ERISA Basics
ERISA bonds are among the most important laws for retirement planning. This law was established to set rules and a regulatory framework to support and govern retirement plans offered by employers and managed. ERISA aims to protect employees who participate in these plans and to oversee other parties involved. Most importantly, the law also assists beneficiaries.
What is an ERISA bond?
You may also hear ERISA bonds referred to as fidelity bonds. To clarify, this type of bond is not the kind of bond traded on the market. It is not a form of debt at all. Instead, it is a specific insurance document that applies to health and retirement plans that fall under ERISA’s jurisdiction. The bond was created to address public concerns regarding fraud in the system.
How do ERISA bonds differ from other types of coverage?
ERISA bonds must contain specific terms to comply with the law and Department of Labor regulations.
First, an ERISA bond cannot include any deductibles in the insurance contract or any feature that charges the holder upfront, as all losses due to fraud or dishonesty must be covered from the first penny.
Second, the ERISA bond must name the same benefit plan provided by the employer as the beneficiary of the insurance policy. This means that if there are any parties who benefit from the plan, they should be the ones contributing to it who primarily benefit. These measures help prevent foul play by removing any opportunity for those managing the plan to line their own pockets. They also help ensure that the plan (and the plan participants and their beneficiaries) can make a direct claim on the bond.
What coverage must the bond include?
ERISA has strict rules regarding the extent of coverage that bonds must include. This includes the following amounts:
– Every person dealing with or having access to funds in the employer-sponsored retirement plan must be covered for no less than 10% of the amount they handled or had access to in the previous year.
– In most cases, the bonds cannot cover amounts less than $1,000 or more than $500,000.
– Bonds can cover up to $1 million when the employer’s plan includes securities issued by the employer.
Who pays for the ERISA bond?
Since the ERISA bond covers the employer’s plan, funds from the plan can be used to pay the bond premiums.
How does ERISA define “funds”?
Under the law, “funds” is a broad term encompassing a wide range of assets. This term extends far beyond publicly traded stocks, bonds, mutual funds, and exchange-traded funds that make up most retirement plans.
In outlining the ways the plan may invest, the Department of Labor refers to “land and buildings, real estate, closely held corporate securities,” along with contributions from employers and employees.
All these types of assets are covered under the term “funds,” whether cash, check, or property. The ERISA bond must be in place to protect the assets from theft or misdirection before they are invested.
Who must be covered by ERISA bonds?
ERISA makes it illegal for anyone to “receive, handle, disburse, or exercise custody or control over plan funds or property” without being properly bonded.
The Department of Labor offers six factors to determine when a person is dealing with funds during the previous year. They are posed as questions, and if the answer to any of these questions is “yes,” then that person is dealing with the funds:
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Did the person have access to cash or checks or similar property belonging to the plan?
– Did the person have the authority or ability to transfer funds from the plan, either for themselves or for a third party?
– Did the person have the authority or ability to negotiate property belonging to the plan? (The Department of Labor offers examples such as obtaining a mortgage on a piece of real estate, or holding the title to land or buildings, or enjoying stock certificates.)
– Did the person have any other authority or ability to disburse or to direct others to disburse funds?
– Could the person sign checks or other pre-accepted instruments drawn on the funds in the plan?
– Does the person take on responsibility for any activities or make any decisions that require a bond?
Who Issues ERISA Bonds?
The market for ERISA bonds is heavily regulated. For example, bonds must be issued by a surety such as a bonding company or a reinsurance company. This is very common. However, for ERISA bonds, the issuing entity cannot simply be any licensed body; it must be chosen by the Treasury Department. The Treasury maintains a “list of approved sureties” to choose from.
There is also another requirement: ERISA bonds must be issued by an independent insurance company and obtained through an independent insurance broker. If you have any hint of a financial interest in either, you cannot purchase an ERISA bond through that company. For instance, if you own a retail store, and you also have a significant stake in a local insurance agency, you would not be able to purchase an ERISA bond for your retail store through that insurance agency.
Note: In rare cases, an ERISA bond may be obtained from the specialized insurance market known as Underwriters at Lloyds of London, but only if permitted by the Department of Labor.
ERISA Exceptions
While ERISA applies to many employee benefit plans offered by employers, there are exceptions to this rule. ERISA bonds are not required in the following cases:
– Organizations listed in section 1 of ERISA, which include church employee plans and plans offered by governmental entities.
– Some financial institutions that are subject to other regulations, such as “certain banks, insurance companies, brokers, and registered dealers.”
Source: https://www.thebalancemoney.com/what-is-an-erisa-bond-4141079
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