(July 2019)
The individuals with fiduciary responsibilities over pension, profit sharing, or employee welfare plan funds must be bonded for fraud or dishonesty. The requirements for those bonds are outlined in the Employee Retirement Income Security Act of 1974 (ERISA). A separate bond can be purchased or the bond can be provided as an endorsement to the employee theft coverage. The plan name must be added as a named insured to the Commercial Crime declarations. This makes the plan a named insured but for only the policy’s crime portion.
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.
Note: A recent review and analysis by the Department of Labor identified some deficiencies in the protection being provided to ERISA plans by the Commercial Crime Coverage Form, Commercial Crime policy and any Employee Theft and Forgery Policy. CR 25 47–17 U.S. Department of Labor – ERISA Plan Coverage is now required to be attached to these coverage forms and policies whenever an employee benefit plan is a named insured in order to provide appropriate coverage.
The words in italics are the actual words in the Act.
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.
The commercial crime forms provide this coverage. The one important
consideration is the Termination as to Any Employee condition in the crime
coverage form. If an employee with responsibilities for an ERISA plan has been
terminated from coverage due to prior dishonest acts, that employee can no
longer have such responsibilities if the named insured wants to remain in
compliance with the ERISA statute.
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.
The bond is not required to be a faithful performance bond which means
that the standard employee theft insuring agreement in the government and
commercial crime coverage parts and policies are acceptable.
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.
The employee theft insuring agreement covers losses to money, securities, and other property because of theft by an employee. Coverage applies even if the specific employee who caused the loss cannot be identified. The employee causing the theft may be operating alone or in collusion with others. Theft, as defined in the crime coverage part or policy, includes safe burglary and robbery but is not as limiting. The only conditions are that property be taken and that the taking of that property deprives the insured. This definition of theft that is specific to the employee theft insuring agreement is even broader in that it includes forgery.
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.
Position or schedule bonds can be used to provide coverage but they may not be the most appropriate coverage for ERISA exposures. The addition of new positions, changes in positions, or any employee change during the year could leave gaps in bonding coverage that could result in the named insured not complying with ERISA law and requirements. A better approach may be to use the standard employee theft coverage that meets the minimum criteria in the statute and then attach a position bond as excess for those specific individuals or positions that present greater exposures.
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.
The basic rule to follow is to write coverage at no less than ten percent of the previous year’s plan funds, 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 and a much smaller employee theft exposure.
The employee benefits plan coverage should comply with both of the following additional provisions of the Act:
All bonds must be issued by a Treasury Department approved bonding company (Dept. circular # 570).
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.
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 concern was whether 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 a "party in interest" (agent, broker, surety, or other company) may be biased in providing a bond or when bonding personnel that administer a plan. The language indicates that a party of interest may be legitimately involved in a bond transaction. The key consideration is whether such a party can make a bonding decision in a way that maintains an “arm’s length” business relationship. An arm’s length relationship may exist even when the party in interest provides other services to the party provided with the bond. If a party in interest usually provides bond-related services to its clients, it is probably a valid transaction. If the service is outside what that party usually provides, this indicates that undue influence may be involved.
The two subsections above are about the agent. An agency or brokerage firm will need its own ERISA coverage. In such a case “party in interest" situations must be considered. The easiest way to avoid the problem is to another agent write the named insured agency’s 401(k) or pension plan with bonding that ERISA requires.
However, if the insured agency 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) and wants to write its own ERISA coverage, it is important to comply with the intent of the "party in interest" provisions. This can be accomplished by handling it as an arm’s length transaction, meaning there are no special rates or underwriting concessions for the insured agency’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. Always have an attorney with expertise in this area review any intended actions if there are any questions or doubts.