As we continue our ESOP Planning discussion, one area you should review is your ERISA fidelity bonding. Every fiduciary and every person who handles plan funds must be bonded per ERISA Section 412(a), 29 U.S.C. Section 1112(a) - Bonding. The DOL recently published Field Assistance Bulletin No. 2008-04 EBSA issues guidance on fidelity bonding for employee benefit plans to provide more guidance on the Fidelity Bonding Requirements. The Field Assistance Bulletin (FAB) addresses ERISA Fidelity Bonds, Exemptions From The Bonding Requirements, Funds Or Other Property, Handling Funds Or Other Property, Form And Scope Of Bond, Bond Terms And Provisions, and the Amount Of Bond in 42 Q&As. Here are some notable items:
Plan Officials and Named Fiduciaries are Responsible for the Bonding Requirements
FAB 2008-4, Q-6 provides guidance on who is responsible for making sure that plan officials are properly bonded:
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.
An ERISA Fidelity Bond and Fiduciary Liability Insurance are Not the Same
Q-2 helps clarify the difference between an ERISA fidelity bond and fiduciary liability insurance, stressing that the latter does not satisfy the requirement of the former:
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.
The PPA Generally Increased the Maximum Coverage Bonding Requirements for ESOPs and Other Plans Holding Employer Securities to $1,000,000
Effective for plan years beginning on or after January 1, 2008, the maximum coverage bonding requirements for ESOPs and other qualified plans holding employer securities increased to $1,000,000. Q-38 notes that not every plan with employer securities is subject to the increased maximum coverage bonding requirements:
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. Other Notable Items
The FAB also notes that service providers who handle funds must be bonded (unless they qualify for an exception) and that a bond can name more than one plan as an insured if certain requirements are met.