What Is an ERISA Bond and Who Needs One?
This is a type of fidelity bond required of every person who handles employee retirement plans, a so-called “plan official”. Under the Employee Retirement Income Security Act of 1974 (ERISA), such officials, or fiduciaries, are in charge of managing the funds and assets in a plan and must become bonded as a guarantee for their compliance with the Act's conditions on handling plans.
While most businesses with employee benefit plans require an ERISA bond, some exemptions do exist:
- Unfunded plans: if benefits are solely funded by the employer's assets, not employee pay, a bond may not be necessary.
- Regulated financial institutions: certain entities like banks, insurance companies, and registered brokers may be exempt.
- Exempt organizations: church and government plans typically don't need ERISA bonds.
ERISA bonds offer peace of mind for employers and employees alike. If a fiduciary steals or misappropriates any of the funds in a plan, a claim can be filed against their bond to compensate for any losses and damages that have occurred to the plan as a result. The surety then extends compensation up to the full amount of the bond. In return, the fiduciary needs to repay the surety for any compensation it has extended.
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:
Underwriting Requirements and Considerations to Obtain ERISA Bonds
While underwriting is usually lengthy, ERISA surety companies, focusing on the legal need for the bond, are less strict. Underwriters ensure applicants handle plan funds and lack ERISA exemptions. If not legally required, obtaining an ERISA bond might prove challenging.
Underwriters inquire about plan participants and non-qualifying assets like real estate. While these factors don't hinder obtaining a bond, approved surety listings assist in determining the necessary coverage amount.
ERISA bonding has few requirements, with the primary focus on distinguishing between qualifying and non-qualifying assets. Qualifying assets, held by reputable financial institutions, include mutual funds, investment portfolios, and savings accounts. Non-qualifying assets involve items like artwork, real estate, or collectibles.
If an employee benefit plan exceeds 5% in non-qualifying assets, obtaining an ERISA bond becomes more complex. While not mandatory, a bond covering at least 10% of non-qualifying assets is advisable to avoid audits and financial oversight. Opting for a larger ERISA bond that includes the estimated value of non-qualifying assets provides comprehensive coverage.
To find out how surety bonds work, and why they are required, see our detailed 'What is a surety bond' guide!
Want to find out more about the bonding requirements for this bond? Call us at 866.450.3412 anytime.
Cost of Your ERISA Bond
The cost of your ERISA bond is a fraction of the total bond amount. ERISA bonds are determined individually based on the asset types in the benefit plan - qualifying held by financial institutions and non-qualifying like property or artwork.
- If the plan holds only qualifying assets or up to 5% non-qualifying assets, the required bond is 10% of the plan's funds.
- If the plan includes 5% or more non-qualifying assets, the bond must be the greater of 10% of the total value or 100% of non-qualifying assets, with a maximum limit of $500,000 (or $1,000,000 with exemptions for employer-sponsored securities).
The actual cost, a fraction of this total, depends on the fiduciary's credit score and financial indicators.
Applicants who have a high credit score, one of 700 FICO or more, typically get the lowest rates. Such applicants can expect to receive a rate of .75%-1.5% on their ERISA bond. Applicants with slightly lower rates can expect a 1%-2.5% rate on their bond.
Even with a low credit score, you can still get bonded through our Bad Credit Program, which considers all financial factors on a case-by-case basis. While rates are higher than those for high-score applicants, this program ensures you can obtain your bond.
Want to know how much your bond will cost? Complete our bond application form to receive a free and exact quote on your bond!
What Happens If You Don't Have an ERISA Bond?
Without an ERISA bond, you violate pension plan bonding requirements, risking U.S. Department of Labor (DOL) penalties. The DOL, with discretionary authority, can impose financial penalties. Noncompliance triggers a DOL audit, starting with leniency for oversights but severe penalties for willful noncompliance. Court-ordered fines, potentially hundreds of thousands, are rare but possible.
Beyond DOL fines, the absence of an ERISA bond exposes your company to significant liabilities. If theft occurs and isn't covered by a bond, personal liability extends to the owner and plan fiduciaries. Beneficiaries can file lawsuits, compelling plan administrators to repay lost funds from personal savings.
Get Your Bond Now!
Start your application by completing our bond form. We will then provide you with a free quote on your bond along with further information on completing your application. Your bond will be issued in two working days after we receive your final application papers.
We will send you your bond by post as well as by e-mail.
Do you want to know more about this type of bond? Call us at 866.450.3412 for more information regarding the bonding process, or your bond's cost.
