- Responsibility for Bonding: The responsibility for ensuring that the "plan officials" are properly bonded can fall on several individuals simultaneously. In addition to each "plan official" being directly responsible for complying with his own bonding requirement, ERISA § 412(b) makes it unlawful for any plan official to permit any other plan official to "receive, handle, disburse, or otherwise exercise custody or control over plan funds or other property" without being properly bonded. Therefore, plan officials -- which include, but are not limited to, plan fiduciaries -- may not permit others to handle funds without being properly bonded. See FAB Q&A-6
- Who Must Be Bonded: Every person who "handles funds or other property" of the plan must be bonded, unless covered by an exemption. These "plan officials" usually include the plan administrator, and the sponsor's employees who "handle" plan funds (e.g., have physical contact, the power to transfer, disbursement authority, authority to sign checks, or supervisory or decision-making authority). The FAB makes clear that "plan officials" may also include unrelated third-parties (e.g., service providers) who have access to plan funds or whose decisions could pose a risk of loss through fraud or dishonesty. Therefore, employees who are plan officials (even though they may not be plan fiduciaries) are responsible for ensuring that third party plan officials are properly bonded. See FAB Q&A-5, -8 & -18.
- Fidelity Bond versus Fiduciary Liability Insurance: The fidelity bond is distinct from fiduciary liability insurance. A fidelity bond insures against plan losses due to fraud or dishonesty. ERISA requires that all fiduciaries and others who handle funds be covered by a fidelity bond, unless they are otherwise exempt. Fiduciaries who do not handle plan funds are not required to be covered by a bond.
In contrast, fiduciary liability insurance insures against plan losses due to breach of fiduciary duty. Fiduciary liability insurance is not required under ERISA. Its purchase by the plan is a fiduciary decision, and any policy purchased by the plan must permit recourse by the insurer against a breaching fiduciary. A fiduciary may in some cases purchase, at his or her expense, protection against the insurer's recourse rights. See FAB Q&A-2 & -7.
- Who Pays for the Bond: A plan is permitted to pay for the bond required under ERISA *#167; 412. The purchase will not constitute a prohibited transaction under ERISA § 406(a) or (b), since the bond protects the plan and does not benefit the plan officials. Alternatively, the service provider, plan official, plan sponsor, etc., may also pay for the bond. See FAB Q&A-10 & -11.
- Plans Exempt from the Bonding Requirement: The bonding requirement does not apply to plans that are not subject to Title I of ERISA -- for example, governmental plans, church plans, worker's compensation plans, and excess benefit plans. Also, the bonding requirement does not apply to plans that are unfunded. A plan is unfunded if it pays benefits exclusively from the general assets of the employer or union. By definition, a plan is not considered unfunded -- and will remain subject to the bonding requirement -- if:
- benefits are provided through insurance,
- contributions are made to -- or benefits are paid from -- a trust,
- employees contribute to the plan, or
- a separate bank account is maintained (or separate books are maintained to administer a separate fund out of which benefits are to be paid).
Therefore, if employee contributions are made to an employee benefit plan, the bonding requirements apply. However, the FAB clarifies that DOL will treat an employee welfare plan that is associated with a Code § 125 cafeteria plan as unfunded and thereby exempt from the bonding requirement -- even though it includes employee contributions -- as long as it satisfies the requirements of Technical Release 92-01 (e.g., the employee contributions are used within three months of receipt to pay premiums as provided in DOL Reg. §§ 2520.104-20 and 2520.104-44). (It is on these same terms that DOL exempts such Code § 125 affiliated welfare plans from the ERISA reporting requirements.) Presumably, contributory employee welfare plans that are not associated with a Code § 125 plan will remain subject to the bonding requirement.
Insured plans are also subject to the bonding requirement. However, the FAB points out that a bond is not required if no one "handles" funds of the plan:
No bonding is required with respect to the payment of premiums, or other payments made to purchase such benefits, directly from general assets, nor with respect to the bare existence of the contract obligation to pay benefits. Such insured arrangements would not normally be subject to bonding except to the extent that monies returned by way of benefit payments, cash surrender, dividends, credits or otherwise, and which by the terms of the plan belong to the plan (rather than to the employer, employee organization, or insurance carrier), were subject to "handling" by a plan official.
See FAB Q&A-13 & -14.
- Plan Officials Exempt from the Bonding Requirement: Several categories of plan officials are exempt from the bonding requirement:
- Fiduciary Bank or Insurance Company: A fiduciary that is a bank or insurance company, which is subject to state or federal supervision and which meets certain capitalization requirements, is generally exempt.
- Broker Dealers: A registered broker or dealer under the Securities Exchange Act of 1934 (the "Act") §15(b), which is subject to the fidelity bond requirements of a "self regulatory organization" within the meaning of Act § 3(a)(26), is exempt.
- Banks Subject to Regulation: A banking institution or trust company (acting as either a fiduciary or a non-fiduciary), which is subject to regulation by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System or the Federal Deposit Insurance Corporation, is exempt.
- Insurance Carrier: An insurance carrier (acting as either a fiduciary or non-fiduciary), which provides or underwrites welfare or pension benefits in accordance with state law (other than benefits maintained for the insurance carrier or its employees), is exempt.
- Certain Savings and Loan Associations: Certain savings and loan associations are exempt in the administration of plans for their own employees. See FAB Q&A-15.
- Form of Bond & Selection of Surety: The form of bond is flexible -- examples include individual, name schedule (i.e., covering a number of named individuals), position schedule (i.e., covering the occupants of the positions listed), and blanket (i.e., covering the insured's officer and employees generally). One or a combination of forms may be used. The plan can be insured on its own bond or added to the employer's insurance policy (e.g., through an ERISA rider to the employer's commercial crime policy). Although the form is flexible, the bond must be placed with a surety or reinsurer listed on the Department of Treasury's Listing of Approved Sureties, Department Circular 570. Upon learning that a surety is insolvent, in receivership or had its authority to act as an acceptable surety revoked, the plan administrator is responsible for securing a new bond with an acceptable surety. A bond can insure more than one plan, although it may not allow a claim by one plan to reduce the coverage available to the other plans. Also, the bond may not have a deductible, and may not exclude coverage for situations where the employer or sponsor "knew or should have known" a theft was likely. See FAB Q&A-4, & Q&A-22 through -34.
The FAB is available on the DOL website.
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