonesty, the insurance company would reimburse the plan sponsor for the loss in order to make the plan whole again. It does not protect the plan against market fluctuations.
NOTE: The bond requirements under ERISA Section 412 do not apply to employee benefit plans that are completely unfunded, or that are not subject to Title I of ERISA or the fiduciary is organized and doing business under state or federal law, is subject to state or federal supervision or examination, and meets certain capitalization requirements.
Purchasing Fiduciary Liability Insurance
An insurance policy covering the plan sponsor’s directors and officers should be reviewed to determine whether ERISA claims are covered. If it does not cover fiduciary liability, a so-called ‘ERISA rider’ might be considered. When reviewing such documents, it is important to determine whether ERISA breaches of fiduciary duty are covered and, if so, to what extent. Usually, companies can negotiate with insurers for fairly broad coverage at reasonable rates.
NOTE: Fiduciary liability insurance generally protects fiduciaries and their personal assets from lawsuits alleging breaches of fiduciary responsibility (e.g., imprudent investment decisions). If a breach of fiduciary responsibility occurs, the insurance company would pay the claim up to the limits of the policy, reducing the personal exposure of the named fiduciaries. Fiduciary liability insurance may qualify as a fidelity bond, but only if it protects the plan against a fiduciary’s breach.
NOTE: Fiduciary liability insurance paid for by a plan must give the insurer recourse against the fiduciary in the case of a fiduciary breach.
