PenSys ERISA Bond Information

ERISA Fidelity Bond Requirement

     Under Department of Labor regulations, qualified retirements plans must be covered by a fidelity bond (plans covering only owners and their spouses are exempt from these bonding requirements). A fidelity bond protects the assets in the plan from misuse or misappropriation by the plan fiduciaries. At the very least, the bond must equal 10% of the value of the total plan assets, with a minimum bond value of $1,000. For the first year, the bond amount will be based on the estimated amount of assets that will be handled by the plan for the year.

      Plan assets that “qualify” for a 10% bond include employer securities; participant loans; assets held by financial institutions such as banks, insurance companies, broker-dealers, or other organization authorized to hold IRA assets; mutual funds; investment and annuity contracts issued by an insurance company; and self-directed individual account plans in which the participant gets a statement of assets at least once a year. All other assets are considered non-qualifying plan assets.

     However, if more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code §408, the plan sponsors need to do one of two things: 1) make certain that the bond amount is equal to 100% of the value of these “non-qualified” assets or 2) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.

      There are serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond. For one thing, it can be a red flag to the DOL that they need to take a closer look at the plan. In addition, in cases where a plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.

How to get a fidelity bond

      You may wish to contact your general insurance agent to discuss the ERISA/Fidelity bond requirements, or you may obtain a ERISA/Fidelity bond for your plan through Colonial Surety Company on their secure website: www.colonialsurety.com.    If you prefer, you can call Colonial Surety Company at  1-800-221-3662 and a fidelity bond consultant will assist you with the bond application.

     Wherever you decide to obtain your bond, be certain that you are purchasing a Fidelity Bond, NOT an employee dishonesty bond or a fiduciary bond. These other bonds do not fulfill the DOL requirements for ERISA compliance. We are dedicated to the growth and safety of your pension plan assets, and we look forward to serving your future needs.