McKay Hochman Company, Inc.

The Employee Benefits Security Administration (EBSA) recently released Field Assistance Bulletin (FAB) 2008-04, which provides guidance pertaining to the fidelity bonding requirements under section 412 of ERISA.

Section 412 of ERISA generally requires all persons, including fiduciaries, who “handle funds or other property” of an employee benefit plan to be bonded. Each plan official must be bonded for at least 10% of the amount he or she handles, subject to a minimum of no less than $1,000. The maximum bond per official in regard to any one plan is $500,000, or $1,000,000 in the case of a plan that holds employer securities.

FAB 2008-4 consists of 42 frequently asked questions, and clarifies many issues. Here is an overview of many of the highlights.

What losses must an ERISA bond cover?
An ERISA 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”. The bond must provide recovery for loss even when the loss fails to result in personal gain to the person committing the act, and also when the act is not considered a crime or misdemeanor. It is important to remember that this protects against theft and not bad investment decisions. (Q1)

Is an ERISA fidelity bond the same thing as fiduciary liability insurance?
No. Fiduciary liability insurance typically insures the plan against losses caused by a breach of fiduciary responsibility, whereas a fidelity bond specifically insures a plan against losses due to fraud or dishonesty. Fiduciary liability insurance is not a requirement. (Q2)

Who must be bonded?
Every person who “handles funds or other property” of an employee benefit plan or has the discretion thereto is required to be bonded, unless they are covered under an exemption. A complete list of exemptions can be found in the FAB, Q15.

Service providers that only render investment advice do not need to be bonded, but if they perform additional functions that are considered “handling plan funds or other property” then they must be bonded. (Q5, Q8)

What does it mean to “handle” funds or other property of an employee benefit plan so as to require bonding under section 412?
The general rule as to if someone is “handling” funds or other property is if their relationship is such that they could cause a loss to the plan through fraud or dishonesty. (Q18)

What constitutes “funds or other property” of the plan?
“Funds or other property” typically involves all funds or property that a plan may use as a source to pay benefits to plan participants and beneficiaries. (Q17)

If a service provider is required to be bonded, must the plan purchase the bond?
No. A service provider may purchase its own bond, or a plan can add the service provider to its existing bond. (Q10)

If the committee makes investment decisions for the plan, are the committee members “handling” plan funds or other property?
Yes. Each committee member must be bonded if the investment decisions are final. However, if these decisions are subject to the approval of someone else then the committee member would not be required to be bonded. (Q20, Q21)

Can I get an ERISA bond from any bonding or insurance company?
No. Bonds must be obtained through a provider that is named on the Department of the Treasury's Listing of Approved Sureties (fms.treas.gov/c570/c570.html). A plan may obtain bonds from more than one company as long as they use an approved provider. (Q4, Q25)

Can a bond insure more than one plan?
Yes. As long as the bond covers each plan for the required amount had they been insured under separate bonds it is permitted to insure multiple plans. Additionally, a claim by one plan cannot reduce the amount of coverage available to the other plans when multiple plans are covered under the same bond. (Q23, Q24)

May a bond be written for a period longer than one year?
Yes. As long as the bond insures the plan for the required amount each year and covers the appropriate plan officials it may be insured for a period of more than a year. Annual adjustments may need to be made in order to ensure that the bond is in compliance for each plan year. (Q33)

Is every plan whose investments include employer securities subject to the increased maximum bond amount of $1,000,000?
No. The increased bonding requirement does not apply if the only employer securities in a plan are held within a broadly diversified fund, such as a mutual fund. (Q38)

Can the bond have a deductible?
A bond cannot have a deductible when the amount of coverage is less than the maximum amount required under ERISA. It is possible to apply a deductible to coverage on an amount greater than the maximum required under ERISA when a plan chooses to obtain additional coverage. (Q30)

As you can see, FAB 2008-4, is quite interesting; below are the FAB's subsection headings and applicable question numbers for each subsection.

To learn more, call 973-492-1880 or e-mail info@mhco.com.