ERISA Fidelity Bonds Cover Losses From Theft and Fraud

Fidelity bonds are essentially a form of insurance against illegal acts. The coverage required by the Employee Retirement Income Security Act (ERISA) is usually called an ERISA fidelity bond, as it is specifically limited to financial losses from employee benefit plans, and not, for example, from a company’s general coffers. It is also known as a fiduciary bond.
When an administrator or trustee – or anyone serving in a fiduciary capacity for an employee benefit plan – steals or embezzles from the plan, the ERISA fidelity bond will cover those losses up to the coverage limit.

Required by ERISA

Under ERISA section 412, “Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded.” ERISA requires that fiduciaries carry bond coverage valued at:
  • At least 10 percent of the plan assets that are handled, and
  • A minimum of $1,000, and a maximum of $500,000 (or $1 million for retirement plans that hold company stock)
The law specifically requires that this fidelity bond insures a plan against losses due to fraud or dishonesty – theft being the most obvious example – on the part of those who handle plan funds or other property of an employee plan. This coverage includes, but is not limited to, the plan’s fiduciaries. “Handling” is defined as:
  • Actual physical contact with the funds or the power to have contact with or control funds
  • The power to transfer funds or other property from the plan or to negotiate the value of this property
  • Having disbursement authority
  • Having the authority to sign checks or other negotiable instruments
  • Supervisory or decision-making responsibility over these activities
The one exception to the bonding requirements of Section 412 is for employers’ and unions’ plans that are “unfunded.” Unfunded plans are those that pay out benefits only from the general assets of a union or employer. To qualify as unfunded, these assets must not be segregated in any way from your company’s general assets until any benefits are distributed.
Covers employees’ benefits; does not address any legal charges against plan administrators or others who embezzle or steal funds
Importantly, ERISA fidelity bonds exist to replace lost funds that are stolen from a company’s employee benefit plan. It does not insure anyone, even a company employee, against any liabilities, including legal claims for crimes they may have committed. The coverage these bonds provide is completely distinct from that of fiduciary liability insurance, which focuses on unintentional mismanagement.
“First-party” ERISA fidelity bond coverage is required for people in an in-house fiduciary, trustee, or administrative capacity for a company’s employee plan; “third-party” coverage is required for outside contractors or consultants.

Game Plan

  • Get more information on how ERISA defines fidelity bond requirements.
  • If your business works with contractors or outsider providers in “handling” your employee benefit plan funds, these firms must also carry ERISA fidelity bond coverage. They are responsible for carrying that coverage – make sure they do so.
Need Business Insurance?

Need Business Insurance?

For more than 200 years businesses have trusted The Hartford. We can help you get the right coverage with an online quote.
Iniciar cotización
The content displayed is for information only and does not constitute an endorsement by, or represent the view of, The Hartford.