bond insurance requirement for 403(b)

[Guest kaycee]

My nonprofit employer has a 403(b) with employer matching contributions. Is bond insurance required under ERISA? One of the questions on the form 5500 prep. sheet we received from our preparer asks "Did a fidelity bond cover this plan during the plan year?" Thank you.

[Guest getaxa]

A pension plan or arrangement using a tax deferred annuity arrangement under the Code section 403(b)(1) and/or a custodial account for regulated investment company stock under Code section 403(b)(7) as the sole funding vehicle for providing pension benefits need only form 5500, Part I and Part II, lines 1 through 5, and 8 (enter pension code feature code 2L, 2m or both).

If that question "Did a fidelity bond cover this plan during the plan year?" Appears somewhere else besides lines 1 through 5, and 8, it does not have to be answered. I don't know why your preparer is asking the question.

[Guest kaycee]

I don't know why they are asking either. ERISA 412(a) requires bonding apparently and I would like to know if this applies to 403(b) plans where we merely withhold and submit employee funds to their chosen annuities or mutual funds.

[Guest Judy S]

Kaycee, Did you ever get an answer to this question? I too have never been quite sure if ERISA 403(b) plans must have a fidelity bond or not, and my search of this board has not turned up a definitive answer. What has been your conclusion?

[Effen]

Is there a definitive answer to this question?

I have a client with a 403(b), with employer match. The investments are all mutual funds. The money is transfered to the 403(b) carrier with each payroll.

Do they need a fidelity bond?

[Peter Gulia]

Today’s follow-up question is whether insurance company or custodian of regulated investment company shares must be covered by fidelity-bond insurance. But a more immediate question is whether the employer and its people must be so covered.

ERISA § 412(a) requires not only “[e]very fiduciary” but also “every person who [or that] handles [money] or other property of” an ERISA-governed plan to be bonded. (There is an exception for an insurance or trust company, but this usually doesn’t excuse the employer and its people.) Further, ERISA § 412(b) makes it a crime to serve as a plan fiduciary or handle plan assets while not bonded as required.

“Handling” plan assets can include an opportunity to pay or delay contributions to the plan; a power to decide or instruct whether a participant’s or other person’s claim for a benefit is approved or denied; a power to end the service of a trustee, insurer, or custodian; a power to direct a trustee, insurer, or custodian; or almost anything that can cause a loss from dishonesty. See 29 C.F.R. §§ 2580.412-6 and -14.

Beyond what might be required, why wouldn’t an employer WANT to get the fidelity insurance?

Imagine a theft. Imagine it’s a theft that the insurance contract, if the plan held it, would respond to. Now imagine the participants’ claim. You were a fiduciary. Even without expert testimony about what would be “the care, skill, prudence, and diligence” of an expert retirement plan fiduciary, it must be a per-se breach to fail to do that which the statute expressly commands. Had you caused the plan to get the fidelity insurance, the plan would have been covered. Therefore, you are personally liable to make good the plan’s loss. While there’s a logic gap in that plaintiff-style argument, I’d hate to be a defendant who needs to hope that the judge is a strict constructionist. If a liability is based on an ERISA violation, a Federal court order or a Labor department settlement agreement can require an offset of a breaching fiduciary’s plan account to help restore the plan’s uninsured losses.

A plan fiduciary need not pay for the insurance personally (other than his or her share along with other participants). Just pay (or reimburse) the insurance premium from plan assets. It ought to be a “reasonable expense[] of administering the plan” to do a specific thing that the statute expressly commands.