Fidelity vs. Fiduciary Bonds?

[Guest susan w]

Can anyone give me a primer on the difference between fidelity bonds vs. ERISA/Fiduciary bonds? Are both required to be 10% of assets? Do both need to be in place before the beginning of the plan year in order to avoid an audit if the plan is small enough? What happens if a plan doesn't have a fidelity bond? Is it true that fiduciary bond is often covered under the umbrella of the company's general insurance coverage?

Thanks.

[AndyH]

I don't think there is a difference. I think these are two names for the same thing.

When is a bond needed? I would think when the plan has assets, not before. There is a minimum $1,000 amount (and maximum $500,000) to go along with the 10% requirement.

If a plan doesn't have the bond, it's an audit flag on the 5500 filing.

My experience is that if the plan gets audited and it doesn't have the proper bond coverage, the audit is not closed until it does, nothing more.

I can't answer your insurance question other than to say I think these are usually handled through the corporate insurance agent.

Hope this helps.

[Guest Ray Williams]

The Bond must state that it covers ERISA claims. A general fidelity bond would need either a rider or an additional endorsement. The company issuing the bond may or may not require any additional fee.

[Guest susan w]

The audit I was referring to is not an IRS audit, but an audit by an independent qualified public accountant - required for larger plans. The DOL ruled last October that small plans MAY be required to submit to an independent audit if there was no bond in place by the beginning of the plan year.

[Medusa]

The fidelity/ERISA/surety/fiduciary bond is required when the plan has assets and at least one non-owner is a participant. What may confuse the issue is the availability of fiduciary liability insurance, which is not required, but which some plans or fiduciaries have taken. The difference is that while the ERISA bond protects in the event of fraud or dishonesty, there are other types of fiduciary breaches as well for which protection might also be sought. Click here for a link to a Benefitslink Q & A column question on the same issue.

[Guest James Osterhaus]

Protection Amount for Fidelity Bonds (29 CFR 2580, subpart C) (29 CFR 2580.412-23):

The coverage amount is a minimum of $1,000 or 10% of total plan assets as of the beginning of each plan year up to a maximum of $500,000. If it is the first plan year estimate the value that will be handled for the year.

The bond may name specific individuals or may be a “blanket bond” covering plan officials and employees in general.

What the regulations say is that if there is a loss and a fidelity bond is not in place that the plan fiduciaries will be personally liable. Case in point, the DOL, in what can be viewed as a harbinger of things to come, has sued a Michigan company and its majority owner for failing to obtain a bond for their 401(k) plan. The suit is seeking to have the federal court order defendants to obtain a fidelity bond and to remove the owner as the plan administrator and to replace him with an independent trustee, who will subsequently administer and/or terminate the plan. Herman v. Thomas E.

Snyder and Snyder Farm Supply Inc. 401(k) Plan Civil Action # 1:00CV 887

On October 19th, 2000 the Department of Labor (DOL) released final rules 29 CFR Part 2520 that imposed additional bonding requirements on sponsors of small employee benefit plans who file annual reports on Form 5500 without audited financial statements. For each plan year that a waiver is claimed for the plan audit requirement, either at least 95% of the assets of the plan must constitute “qualifying plan assets” or the bonding requirement for the plan is increased to 100% of the total non-qualifying plan assets.

The additional bonding requirement for non-qualifying plan assets should be in place no later than the first day of the plan year beginning after April 17, 2001, which is just around the corner. Generally, the determination is made based on the plan’s information from the preceding plan year. For first plan year cases, the determination is made by estimating the amount handled.

Historically, the bond coverage amount was a minimum of $1,000 or 10% of total plan assets as of the beginning of each plan year up to a maximum of $500,000. If it is the first plan year estimate the value that will be handled for the year. Now, this amount is increased to 100% of non-qualifying plan assets if the plan has greater than 5% of plan assets that represent non-qualifying plan assets.

Qualifying plan assets for this new requirement include employer securities, participant loans, assets held by banks, insurance companies, broker-dealers, or another organization authorized to hold IRA assets, mutual funds, investment and annuity contracts issued by an insurance company, and assets in the individual account of a participant over which that participant has the opportunity to exercise control and in which the participant gets a statement of assets at least once a year. All other assets are considered non-qualifying plan assets.

From the 2000 5500 Instructions Schedule H Line 4e. Plans that check “Yes” must enter the aggregate amount of coverage for all claims. Check “Yes” only if the plan itself (as opposed to the plan sponsor or administrator) is a named insured under a fidelity bond covering plan officials and if the plan is protected as described in 29 CFR 2580.412-18. Generally, every plan official of an employee benefit plan who “handles” funds or other property of such plan must be bonded. Generally, a person shall be deemed to be “handling” funds or other property of a plan, so as to require bonding, whenever his or her other duties or activities with respect to given funds are such that there is a risk that such funds could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others. Section 412 of ERISA and DOL regulations 29 CFR 2580 provide the bonding requirements, including the definition of “handling” (29 CFR 2580.412-6), the permissible forms of bonds (29 CFR 2580.412-10), the amount of the bond (29 CFR 2580, subpart C), and certain exemptions such as the exemption for unfunded plans, certain banks and insurance companies (ERISA section 412), and the exemption allowing plan officials to purchase bonds from surety companies authorized by the Secretary of the Treasury as acceptable reinsurers on Federal bonds (29 CFR 2580.412-23). Note: Plans are permitted under certain conditions to purchase fiduciary liability insurance. These policies do not protect the plan from dishonest acts and are not bonds that should be reported in line 4e.

Note that the plan may but is not required to purchase fiduciary liability insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary. However, the insurance must permit recourse by the insurer against the fiduciary. Thus, insurance of this type protects the plan against losses, but does not protect the fiduciary from the consequences of his or her own actions.

[Guest JAREL]

My own simplistic explanation of the difference between a fidelity or fiduciary bond is that the terms are generally used interchangeably (maybe improperly) to denote two very different things: (1) insurance that is required to protect the plan from unscrupulous fiduciaries; and (2) insurance that is voluntary to protect the fiduciaries from frivolous participant lawsuits (generally paid for by the employer). As was no doubt pointed out above, a fiduciary who is indeed crooked would not be personally absolved from liability in any event.