If you offer pensions or other similar employee benefits, it can be helpful to have an ERISA bond. First described by the Employee Retirement Income Security Act (ERISA), these bonds help protect employee benefit plans from fraud or malicious behavior. They come in several different styles, so you’ll need to figure out which one is right for you. To learn all the details about how this helpful type of bond works, explore our guide.
What Is the Difference Between an ERISA Bond and a Regular Bond?
If you already have standard surety bonds in place, you might be wondering whether you need to bother with an ERISA bond. However, it’s important not to get these two bond types confused. ERISA bonds are a very specific type of bond that covers some situations and circumstances not covered by a regular bond.
Legally speaking, an ERISA bond is a type of bond that meets all the guidelines of the ERISA law. It is meant to protect the employee benefit plan from any loss due to acts of fraud or dishonesty. This type of bond will replace losses if someone uses larceny, wrongful conversion, forgery, embezzlement, or other illegal means to take money from the plan. Furthermore, ERISA plans are legally required not to have deductibles. Employees won’t have to pay any money to get their disbursement if someone steals it.
Meanwhile, a regular fiduciary bond only covers regular circumstances. These bonds are meant to be liability insurance in case the fiduciary follows the law but commits breaches of fiduciary responsibilities. For example, consider a fidelity bond coverage situation where the person managing the plan made a poor choice and lost a bunch of money. The employees could petition the court to have the fiduciary liability insurance replace their losses.
Ultimately, ERISA bonds are both broader and more specific than regular bonds. They only kick in if a plan loses money due to fraud or other illegal acts. However, once this situation arises, the ERISA bond will cover the entire plan’s losses.
Purpose of ERISA Bond and Who Needs One
The Employee Retirement Income Security Act of 1974 was written to ensure that employee pension plans were protected from acts of fraud. This act was created after several major companies mishandled retirement plans and left employees without retirement plans or any sort of insurance policy. The Department of Labor realized that financial loopholes meant that employees often had zero protection from fraud. Therefore, they decided to require all companies to get a bond to make up for any theft, embezzlement, or other fraudulent losses.
Since the ERISA bond is meant to protect employees from fraud, a wide variety of employers and businesses will need this type of bond. According to ERISA, anyone who handles or exercises control over plan assets must be properly bonded. Service providers that handle benefit plan funds may also need an ERISA bond.
Just about every business with any employee benefit plan or pension plan needs an ERISA bond. However, there are some rare cases where this type of bond isn’t needed. Since an ERISA bond is technically a legal requirement, it can be helpful to consult with an employment lawyer. They can examine your situation and let you know whether or not an ERISA bond is necessary.
How to Get an ERISA Bond
Because ERISA bonds are a legal requirement, they are very widely available. You can find them at a variety of surety bond companies, and the application process is simple. In every ERISA bond, there will be two involved parties. The bond process requires a named insured, who is anyone who handles the employee benefit plan, to purchase a bond from a surety company. Bonds must be purchased from a licensed officer listed in the Department of the Treasury’s Department Circular 570. In exchange for paying a set price, you get coverage for a limited period of time. To purchase a bond, you usually just need to make sure that you meet a few specific requirements.
Cost to Obtain an ERISA Bond
The requirement for ERISA bonds is that you have enough money to pay for the plan. This is one of the most important bond requirements. Just like standard insurance, the whole concept of a bond relies on you paying a small sum of money and the bond company paying a large sum of money if an unlikely event occurs.
The cost of your ERISA bond premium will vary depending on how large of a bond you need. ERISA laws require that each person be bonded for at least 10% of the total funds they handled in the previous year. The bonds have a minimum amount of $1,000 and a maximum amount of $1,000,000. Therefore, there is a lot of variety in the bond amount.
Every bond provider has slightly different premium prices. You usually end up paying somewhere around 1% of the bond’s total cost. The average company pays between $100 and $300 each year for its ERISA surety bond premiums. Many things impact your quoted premium, including:
- Your location
- The amount of money the bond covers
- The number of people handling the plan
- How long your business has been around
- Whether you’ve experienced fraud in the past
Underwriting Requirements for ERISA Bonds
For most types of bonds and other insurance, underwriting is a lengthy process. The surety bond company company goes over the plan sponsor’s finances carefully, and you can only get a bond if you meet strict requirements. However, fidelity bonding requirements for ERISA bonds are a little different. Since they’re a government-required bond and only cover instances of fraud, bonding companies will not be as strict with providing bond coverage.
Instead of carefully assessing liability risks and credit ratings, an ERISA surety company will mostly just focus on whether or not you fall into the legal category of people who need an ERISA bond. The underwriters will check to ensure that all applicants for the bond are people who are handling plan funds. They will also make sure that your business does not meet any of the exemptions for receiving an ERISA bond. If you do not legally need an ERISA bond, most companies will not want to bother with providing a bond for you.
Underwriters will also ask about things like how many plan participants there are and whether any non-qualifying assets, such as real estate, are included in the plan. Your answers to these questions do not prevent you from getting an ERISA bond. However, things like the listing of approved sureties help underwriters figure out what coverage amount you need.
Requirements and Considerations to Obtain ERISA Bonds
There aren’t many ERISA bonding requirements, so the main consideration you need to be aware of is just the difference between qualifying and non-qualifying assets. Qualifying assets are all finances held by reputable financial institutions. They include things like a mutual fund, investment portfolio, savings account, or another similar property. Non-qualifying assets are any employee benefit plan backed by items not held in a financial institution. These general assets include things like artwork, real estate, or collectibles.
When an employee benefit plan has more than 5% of its value in non-qualifying assets, getting an ERISA bond can be a little more complicated. You don’t necessarily need a bond equal to 10% of the worth of the non-qualifying assets. However, not getting a bond that covers your non-qualifying assets can open the plan up to audits and other financial oversight. It can often be easier to go ahead and pay extra for a larger ERISA bond that also covers the estimated value of the non-qualifying assets.
What Happens if You Don’t Have an ERISA Bond?
The law does require bonding of pension plans. The act that specified the need for bonds did not lay out any specific penalty for businesses that do not have one. However, you will violate U.S. Department of Labor (DOL) regulations. They will be able to apply a financial penalty, and the amount is left up to their discretion.
Usually, if the DOL becomes aware that you don’t have an ERISA bond, they will start with an audit of your company’s employee benefit plan. If they discover that your lack of a plan was an oversight or a mistake, they might choose to be lenient. However, if they find that there was a willful misapplication of ERISA, they might penalize you more heavily. Though rare, the court can order companies to pay hundreds of thousands of dollars in fines.
Even if you don’t get slapped with massive DOL fines, skipping an ERISA bond can lead to major problems. If someone does steal money from your pension plan and it’s not covered by a bond, your company is personally liable. Both the owner of the company and the plan fiduciaries may be held personally responsible. Beneficiaries will be able to bring a lawsuit against the plan administrator and request that they pay back lost funds out of their savings.
The majority of businesses with employee benefit plans do need an ERISA bond. However, there are some potential exemptions.
- Unfunded plans: If the benefits are completely funded from the employer’s assets, not the employees’ paychecks, a bond isn’t necessary.
- Plans for regulated financial institutions: Certain regulated financial institutions, such as banks, insurance companies, and registered brokers, may not need a bond.
- Plans for exempt organizations: Church plans and government plans usually do not need ERISA bonds.
As you can see, ERISA plans provide both employers and their employees with peace of mind. If you want to protect your employees’ finances and follow all federal guidelines, it’s essential to have an ERISA bond.