ERISA Bond for PEPs

Do the plan sponsors who adopt a PEP also need to carry their own ERISA Bond ?

The Department of Labor released an Information Letter on 9/7/2022 specifically addressing this question (see attached).

There are 3 interesting points.

First, the DOL notes the maximum bond for a PEP is $1,000,000.

Next, on page 2, the DOL observes the PEP does not have to extend ERISA fiduciary bond coverage to employees of employers participating in a PEP.  This conclusion follows comments that the bonding regulations address the point at which contributions to a plan become "funds or other property" of the plan for purposes of the bonding requirements, and this does not occur until the contributions are received by the plan administrator (i.e., the PEP).

Immediately after arriving at this conclusion, the DOL comments "that there may be circumstances in which participant contributions are not timely transmitted to the PEP".

In other words, the contributions handled by employees of employers are not plan assets until the contributions are received by the PEP, or under some unspecified circumstances, the contributions are late deposits and then they become plan assets in the hands of the employer.

Then, at the end of the letter the DOL observes the PEP needs to make sure that an independent contractor administrator or manager who handles plan funds must be properly covered by an ERISA fiduciary bond.

To answer your question, it appears that according to this letter, the employees of employers to adopt the PEP do not need their own ERISA bond unless they fail to timely transmit contributions. 

Gummint logic.

DOL Information Letter 09-07-2022.pdf

Thanks Paul I.  I previously read the DOL informational letter, but felt like a clear answer wasn't provided.   To me it didn't specifically state the employer adopting the PEP, but did talk about employees of the employer.  Going by this, I am leaning as the employer adopting the PEP does not need an ERISA Bond.

I agree.  Keep in mind that the Pooled Plan Provider must designate a fiduciary to enforce the timely collection of payroll-based amounts so the PEP is in a position to prevent or minimize late deposits. 

An argument could be made that the PPP must ensure that payroll providers and employees of employers who are considered to handle funds have bond coverage.  If a PPP did not arrange for coverage of those employees but instead tried to get the employers to obtain coverage, the PPP quickly learn that is easier to herd cats than to track bond coverage on an employer-by-employer basis.

One advising a participating employer might consider, and advise about, these points:

A participating employer is a pooled-employer plan’s fiduciary. ERISA § 3(43)(B)(iii).

ERISA makes it a fiduciary breach (and a Federal crime) for a person to handle plan assets or serve as a plan’s fiduciary unless the person is “bonded” with ERISA fidelity-bond insurance, at least for the § 412(a)-required amount.

Even if one is confident that the employer-fiduciary never handles plan assets, construing § 412(a) to require only a bond of $0.00 is a doubtful interpretation of the statute. Section 412(a) includes: “In no case shall such bond be less than $1,000[.]

An interpretation in the 2008 Field Assistance Bulletin or in the 2022 Information Letter is not a rule or regulation. A court need not defer to it. A court need not even consider it. If a court considers an executive agency’s nonrule guidance, a court considers the stated reasoning and evaluates whether the reasoning persuades the court about how to interpret an ambiguous statute.

Not buying the insurance because one assumes an employer-fiduciary regularly pays over contributions promptly and so does not handle plan assets is risky. Fidelity-bond insurance does not protect a plan from a theft loss unless the insurance is in effect when the theft happens.

Imagine a plan suffers a theft loss with the theft happening before money was collected by the pooled-employer plan’s trustee or its agent. Imagine all or some of the loss would be covered had the employer obtained ERISA fidelity-bond insurance. Could a participant harmed by the theft loss assert that the employer-fiduciary is personally liable for the uncovered loss because the fiduciary failed to do what the statute commands? Consider ERISA § 409(a).

Even if the employer pays the insurance premium (and it need not, because fidelity-bond coverage is a plan-administration expense), might that be much less expensive than bearing personal liability for a theft loss?