Bonding Requirements

[Guest Douglas]

Can the amount of the bond exceed $500,000? DOL Reg. 2580.412-20 seems to suggest that this is possible, but it is not entirely clear to me. Does anyone have any thoughts on this?

[Bill Ecklund]

Can the amount of the bond exceed $500,000? DOL Reg. 2580.412-20 seems to suggest that this is possible, but it is not entirely clear to me. Does anyone have any thoughts on this?

In some cases it may be a breach of fiduciary duty not to have a larger bond than $500,000. If you have a very large fund and it is possible that a fraud may exceed $500,000, a bond of only that size may be imprudent.

[Guest Sieve]

Of course, we all know (??) that the bonding requirement was increased to a maximum of $1 million for a plan that holds employer securities. (See ERISA Section 412(a), last sentence, as amended by PPA '06.) So, yes, it certainly can go over $500,000.

But, I think your question is whether the limits of the bond set by ERISA Section 412 somehow prohibit a plan from being bonded in excess of those amounts. I am certain that the answer is "no". There is no reason that a higher bond would be prohibited--other than the argument that, if the plan is paying the bond, the price for a large bond might be excessive.

More specifically, the ERISA bonding section merely indicates the minimum amount of bonding that is required so that a violation of Section 412 does not occur. Notice that the regs say that "no such bond shall be required in excess of $500,000 . . ." (ERISA Regs. Section 2580.412-11, emphasis added), which to me means eactly what it says: EBSA cannot require more than that. It doesn't mean that more is prohibited.

[Bill Ecklund]

Of course, we all know (??) that the bonding requirement was increased to a maximum of $1 million for a plan that holds employer securities. (See ERISA Section 412(a), last sentence, as amended by PPA '06.) So, yes, it certainly can go over $500,000.

But, I think your question is whether the limits of the bond set by ERISA Section 412 somehow prohibit a plan from being bonded in excess of those amounts. I am certain that the answer is "no". There is no reason that a higher bond would be prohibited--other than the argument that, if the plan is paying the bond, the price for a large bond might be excessive.

More specifically, the ERISA bonding section merely indicates the minimum amount of bonding that is required so that a violation of Section 412 does not occur. Notice that the regs say that "no such bond shall be required in excess of $500,000 . . ." (ERISA Regs. Section 2580.412-11, emphasis added), which to me means eactly what it says: EBSA cannot require more than that. It doesn't mean that more is prohibited.

I believe the $1,000,000 limit only applies if the plan holds employer securities.

[Guest Sieve]

Yes. As noted in my post.

[Lori Friedman]

For your consideration, here's a very concise and helpful excerpt from the PPC 5500 Deskbook:

The bond must generally equal at least 10% of the amount of funds handled. However, it cannot be less than $1,000, nor is it required to be more than $500,000, unless specifically required by the DOL. The limit increased to $1 million for plan years beginning after 2007 for plans that hold employer securities.

The bond isn't required to exceed $500K (unless the Dept. of Labor mandates a greater amount), but a plan administrator isn't prohibited from buying more coverage. Even though the law sets the bond maximum at $500K, fiduciary duty and the amount of plan assets might necessitate greater coverage.

[Peter Gulia]

For the May 2008 edition of the Q&A sessions that the American Bar Association Joint Committee on Employee Benefits does with people from Government agencies, I posed a question (and, as the JCEB procedure has been, presented my suggested answer) on what makes it prudent to buy more fidelity-bond insurance than the statute requires. The EBSA person more-or-less agreed with a view based on ERISA's prudence duty. Further, the EBSA person suggested that the fiduciary's decision also must meet ERISA's exclusive-purpose duty. In the attachment, it's Q&A 21.

One wonders how a fiduciary should consider that exclusive-purpose duty concerning a single-employer plan if the employer, the plan sponsor, and the named plan fiduciary all are the same corporation, and the natural persons handling plan assets (and acting for the named plan fiduciary) all are employees of that corporation.

2008_ABA_QandA_EBSA.pdf