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Date: |
November 25, 2008 |
Memorandum For: |
Virginia C. Smith
Director of Enforcement Regional Directors |
From: |
Robert J. Doyle Director of Regulations
and Interpretations |
Subject: |
Guidance Regarding ERISA Fidelity Bonding Requirements
|
ERISA section 412 and related regulations (29 C.F.R. § 2550.412-1 and
29 C.F.R. Part 2580) generally require that every fiduciary of an employee
benefit plan and every person who handles funds or other property of such
a plan shall be bonded. ERISA’s bonding requirements are intended to
protect employee benefit plans from risk of loss due to fraud or
dishonesty on the part of persons who ”handle” plan funds or other
property. ERISA refers to persons who handle funds or other property of an
employee benefit plan as “plan officials.” A plan official must be
bonded for at least 10% of the amount of funds he or she handles, subject
to a minimum bond amount of $1,000 per plan with respect to which the plan
official has handling functions. In most instances, the maximum bond
amount that can be required under ERISA with respect to any one plan
official is $500,000 per plan. Effective for plan years beginning on or
after January 1, 2007, however, the maximum required bond amount is
$1,000,000 for plan officials of plans that hold employer securities.(1)
Since enactment of ERISA, the Agency has provided various forms of
guidance concerning the application of ERISA’s bonding requirements.
Over the past several years, however, a number of questions have been
raised by our Regional Offices and others concerning the bonding rules. In
addition, amendments to section 412 that were enacted in the Pension
Protection Act of 2006 (PPA) have presented questions concerning the
application of those changes to plan fiduciaries and other persons
handling plan funds or other property. This Bulletin provides guidance, in
a question and answer format, for our Regional Offices concerning the
application of ERISA’s bonding requirements and the PPA changes thereto.
This Bulletin is not intended to address any civil or criminal liability
that may result from losses to a plan caused by acts of fraud or
dishonesty or violations of ERISA’s fiduciary provisions.
An ERISA section 412 bond (sometimes referred to as an ERISA fidelity
bond) must protect the plan against loss by reason of acts of fraud or
dishonesty on the part of persons required to be bonded, whether the
person acts directly or through connivance with others. ERISA § 412; 29
C.F.R. § 2580.412-1. The term “fraud or dishonesty” for this purpose
encompasses risks of loss that might arise through dishonest or fraudulent
acts in handling plan funds or other property. This includes, but is not
limited to, larceny, theft, embezzlement, forgery, misappropriation,
wrongful abstraction, wrongful conversion, willful misapplication, and
other acts where losses result through any act or arrangement prohibited
by 18 U.S.C. § 1954. The bond must provide recovery for loss occasioned
by such acts even though no personal gain accrues to the person committing
the act and the act is not subject to punishment as a crime or
misdemeanor, provided that within the law of the state in which the act is
committed, a court would afford recovery under a bond providing protection
against fraud or dishonesty. 29 C.F.R. § 2580.412-9. Deductibles or other
similar features that transfer risk to the plan are prohibited. 29 C.F.R. §
2580.412-11. [See also Bond Terms and Provisions, Q-26 through Q-30.]
No. The fidelity bond required under section 412 of ERISA
specifically insures a plan against losses due to fraud or dishonesty
(e.g., theft) on the part of persons (including, but not limited to, plan
fiduciaries) who handle plan funds or other property. Fiduciary liability
insurance, on the other hand, generally insures the plan against losses
caused by breaches of fiduciary responsibilities.
Fiduciary liability insurance is neither required by nor subject to
section 412 of ERISA. Whether a plan purchases fiduciary liability
insurance is subject, generally, to ERISA’s fiduciary standards,
including section 410 of ERISA. ERISA section 410 allows, but does not
require, a plan to purchase insurance for its fiduciaries or for itself
covering losses occurring from acts or omissions of a fiduciary. Any such
policy paid for by the plan must, however, permit recourse by the insurer
against the fiduciary in the case of a fiduciary breach. In some cases,
the fiduciary may purchase, at his or her expense, protection against the
insurer's recourse rights.
In a typical bond, the plan is the named insured and a surety company
is the party that provides the bond. The persons “covered” by the bond
are the persons who “handle” funds or other property of the plan
(i.e., plan officials). As the insured party, the plan can make a claim on
the bond if a plan official causes a loss to the plan due to fraud or
dishonesty. [See also Bond Terms and Provisions, Q-31 and Q-32.]
No. Bonds must be placed with a surety or reinsurer that is named on
the Department of the Treasury's Listing of Approved Sureties, Department
Circular 570 (available at fms.treas.gov/c570/c570.html). 29 C.F.R. §
2580.412-21, § 2580.412-23, § 2580.412-24. Under certain conditions,
bonds may also be placed with the Underwriters at Lloyds of London. 29
C.F.R. § 2580.412-25, § 2580.412.26. In addition, neither the plan nor a
party-in-interest with respect to the plan may have any control or
significant financial interest, whether direct or indirect, in the surety,
or reinsurer, or in an agent or broker through which the bond is obtained.
ERISA § 412(c); 29 C.F.R. § 2580.412-22 and §§ 2580.412-33 to
2580.412.36. If a surety becomes insolvent, is placed in receivership, or
has its authority to act as an acceptable surety revoked, the
administrator of any plan insured by the surety is responsible, upon
learning of such facts, for securing a new bond with an acceptable surety.
29 C.F.R. § 2580.412-21(b).
Every person who “handles funds or other property” of an
employee benefit plan within the meaning of 29 C.F.R. § 2580.412-6 (i.e.,
a plan official) is required to be bonded unless covered under one of the
exemptions in section 412 for certain banks, insurance companies, and
registered brokers and dealers, or by one of the regulatory exemptions
granted by the Department in its regulations. [See Exemptions From The Bonding Requirements, Q-12 through Q-15,
Funds Or Other Property, Q-17,
and Handling Funds Or Other Property, Q-18 through Q-21.] Plan officials
will usually include the plan administrator and those officers and
employees of the plan or plan sponsor who handle plan funds by virtue of
their duties relating to the receipt, safekeeping and disbursement of
funds. Plan officials may also include other persons, such as service
providers, whose duties and functions involve access to plan funds or
decision-making authority that can give rise to a risk of loss through
fraud or dishonesty. Where a plan administrator, service provider, or
other plan official is an entity, such as a corporation or association,
ERISA’s bonding requirements apply to the natural persons who perform
“handling” functions on behalf of the entity. See 29 C.F.R. §
2550.412-1(c), § 2580.412-3 and § 2580.412-6.
The responsibility for ensuring that plan officials are bonded may
fall upon a number of individuals simultaneously. In addition to a plan
official being directly responsible for complying with the bonding
requirements in section 412(a) of ERISA, section 412(b) specifically
states that it is unlawful for any plan official to permit any other plan
official to receive, handle, disburse, or otherwise exercise custody or
control over plan funds or other property without first being properly
bonded in accordance with section 412. In addition, section 412(b) makes
it unlawful for “any other person having authority to direct the
performance of such functions” to permit a plan official to perform such
functions without being bonded. Thus, by way of example, if a named
fiduciary hires a trustee for a plan, the named fiduciary must ensure that
the trustee is either subject to an exemption or properly bonded in
accordance with section 412, even if the named fiduciary is not himself or
herself required to be bonded because he or she does not handle plan funds
or other property.
No. Fiduciaries must be bonded only if they “handle” funds or
other property of an employee benefit plan and do not fall within one of
the exemptions in section 412 or the regulations. [See also Exemptions From The Bonding Requirements, Q-12 through Q-15, and
Handling Funds Or Other Property, Q-18 through Q-21.]
As noted above, only those persons who “handle” funds or other
property of an employee benefit plan are required to be bonded under
section 412. Therefore, a service provider, such as a third-party
administrator or investment advisor, will be subject to bonding under
section 412 only if that service provider “handles” funds or other
property of an employee benefit plan. See 29 C.F.R. §
2580.412-3(d), § 2580.412-4, § 2580.412-5 and § 2580.412-6. [See also Funds Or Other Property, Q-17, and
Handling Funds Or Other Property,
Q-18.]
No. A person who provides investment advice, but who does not
exercise or have the right to exercise discretionary authority with
respect to purchasing or selling securities or other property for the
plan, is not required to be bonded solely by reason of providing such
investment advice. If, however, in addition to rendering such investment
advice, such person performs any additional functions that constitute “handling”
plan funds or other property within the meaning of 29 C.F.R. §
2580.412-6, then that person must be bonded in accordance with section
412. [See also Handling Funds Or Other Property, Q-18 through Q-21.]
No. A service provider can purchase its own separate bond insuring
the plan, and nothing in ERISA specifically requires the plan to pay for
that bond. If, on the other hand, a plan chooses to add a service provider
to the plan’s existing bond, that decision is within the discretion of
the plan fiduciaries. Regardless of who pays for the bond, section 412
provides that if a service provider to the plan is required to be bonded,
the plan fiduciaries who are responsible for retaining and monitoring the
service provider, and any plan officials who have authority to permit the
service provider to perform handling functions, are responsible for
ensuring that such service provider is properly bonded before he or she
handles plan funds. ERISA § 412(b). [See also Q-6, above, and Form And
Scope Of Bond, Q-22 and Q-25.]
Yes. Because the purpose of ERISA’s bonding requirements is to
protect employee benefit plans, and because such bonds do not benefit plan
officials or relieve them from their obligations to the plan, a plan’s
purchase of a proper section 412 bond will not contravene ERISA’s
fiduciary provisions in sections 406(a) and 406(b). See 29 C.F.R.
§ 2509.75-5, FR-9.
No. The bonding requirements under ERISA section 412 do not apply to
employee benefit plans that are completely unfunded or that are not
subject to Title I of ERISA. ERISA § 412(a)(1); 29 C.F.R. § 2580.412-1,
§ 2580.412-2.
An unfunded plan is one that pays benefits only from the general
assets of a union or employer. The assets used to pay the benefits must
remain in, and not be segregated in any way from, the employer’s or
union’s general assets until the benefits are distributed. Thus, a plan
will not be exempt from ERISA’s bonding requirements as “unfunded”
if:
-
any benefits under the plan are provided or
underwritten by an insurance carrier or service or other organization;
-
there is a trust or other separate entity to which
contributions are made or out of which benefits are paid;
-
contributions to the plan are made by the employees,
either through withholding or otherwise, or from any source other than
the employer or union involved; or
-
there is a separately maintained bank account or
separately maintained books and records for the plan or other evidence
of the existence of a segregated or separately maintained or
administered fund out of which plan benefits are to be provided.
As a general rule, however, the presence of special ledger accounts or
accounting entries for plan funds as an integral part of the general books
and records of an employer or union will not, in and of itself, be deemed
sufficient evidence of segregation of plan funds to take a plan out of the
exempt category, but shall be considered along with the other factors and
criteria discussed above in determining whether the exemption applies. 29
C.F.R. § 2580.412-1, § 2580.412-2.
As noted above, an employee benefit plan that receives employee
contributions is generally not considered to be unfunded. Nevertheless,
the Department treats an employee welfare benefit plan that is associated
with a fringe benefit plan under Internal Revenue Code section 125 as
unfunded, for annual reporting purposes, if it meets the requirements of
DOL Technical Release 92-01,(2) even though it includes employee
contributions. As an enforcement policy, the Department will treat plans
that meet such requirements as unfunded for bonding purposes as well.
No. As noted above, a plan is considered “unfunded” for bonding
purposes only if all benefits are paid directly out of an employer’s or
union’s general assets. 29 C.F.R. § 2580.412-2. Thus, insured plan
arrangements are not considered “unfunded” and are not exempt from the
bonding requirements in section 412 of ERISA. The insurance company that
insures benefits provided under the plan may, however, fall within a
separate exemption from ERISA’s bonding requirements. See ERISA § 412;
29 C.F.R. § 2580.412-31, § 2580.412-32. In addition, if no one “handles”
funds or other property of the insured plan, no bond will be required
under section 412. For example, as described in 29 C.F.R. §
2580.412-6(b)(7), in many cases contributions made by employers or
employee organizations or by withholding from employees’ salaries are
not segregated from the general assets of the employer or employee
organization until paid out to purchase benefits from an insurance
carrier, insurance service or other similar organization. No bonding is
required with respect to the payment of premiums, or other payments made
to purchase such benefits, directly from general assets, nor with respect
to the bare existence of the contract obligation to pay benefits. Such
insured arrangements would not normally be subject to bonding except to
the extent that monies returned by way of benefit payments, cash
surrender, dividends, credits or otherwise, and which by the terms of the
plan belong to the plan (rather than to the employer, employee
organization, or insurance carrier), were subject to “handling” by a
plan official. [See also 29 C.F.R. § 2580.412-5(b)(2); Q-15,
below; and Handling Funds Or Other Property, Q-18.]
Yes. Both section 412 and the regulations found in 29 C.F.R. Part
2580 contain exemptions from ERISA’s bonding requirements. Section 412
specifically excludes any fiduciary (or any director, officer, or employee
of such fiduciary) that is a bank or insurance company and which, among
other criteria, is organized and doing business under state or federal
law, is subject to state or federal supervision or examination, and meets
certain capitalization requirements. ERISA § 412(a)(3). Section 412 also
excludes from its requirements any entity which is registered as a broker
or a dealer under section 15(b) of the Securities Exchange Act of 1934
(SEA), 15 U.S.C. 78o(b), if the broker or dealer is subject to the
fidelity bond requirements of a “self regulatory organization” within
the meaning of SEA section 3(a)(26), 15 U.S.C. 78c(a)(26). ERISA §
412(a)(2). As with section 412’s other statutory and regulatory
exemptions, this exemption for brokers and dealers applies to both the
broker-dealer entity and its officers, directors and employees.
In addition to the exemptions outlined in section 412, the Secretary
has issued regulatory exemptions from the bonding requirements. These
include an exemption for banking institutions and trust companies that are
subject to regulation and examination by the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, or the Federal
Deposit Insurance Corporation. 29 C.F.R. § 2580.412-27, § 2580.412-28.
Unlike the exemption in section 412 for banks and trust companies, this
regulatory exemption applies to banking institutions even if they are not
fiduciaries to the plan, but it does not apply if the bank or trust
company is subject only to state regulation.
The Department’s regulations also exempt any insurance carrier (or
service or similar organization) that provides or underwrites welfare or
pension benefits in accordance with state law. This exemption applies only
with respect to employee benefit plans that are maintained for the benefit
of persons other than the insurance carrier or organization’s own
employees. 29 C.F.R. § 2580.412-31, § 2580.412-32. Unlike the exemption
in section 412 for insurance companies, this regulatory exemption applies
to insurance carriers even if they are not plan fiduciaries, but it does
not apply to plans that are for the benefit of the insurance company’s
own employees.
In addition to the exemptions described above, the Secretary has issued
specific regulatory exemptions for certain savings and loan associations
when they are the administrators of plans for the benefit of their own
employees. 29 C.F.R. § 2580.412-29, § 2580.412-30.
There is no specific exemption in section 412 for SEP (IRC § 408(k)) or
SIMPLE IRA (IRC § 408(p)) retirement plans. Such plans are generally
structured in such a way, however, that if any person does “handle”
funds or other property of such plans that person will fall under one of
ERISA’s financial institution exemptions. ERISA § 412; 29 C.F.R. §
2580.412-27, § 2580.412-28.
The term “funds or other property” generally refers to all funds or
property that the plan uses or may use as a source for the payment of
benefits to plan participants or beneficiaries. 29 C.F.R. § 2580.412-4.
Thus, plan “funds or other property” include contributions from any
source, including employers, employees, and employee organizations, that
are received by the plan, or segregated from an employer or employee
organization’s general assets, or otherwise paid out or used for plan
purposes. 29 C.F.R. § 2580.412-5(b)(2). Plan “funds or other property”
also include all items in the nature of quick assets, such as cash, checks
and other negotiable instruments, government obligations, marketable
securities, and all other property or items that are convertible into cash
or have a cash value that are held or acquired for the ultimate purpose of
distribution to plan participants or beneficiaries.
Plan “funds or other property” include all plan investments, even
those that are not in the nature of quick assets, such as land and
buildings, mortgages, and securities in closely-held corporations,
although permanent assets that are used in operating the plan, such as
land and buildings, furniture and fixtures, or office and delivery
equipment used in the operation of the plan, are generally not considered
to be “funds or other property” of the plan for bonding purposes. 29
C.F.R. § 2580.412-4. It is important to note, however, that ERISA’s
bonding requirements apply only to persons who “handle” plan “funds
or other property.” Whether a person is “handling” any given plan
“funds or other property” so as to require bonding will depend on
whether that person’s relationship to the property is such that there is
a risk that the person, acting alone or in connivance with others, could
cause a loss of such funds or other property though fraud or dishonesty.
[See Handling Funds Or Other Property,
Q-18.]
The term “handling” carries a broader meaning than actual
physical contact with “funds or other property” of the plan. A person
is deemed to be “handling” funds or other property of a plan so as to
require bonding whenever his duties or activities with respect to given
funds or other property are such that there is a risk that such funds or
other property could be lost in the event of fraud or dishonesty on the
part of such person, whether acting alone or in collusion with others.
Subject to this basic standard, the general criteria for determining “handling”
include, but are not limited to:
-
physical contact (or power to exercise physical contact or control)
with cash, checks or similar property;
-
power to transfer funds or other property from the plan to oneself
or to a third party, or to negotiate such property for value (e.g.,
mortgages, title to land and buildings, or securities);
-
disbursement authority or authority to direct disbursement;
-
authority to sign checks or other negotiable instruments; or
-
supervisory or decision-making responsibility over activities that
require bonding.
29 C.F.R. 2580.412-6(b). [See also Funds Or Other Property, Q-17.]
“Handling” does not occur, on the other hand, and bonding is not
required, under circumstances where the risk of loss to the plan through
fraud or dishonesty is negligible. This may be the case where the risk of
mishandling is precluded by the nature of the “funds or other property”
at issue (e.g., checks, securities, or title papers that cannot be
negotiated by the persons performing duties with respect to them), or
where physical contact is merely clerical in nature and subject to close
supervision and control. 29 C.F.R. § 2580.412-6(a)(2), §
2580.412-6(b)(1). In the case of persons with supervisory or
decision-making responsibility, the mere fact of general supervision would
not, necessarily, in and of itself, mean that such persons are “handling”
funds so as to require bonding. Factors to be accorded weight are the
system of fiscal controls, the closeness and continuity of supervision,
and who is in fact charged with or actually exercising final
responsibility for determining whether specific disbursements,
investments, contracts, or benefit claims are bona fide and made in
accordance with the applicable trust or other plan documents. 29 C.F.R. §
2580.412-6(b)(6). Again, the general standard for determining whether a
person is “handling” plan funds or other property is whether the
person’s relationship with respect those funds is such that he or she
can cause a loss to the plan through fraud or dishonesty.
Yes, if the committee’s decision to pay benefits is final and not
subject to approval by someone else, the committee members are “handling”
plan funds within the meaning of 29 C.F.R. § 2580.412-6, and each
committee member must be bonded.
Yes, if the committee’s investment decisions are final and not
subject to approval by someone else, the committee members are “handling”
within the meaning of 29 C.F.R. § 2580.412-6, and each committee member
must be bonded.
No, not if someone else is responsible for final approval of the
committee’s recommendations. 29 C.F.R. § 2580.412-6.
The Department’s regulations allow substantial flexibility
regarding bond forms, as long as the bond terms meet the substantive
requirements of section 412 and the regulations for the persons and plans
involved. Examples of bond forms include: individual; name schedule
(covering a number of named individuals); position schedule (covering each
of the occupants of positions listed in the schedule); and blanket
(covering the insured’s officers and employees without a specific list
or schedule of those being covered). A combination of such forms may also
be used. 29 C.F.R. § 2580.412-10.
A plan may be insured on its own bond or it can be added as a named
insured to an existing employer bond or insurance policy (such as a “commercial
crime policy”), so long as the existing bond is adequate to meet the
requirements of section 412 and the regulations, or is made adequate
through rider, modification or separate agreement between the parties. For
example, if an employee benefit plan is insured on an employer’s crime
bond, that bond might require an “ERISA rider” to ensure that the plan’s
bonding coverage complies with section 412 and the Department’s
regulations. Service providers may also obtain their own bonds, on which
they name their plan clients as insureds, or they may be added to a plan’s
bond by way of an “Agents Rider.” Choosing an appropriate bonding
arrangement that meets the requirements of ERISA and the regulations is a
fiduciary responsibility. See 29 C.F.R. § 2580.412-10 and § 2580.412-20.
[See also ERISA Fidelity Bonds, Q-3, Q-4, Q-10, and
Bond Terms and Provisions, Q-26 through Q-34.]
Yes. ERISA does not prohibit more than one plan from being named as
an insured under the same bond. Any such bond must, however, allow for a
recovery by each plan in an amount at least equal to that which would have
been required for each plan under separate bonds. Thus, if a person
covered under a bond has handling functions in more than one plan insured
under that bond, the amount of the bond must be sufficient to cover such
person for at least ten percent of the total amount that person handles in
all the plans insured under the bond, up to the maximum required amount
for each plan. 29 C.F.R. § 2580.412-16(c), § 2580.412-20. [See also Amount
Of Bond, Q-35 through Q-42.]
Example: X is the administrator of two welfare plans run by the
same employer and he “handled” $100,000 in the preceding reporting
year for Plan A and $500,000 for Plan B. If both plans are insured under
the same bond, the amount of the bond with respect to X must be at least
$60,000, or ten percent of the total funds handled by X for both plans
insured under the bond ($10,000 for Plan A plus $50,000 for Plan B).
Example: Y is covered under a bond that insures two separate
plans, Plan A and Plan B. Both plans hold employer securities. Y handles
$12,000,000 in funds for Plan A and $400,000 for Plan B. Accordingly, Plan
A must be able to recover under the bond up to a maximum of $1,000,000 for
losses caused by Y, and Plan B must be able to recover under the bond up
to a maximum of $40,000 for losses caused by Y.
No. As noted above, when a bond insures more than one plan, the bond’s
limit of liability must be sufficient to insure each plan as though such
plan were bonded separately. 29 C.F.R. § 2580.412-16(c). Further, in
order to meet the requirement that each plan insured on a multi-plan bond
be protected, the bonding arrangement must ensure that payment of a loss
sustained by one plan will not reduce the amount of required coverage
available to other plans insured under the bond. This can be achieved
either by the terms of the bond or rider to the bond, or by separate
agreement among the parties concerned that payment of a loss sustained by
one of the insureds shall not work to the detriment of any other plan
insured under the bond with respect to the amount for which that plan is
required to be insured. 29 C.F.R. § 2580.412-16(d), § 2580.412-18.
Yes. Nothing in ERISA prohibits a plan from using more than one
surety to obtain the necessary bonding, so long as the surety is an
approved surety. 29 C.F.R. § 2580.412-21. Persons required to be bonded
may be bonded separately or under the same bond, and any given plans may
be insured separately or under the same bond. A bond may be underwritten
by a single surety company or more than one surety company, either
separately or on a co-surety basis. 29 C.F.R. § 2580.412-20. [See also ERISA Fidelity Bonds, Q-4.]
Yes, but only if the replacement bond provides the
statutorily-required coverage that would otherwise have been provided
under the prior bond’s one-year discovery period. If the replacement
bond does not provide such coverage, the bonding arrangement does not meet
the requirements of section 412.
ERISA requires that a plan have a one year period after termination of
a bond to discover losses that occurred during the term of the bond. 29
C.F.R. § 2580.412-19(b). Some bonds, such as those written on a “loss
sustained” basis, may contain a clause providing for such discovery
period. Other bonds, such as those written on a “discovery basis,” may
not contain such a clause, but may give the plan the right to purchase a
one-year discovery period following termination or cancellation of the
bond. In some instances, a prior bond and a replacement bond may work in
conjunction to give the plan the required one-year discovery period. The
surety industry has drafted standard bond forms that are intended to work
together to provide the required coverage. Thus, both the terminating bond
and the replacement bond should be examined to assure that the plan is
properly insured against losses that were incurred during the term of the
terminating bond, but not discovered until after it terminated.
No. This exclusion is unacceptable in an ERISA fidelity bond because
the plan is the insured party, not the employer or plan sponsor.
Many bonds contain provisions that exclude from coverage any persons
known to have engaged in fraudulent or dishonest acts. A bond may also
contain a provision that cancels coverage for any person who a plan
official knows has engaged in any acts of dishonesty. In such cases, the
plan must exclude any such person from handling plan funds or other
property if he cannot obtain bonding coverage.
If the crime bond excludes the company owner, and the owner handles plan
funds, then the company bond does not fully protect the plan as required
by ERISA section 412 and the Department's regulations. The company owner
would then need to be covered under a separate bond or, alternatively, if
the crime bond has an ERISA rider, that rider must ensure that the company
owner is not excluded from coverage with respect to the plan.
No. Section 412 requires that the bond insure the plan from the first
dollar of loss up to the maximum amount for which the person causing the
loss is required to be bonded. Therefore, bonds cannot have deductibles or
similar features whereby a portion of the risk required to be covered by
the bond is assumed by the plan or transferred to a party that is not an
acceptable surety on ERISA bonds. 29 C.F.R. § 2580.412-11. However,
nothing in ERISA prohibits application of a deductible to coverage in
excess of the maximum amount required under ERISA.
Yes. The plan whose funds are being handled must be specifically named or
otherwise identified on the bond in such a way as to enable the plan’s
representatives to make a claim under the bond in the event of a loss due
to fraud or dishonesty. 29 C.F.R. § 2580.412-18.
Yes. An “omnibus clause” is sometimes used as an alternative way to
identify multiple plans as insureds on one bond, rather than specifically
naming on the bond each individual plan in a group of plans. By way of
example, an omnibus clause might name as insured “all employee benefit
plans sponsored by ABC company.” ERISA does not prohibit using an
omnibus clause to name plans insured on a bond, as long as the omnibus
clause clearly identifies the insured plans in a way that would enable the
insured plans’ representatives to make a claim under the bond.
If an omnibus clause is used to name plans insured on a
bond, the person responsible for obtaining the bond must ensure that the
bond terms and limits of liability are sufficient to provide the
appropriate amount of required coverage for each insured plan. [See Amount
Of Bond Q-35 through Q-42.]
Yes. Bonds may be for periods longer than one year, so long as the bond
insures the plan for the statutorily-required amount. At the beginning of
each plan year, the plan administrator or other appropriate fiduciary must
assure that the bond continues to insure the plan for at least the
required amount, that the surety continues to satisfy the requirements for
being an approved surety, and that all plan officials are bonded. If
necessary, the fiduciary may need to obtain appropriate adjustments or
additional protection to assure that the bond will be in compliance for
the new plan year. 29 C.F.R. § 2580.412-11, § 2580.412-19, §
2580.412-21.
Yes. Nothing in section 412 or the regulations prohibits using an “inflation
guard” provision in a bond to automatically increase the amount of
coverage under a bond to equal the amount required under ERISA at the time
a plan discovers a loss.
Generally, each plan official must be bonded in an amount equal to at
least 10% of the amount of funds he or she handled in the preceding year.
The bond amount cannot, however, be less than $1,000, and the Department
cannot require a plan official to be bonded for more than $500,000
($1,000,000 for plans that hold employer securities) unless the Secretary
of Labor (after a hearing) requires a larger bond. These amounts apply for
each plan named on a bond in which a plan official has handling functions.
ERISA § 412; 29 C.F.R. §§ 2580.412-11 through 2580.412-13, §
2580.412-16, § 2580.412-17. [See also Funds Or Other Property, Q-17 and
Handling Funds Or Other Property, Q-18 through Q-21.]
Yes. The Department’s regulations provide that bonds covering more than
one plan may be required to be over $500,000 in order to meet the
requirements of section 412 because persons covered by such a bond may
have handling functions in more than one plan. The $500,000/$1,000,000
limitations for such persons apply only with respect to each separate plan
in which those persons have such functions. 29 C.F.R. § 2580.412-16(e).
The regulations also provide that the Secretary may prescribe a higher
maximum amount for a bond, not exceeding 10 per cent of funds handled, but
only after due notice and an opportunity for a hearing to all interested
parties. 29 C.F.R. § 2580.412-11, § 2580.412-17. Further, although ERISA
cannot require a plan to obtain a bond in excess of the statutory maximums
(absent action by the Secretary, as noted above), nothing in section 412
precludes the plan from purchasing a bond for a higher amount. Whether a
plan should purchase a bond in an amount greater than that required by
section 412 is a fiduciary decision subject to ERISA’s prudence
standards. 29 C.F.R. § 2580.412-20.
In addition to the general rule described above, if a plan’s fidelity
bond is intended to meet both the bonding requirements under section 412
and the enhanced bond requirement under the Department’s small plan
audit waiver regulation, 29 C.F.R. § 2520.104-46, that bond must meet the
additional requirements under the audit waiver regulation. Pursuant to the
audit waiver regulation, in order for a small plan to be exempt from ERISA’s
requirement that plans be audited each year by an independent qualified
public accountant, any person who handles “non-qualifying plan assets”
within the meaning of 29 C.F.R. § 2520.104-46 must be bonded in an amount
at least equal to 100% of the value of those non-qualifying assets if such
assets constitute more than 5% of total plan assets. For more information
on the audit waiver requirements under 29 C.F.R. § 2520.104-46, go to “Frequently
Asked Questions On The Small Pension Plan Audit Waiver Regulation” at
www.dol.gov/ebsa/faqs/faq_auditwaiver.html.
No. The minimum amount of a bond is $1,000, even if 10% of the amount
of funds handled is less than $1,000. ERISA § 412; 29 C.F.R. 2580.412-11.
No. Section 412(a), as amended by section 622 of the Pension Protection
Act of 2006, provides that “[i]n the case of a plan that holds employer
securities (within the meaning of section 407(d)(1)), this subsection
shall be applied by substituting ‘$1,000,000’ for ‘$500,000’ each
place it appears.” The Staff Report of the Joint Committee on Taxation
contains a technical explanation of this provision, which states that “[a]
plan would not be considered to hold employer securities within the
meaning of this section where the only securities held by the plan are
part of a broadly diversified fund of assets, such as mutual or index
funds.”(3) Accordingly, it is the
Department's view that a plan is not considered to be holding employer
securities, for purposes of the increased bonding requirement, merely
because the plan invests in a broadly-diversified common or pooled
investment vehicle that holds employer securities, but which is
independent of the employer and any of its affiliates.
No. There is no requirement in the regulations that a bond state
a specific dollar amount of coverage, so long as the bond provides the
required statutory amount per plan of at least 10% of funds handled, with
minimum coverage of $1,000, for each plan official covered under the bond.
For example, assume that X is the administrator of a welfare benefit plan
for which he handled $600,000 in the preceding year. The bond may state
that X is covered under the bond for the greater of $1,000 or 10% of funds
handled, up to $500,000.
ERISA requires that each of the nine plan officials handling the
$1,000,000 be bonded for at least 10% of the amount of funds he or she
handles, or $100,000, to protect the plan from losses caused by those plan
officials, whether acting alone or in collusion with others. As noted in
Q-39, bond amounts may be fixed either by referencing the statutory
language of 10% of funds handled up to the required maximums, or by
stating a specific dollar limit of coverage.
The bonding regulations allow flexibility in the form of bonds that can
be used to insure the plan. Bond forms, such as individual, name schedule,
position schedule, and blanket bonds, vary as to how persons covered under
the bond are identified, how the bond amount is stated, and in the amount
of recovery a plan can obtain for any single act of theft. 29 C.F.R. §
2580.412-10. For example, name schedule bonds and position schedule bonds
generally cover named individuals, or occupants of positions listed in the
schedule, in amounts that are set opposite such names or positions.
Blanket bonds, on the other hand, generally cover all of an insured’s
officers and employees in a blanket penalty. The following examples
illustrate how the differences between a blanket bond and a schedule bond
might affect a plan’s recovery:
If a plan sponsor purchases a blanket bond on which the plan is a named
insured, covering all of the plan sponsor’s officers and employees who
handle the $1,000,000, the stated bond amount must be at least $100,000.
That amount applies to each plan official covered under the bond. The bond
terms, however, would generally specify that the $100,000 limit is an “aggregate
penalty” which applies “per occurrence.” This means that if two of
the bonded plan officials act together to steal $300,000 from the plan,
that loss would generally be considered one “occurrence” for which the
plan could recover only $100,000 under the bond. See 29 C.F.R. §
2580.412-10(d)(1).
A schedule bond, on the other hand, gives separate coverage for each
plan official covered under the bond, whether that person is named
individually or covered under a named position. Thus, if the plan is
insured on a schedule bond, and each named individual or position listed
on the schedule is covered in the amount is $100,000, the net effect would
be the same as though a separate bond were issued in the amount of
$100,000 for each plan official covered under the bond. Unlike the blanket
bond described above, these types of bonds generally do not limit recovery
to an aggregate amount “per occurrence.” Accordingly, where, as in the
above example, two plan officials act together to steal $300,000, the plan
should be able to recover $200,000 under the schedule bond (i.e., $100,000
for each of the two named individuals who caused the loss to the plan).
See 29 C.F.R. § 2580.412-10(b) and (c).
Schedule bonds generally cost more than aggregate penalty blanket bonds
with the same stated limits of liability ($100,000 in the above examples)
because of the potential for a higher recovery under the schedule bond.
Both aggregate penalty blanket bonds and schedule bonds are permissible
forms of bonds if they otherwise meet the requirements of section 412 and
the Department's regulations. It is ultimately the responsibility of the
plan fiduciary or plan official who is procuring the bond to ensure that
the type and amount of the bond, together with its terms, limits, and
exclusions, are both appropriate for the plan and provide the amount of
coverage required under section 412.
No. The regulations require that, with respect to each covered person, the
bond amount be fixed annually. The bond must be fixed or estimated at the
beginning of the plan’s reporting year; that is, as soon after the date
when such year begins as the necessary information from the preceding
reporting year can practicably be ascertained. The amount of the bond must
be based on the highest amount of funds handled by the person in the
preceding plan year. ERISA § 412; 29 C.F.R. § 2580.412-11, §
2580.412-14, § 2580.412-19.
If the plan does not have a complete preceding reporting year from which
to determine the amounts handled, the amount handled by persons required
to be covered by a bond must be estimated using the procedures described
in the Department’s regulation at 29 C.F.R. § 2580.412-15.
Questions concerning this guidance can be directed to the Division of
Coverage, Reporting and Disclosure, Office of Regulations and
Interpretations, at 202.693.8523.
-
Pension Protection Act of 2006, Pub.
L. No. 109-280, 120 Stat. 780 (2006).
-
57 Fed. Reg. 23272 (June 2, 1992)
and 58 Fed. Reg. 45359 (August 27, 1993).
-
Joint Committee on Taxation,
Technical Explanation of H.R. 4, the “Pension Protection Act of
2006,” as Passed by the House on July 28, 2006, and as Considered by
the Senate on August 3, 2006 (JCX-38-06), Aug. 3, 2006.
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