Can fiduciary Liability Insurance be paid through the plan?

[Guest Why]

If not can you direct me to a cite or reg that supports this?

Thanks

Why

[alanm]

Probably can under the section 408 exemption to section 406(b) transactions.

This is from DOL opinion 2002-08A

' The Department does not believe that, in and of themselves, most limitation of liability and indemnification provisions in a service provider contract are either per se imprudent under ERISA section 404(a)(1)(B) or per se unreasonable under ERISA section 408(b)(2). The Department believes, however, that provisions that purport to apply to fraud or willful misconduct by the service provider are void as against public policy and that it would not be prudent or reasonable to agree to such provisions. Other limitations of liability and indemnification provisions, applying to negligence and unintentional malpractice, may be consistent with sections 404(a)(1) and 408(b)(2) of ERISA when considered in connection with the reasonableness of the arrangement as a whole and the potential risks to participants and beneficiaries. At a minimum, compliance with these standards would require that a fiduciary assess the plan’s ability to obtain comparable services at comparable costs either from service providers without having to agree to such provisions, or from service providers who have provisions that provide greater protection to the plan.'

Since you can't buy insurance, I assume, to cover willful misconduct of a fiduciary, the policy would be a prudent step taken by a fiduciary and a reasonable expense that could be paid for by the plan. Of course cost of employing a trustee must be reasonable and there is no dfinitive answer to that.

[KJohnson]

alanm

I think the issue you are referring to is a plan indemnifying a service provider.

Fiduciary liability insurance, on the other hand, protects the plan (not the service provider) in case of a fiduciary breach. This is a legitimate plan expense that can be paid for by the plan.

What the plan cannot pay is any non-recourse premium for the fiduciaries themselves. Without a non-recourse provision, the insurance company, after it pays the plan, could go after the fiduciary.

Typically, however, non-recourse premiums are fairly low (sometimes less than $100) and the fiduciary or the plan sponsor can pick this up with money outside of the plan's assets.

This is a bit old, but it is a decent article:

http://www.rsgroup.com/pics/spring02.pdf

[Kirk Maldonado]

ERISA section 410(b)(1) provides as follows:

(b) Nothing in this subpart [part] shall preclude—

(1) a plan from purchasing insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary;

[KJohnson]

Kirk,

I guess the logic is that the plan is only using its money to purchase insurance that has recourse. The individual fiduciaries (or plan sponsor) are purchasing separate "riders" for the non-recourse. Thus the plan's payment of premiums still fall within the statutory provisions. Is that your understanding?

[Kirk Maldonado]

Yes.