ERISA fidelity bonds vs fiduciary liability insurance

An ERISA fidelity bond is required by federal law and pays the plan when someone who handles plan money commits fraud or dishonesty. Fiduciary liability insurance is optional and pays defense and covered settlements when someone says the plan's fiduciaries breached their duties. Buying one does not satisfy the other, and a plan that has only one has a hole.

The two products side by side

The Department of Labor spells out the difference in Field Assistance Bulletin 2008-04: a fidelity bond protects the plan against fraud or dishonesty by people who handle plan assets, fiduciary liability insurance generally covers losses from fiduciary breaches, and the insurance is not required under section 412. Both exist because they answer different questions: "Did someone steal from the plan?" and "Did someone in charge of the plan make a decision that hurt participants?" See fiduciary liability insurance for employee benefit plans for the second.

Who must be bonded, and for how much

The statute, 29 U.S.C. § 1112, requires every fiduciary and every person who handles plan funds or other property to be bonded. The bulletin narrows that in practice: fiduciaries must be bonded only if they handle plan funds, and service providers only if they handle plan funds too. "Handling" is broad. It reaches anyone whose role carries a risk of loss through fraud or dishonesty, such as having disbursement authority or check-signing power. A person who only gives investment advice is not bonded for that reason alone.

The amount, from the statute and the bulletin:

• 10 percent of the funds handled, based on the prior plan year.
• Minimum $1,000, even if 10 percent is less.
• Maximum $500,000 for each plan official, for each plan named on the bond.
• Maximum $1,000,000 for plan years beginning on or after January 1, 2008, if the plan holds employer securities. A plan does not count as holding employer securities merely because it invests in a broadly diversified pooled vehicle independent of the employer.

Two plans for illustration, both hypothetical:

1. A 401(k) plan whose treasurer handles about $2.4 million a year in contributions, benefit payments and transfers. Ten percent is $240,000, so the bond must be at least that.
2. A plan where the CFO handles $8 million. Ten percent is $800,000, but the cap applies, so $500,000 is the maximum the Labor Department can require (unless the plan holds employer stock, where the cap is $1 million).

Many plans carry more than the minimum. The statute sets a floor, and a loss bigger than the bond comes out of the plan.

Plans that need no bond

Section 412 does not apply to plans that are completely unfunded, meaning benefits are paid solely from the employer's or union's general assets. A self-funded health plan paid solely from corporate cash is the common example. The bulletin says that insured plan arrangements are not considered unfunded, but if nobody handles plan funds, no bond is required. Qualifying banks, insurance companies and registered broker-dealers also have exemptions. Whether your plan is exempt depends on how money actually moves, so ask your plan counsel or TPA. See ERISA basics for small employers: what the law requires of your benefit plans for a plain-language overview.

What the bond must say

The bulletin sets requirements that catch buyers who assume any policy will do:

• Coverage for fraud or dishonesty. The bond must protect the plan against loss from acts of fraud or dishonesty by persons required to be bonded, including larceny, theft, embezzlement, forgery and misappropriation. Narrow "employee theft" wording may fall short.
• No deductible on the required amount. The bond must cover from the first dollar up to the required amount. A deductible may apply only to coverage above what ERISA requires.
• Acceptable surety. The bond must be placed with a surety or reinsurer on the Treasury Department's list of approved sureties (Department Circular 570), and under certain conditions with Underwriters at Lloyd's. Neither the plan nor a party in interest may have a significant financial interest in the surety, agent or broker.
• Discovery period. The plan gets a one-year period after the bond ends to discover losses from the bond's term. A replacement bond has to carry that coverage forward.
• The plan must be an insured. One bond can cover several plans if each plan is named or identified on it, and each plan has to be able to recover as if it had its own bond.

The plan can pay for a proper section 412 bond from plan assets, the bulletin says. By contrast, section 1110(b) lets a plan pay for fiduciary insurance only if the insurer has recourse against a fiduciary who breached. Many companies pay for both themselves.

Can a crime policy serve as the bond?

Often yes. A plan can be added as an insured on an employer's commercial crime policy if the policy meets section 412. The policy's employee-theft insuring agreement must work as a bond. Edition matters: IRMI reported in August 2024 that under the revised ISO commercial crime forms, ERISA plan official dishonesty coverage is no longer included automatically with employee theft. It has to be elected. If your crime policy predates the change, or your carrier uses its own form, check how the plan is covered. See commercial crime insurance: what it covers and what it excludes and employee theft coverage and fidelity bonds: what they cover and who needs one for how crime coverage works generally. A checklist for your broker:

1. The plan is a named insured, and every plan is listed.
2. The ERISA plan official dishonesty coverage is elected where the form requires it.
3. The limit meets the 10 percent formula, with $1 million where the plan holds employer securities.
4. No deductible applies to the required amount.
5. Owners and anyone else who handles plan funds are not excluded.
6. The carrier is on Circular 570 or meets the Lloyd's conditions.
7. The one-year discovery period is preserved on renewal or replacement.

Where employee benefits liability fits

A third product often causes confusion. Employee benefits liability, usually an endorsement to the general liability policy, covers ordinary administrative mistakes such as failing to enroll an employee on time. It generally does not cover ERISA fiduciary breaches, which is why a company can have a bond, an EBL endorsement and still have no fiduciary coverage. See Employee benefits liability coverage: insuring HR administration errors. Many small companies end up buying fiduciary, crime and EPLI together in a Management liability packages: D&O, EPLI, fiduciary and crime.

Key takeaways

• The bond is mandatory for most funded plans; fiduciary liability insurance is not.
• The bond pays the plan for fraud or dishonesty by people who handle plan funds, with no deductible on the required amount.
• The required amount is 10 percent of funds handled, with a $1,000 minimum and a $500,000 cap per official per plan, or $1 million if the plan holds employer securities.
• A crime policy can serve as the bond only if the plan is an insured and the ERISA coverage is actually in force, and the revised ISO forms require you to elect it.
• Fiduciary liability insurance and employee benefits liability coverage do not satisfy the bonding requirement.