(October 2006)
Anyone who deals with pension, profit sharing or employee welfare plan funds must be bonded for fraud or dishonesty while handling plan funds. A bond must be obtained if the plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA) and plan funds are handled. This coverage is available through employee theft coverage.
This discussion includes excerpts from the U.S. Code concerning ERISA bonding rules. Only parts of the code are included here. Consult Subchapter I–Temporary Bonding Rules Under the Employee Retirement Income Security Act of 1974, part 2580–Temporary Bonding Rules, Subparts A through G for the complete set of these rules.
ss: 2580.412-1
Statutory Provision
Section 13(a) of the Welfare and Pension Plans Disclosure Act of 1958, as amended, states in part:
Every administrator,
officer and employee of any welfare benefit plan or of any employee pension benefit
plan subject to this act who handles funds or other property of such a plan
shall be bonded as herein provided; except that, where such plan is one under
which the only assets from which benefits are paid are the general assets of a
union or an employer, the administrator, officers, and employees of such plan
shall be exempt from the bonding requirements of this section.
Such bond shall
provide protection to the plan against loss by reason of acts of fraud or
dishonesty on the part of such administrator, officer, or employee, directly or
through connivance with others.
ss: 2580.412-7
Statutory provision–Scope of the Bond
The statute requires
that the bond provide protection to the plan against loss by reason of acts of
fraud or dishonesty on the part of a plan administrator, officer or employee,
directly or through connivance with others.
ss: 2580.412-8 The
nature of the duties or activities to which the bonding requirement relates
The bond required
under Section 13 is limited to protection for those duties and activities from
which loss can arise through fraud or dishonesty. It is not required to provide
the same scope of coverage required in faithful discharge of duties bonds under
the Labor-Management Reporting and Disclosure Act of 1959 or in the faithful
performance bonds of public officials.
Note: To meet the requirements for Labor Unions under the Labor-Management Reporting and Disclosure Act of 1959, add endorsement Form CR 25 15, Amend Definition of Employee to Comply with Labor–Management Reporting and Disclosure Act of 1959.
Note: Public employee theft coverage is written on both an each-person and an each-occurrence basis.
ss: 2580.412-9 Meaning
of Fraud or Dishonesty
The term ``fraud or
dishonesty'' shall be deemed to encompass all those risks of loss that might
arise through dishonest or fraudulent acts in handling of funds as delineated
in Sec. 2580.412-6. As such, 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. As usually applied under state laws, the term ``fraud or
dishonesty'' encompasses such matters as larceny, theft, embezzlement, forgery,
misappropriation, wrongful abstraction, wrongful conversion, willful
misapplication or any other fraudulent or dishonest acts. For the purposes of
section 13, other fraudulent or dishonest acts shall also be deemed to include
acts where losses result through any act or arrangement prohibited by title 18,
section 1954 of the U.S. Code.
CAUTION: Employee benefits plan coverage activated under employee theft coverage does not give back or provide coverage on an employee who the employer knows has previously committed an illegal act or acts. Convicted felons, as well as employees disciplined for relatively minor acts, such as pilferage, are not covered by any employee theft coverage. As a result, if an employer wishes to retain an employee who previously committed illegal acts and still meet federal ERISA requirements, that employee cannot handle or have access to any pension, employee benefits or welfare plan funds.
ss: 2580.410-10
Individual or schedule or blanket form of bonds
Section 13 provides that "any bond shall be in a form or of a
type approved by the Secretary, including individual bonds or schedule or
blanket forms of bonds which cover a group or class." Any form of bond
that may be described as individual, schedule or blanket in form or any
combination of such forms of bonds is acceptable to meet the requirements of
Section 13. However, in each case, the form of the bond, in its particular
clauses and application, must be consistent in meeting the substantive
requirements of the statute for the persons and plan involved and with meeting
the specific requirements of the regulations in this part.
CAUTION: Position or schedule bonds may not be appropriate coverage forms for ERISA exposures. The addition of new positions, change in positions or any employee change during the year could leave gaps in bonding coverage that could take the insured out of compliance with ERISA law and requirements.
ss: 2580.412-11
Statutory Provisions
Section 13 requires that the amount of the bond be fixed at the
beginning of each calendar, policy or other fiscal year, as the case may be,
which constitutes the reporting year of the plan for purposes of the reporting
provisions of the Act. The amount of the bond shall not be less than ten per
centum of the amount of funds handled, except that any such bond shall be in at
least the amount of $1,000 and no such bond shall be required in an amount in
excess of $500,000. Provided that the Secretary, after due notice and
opportunity for hearing all interested parties and after consideration of the
record, may prescribe an amount in excess of $500,000, which in no event shall
exceed ten per centum of the funds handled. For purposes of fixing the amount
of such bond, the amount of funds handled shall be determined by the funds
handled by the person, group or class to be covered by such bond and by their
predecessor or predecessors, if any, during the preceding reporting year, or if
the plan has no preceding reporting year, the amount of funds to be handled
during the current reporting year, by such person, group, or class estimated as
provided in the regulations in this part. With respect to persons required to
be bonded, Section 13 shall be deemed to require the bond to insure from the
first dollar of loss up to the requisite bond amount and not to permit the use
of deductible or similar features whereby a portion of the risk within such
requisite bond amount is assumed by the insured. Any request for variance from
these requirements shall be made pursuant to the provisions of Section 13(e) of
the Act.
Note: The basic rule to follow to determine the appropriate limit needed is that it should be ten percent of the amount of funds in the plan the previous year, up to a maximum limit of $500,000. The insured might consider writing a separate ERISA compliance employee theft policy when the plan account has significant funds but the employee theft exposure and limit needed is considerably smaller. Conversely, a separate ERISA employee theft policy might also be in order when the insured has an employee theft exposure and limit needed that exceeds $500,000.
The employee benefits plan coverage should comply with these additional provisions of the Act:
All bonds must be issued by a Treasury Department approved bonding company (Dept. circular # 570).
ss: 2580.412-22
Interests held in agents, brokers and surety companies
Section 13(c) prohibits the placing of bonds, required to be obtained pursuant to Section 13, with any surety or other company, or through any agent or broker in whose business operations a plan or any party in interest in a plan has significant control or financial interest, direct or indirect. An interpretation of this section has been issued under paragraph ss: 2580.412-36 of this chapter.
ss: 2580.412-36
Application of 13(c) to "parties in interest"
Under 13(c), an agent, broker or surety or other company is disqualified from having a bond placed through or with it if a "party in interest" in the plan has any significant control or financial interest in such agent, broker, surety or other company.
Section 3(13) of the Act
defines the term "party in interest" to mean "any administrator, officer, trustee,
custodian, counsel, or employee of any employee welfare benefit plan or a
person providing benefit plan services to any such plan, or an employer any of
whose employees are covered by such a plan or officer or employee or agent of
such employer, or an officer or agent or employee of an employee organization
having members covered by such plan."
The basic question presented is if the effect of 13(c) prohibits persons from placing a bond through or with any "party in interest" in the plan. The language used in 13(c) appears to suggest that the intent of Congress was to eliminate situations where the existing financial interest or control held by the "party in interest" in the agent, broker, surety or other company may not be compatible with an unbiased exercise of judgment in providing the bond or in bonding the personnel that handle the plan. It then follows that not all parties in interest are necessarily disqualified from providing bonds for the plan. As a result, where a "party in interest" or its affiliate provides multiple benefit plan services to plans, persons are not prohibited from taking advantage of the bonding services provided by the "party in interest" or affiliates merely because the plan has already availed itself, or will avail itself, of other services provided by the "parties in interest."
In this case, it is inherent in the nature of the "party in interest" or its affiliate, as an individual or organization providing multiple benefit plan services, one of which is a bonding service, that the existing financial interest or control held is not, in and of itself, incompatible with an unbiased exercise of judgment in regard to procuring the bond or bonding the plan’s personnel. There should be no distinction between this type of relationship and the ordinary arm’s length business relationship established between a plan customer and an agent, broker or surety company. This is the kind of relationship that Congress probably did not intend to disturb. On the other hand, where a "party in interest" in the plan or an affiliate does not provide a bonding service as part of its general business operations, 13(c) would prohibit any person from procuring the bond through or with any agent, broker, surety or other company, with respect to which the "party in interest" has any significant control or financial interest, direct or indirect. In this case, the failure of the "party in interest" or its affiliate to provide a bonding service as part of its general business operations raises the possibility of less than an arm’s length business relationship between the plan and the agent, broker, surety or other company since the objectivity of either the plan or the agent, broker, or surety may be influenced by the "party in interest."
CAUTION: The safest way to avoid "party in interest" situations is to have another agent write the named insured agency’s 401(k) or pension plan with ERISA-required bonding. If the insured also sells bonds to other clients, meaning the ERISA bond for the insured’s 401(k) or pension plan is not the only ERISA bond it has on the books, it is important not to violate the intent of the "party in interest" provisions, as long as the bonding is conducted as an arm’s length transaction, meaning there are no special rates or underwriting concessions for the insured’s bond. Problems become more complex if the insured insurance agency also owns or controls other businesses, such as rental properties or real estate firms that have their own pension or welfare and benefits plans. If there are questions or doubts, always have an attorney review any intended actions.