On November 25th, the Department of Labor (“DOL”) issued Field Assistance Bulletin (“FAB”) 2008-04, which provides additional guidance to the DOL’s national and regional offices on the fidelity bonding requirements under ERISA Section 412. The FAB, which is drafted in a question and answer format, provides guidance on, among other matters, (1) the ERISA fidelity bond requirements, (2) the exemptions from the bonding requirements, and (3) the form and type of bond required.
In general, ERISA Section 412 requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be bonded to protect the plan against losses by reason of acts of fraud or dishonesty on the part of a person required to be bonded. Acts of fraud or dishonesty include, but are not limited to, larceny, theft, embezzlement, forgery, misappropriation, and wrongful conversion. The fidelity bond must provide recovery for such losses even if no personal gain accrued to the person committing the dishonest or fraudulent act.
With limited exceptions, every person who handles funds or other property of an employee benefit plan is required to be bonded. A person is deemed to be handling funds or other property of a plan so as to require bonding whenever his/her duties or activities create a risk of loss in the event of fraud or dishonesty. Handling funds or other property, includes: (1) the power to exercise physical contact or control of checks, cash or similar property; (2) the power to transfer funds or other property from the plan to oneself or a third party; (3) disbursement authority or authority to direct disbursement; (4) authority to sign checks or other negotiable instruments; or (5) supervisory authority or decision-making responsibility over activities that require bonding.
Each plan official must be bonded in an amount equal to at least 10% of the amount of funds that he or she handled in the preceding year. The DOL cannot require that a plan official be bonded for more than $500,000 ($1,000,000 for plans that hold a substantial amount of plan assets). The minimum bond amount is $1,000. The bond must be placed with a surety or reinsurer on the Treasury’s Listing of Approved Sureties or with Lloyds of London under certain circumstances. The bond amount must be fixed or estimated at the beginning of the plan’s reporting year. The amount of the bond must be based on the highest amount of funds handled by the person in the preceding year.
Frank Del Barto notes that the fidelity bond is not fiduciary liability insurance. According to Frank, the fidelity bond which is required by ERISA Section 412 insures the plan against losses due to fraud or dishonesty on the part of person who handle the funds or property of the plan. In contrast, fiduciary liability insurance insures the plan due to breaches of a fiduciary duty. Although fiduciary liability insurance is not required, Frank recommends that all plan sponsors consider purchasing this insurance to protect them from the personal liability associated with being a welfare plan or qualified plan fiduciary.