Health, retirement and other employee benefit plan fiduciaries, sponsors and service providers should confirm and document that all plan fiduciaries, service providers and other plan workforce members are properly bonded to protect the plan against fraud and dishonesty, as well as avoid incurring liability for breaching the fiduciary responsibility requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”).

ERISA Requires Fidelity Bonding

ERISA imposes fidelity bonding requirements under ERISA §412 and 29 C.F.R. Part 2580 to protect plan assets against loss due to fraud or dishonesty. ERISA §412(a) requires that every fiduciary of an employee benefit plan and every person who ‘handles funds or other property’ of the plan must be bonded against loss resulting from fraud or dishonesty. The Department of Labor (“DOL”) regulations at 29 C.F.R. §2580.412‑6 define handling of funds to include physical contact, power to transfer, ability to sign checks, or supervisory authority over those who handle plan assets.

As ERISA’s bonding requirements are part of ERISA’s fiduciary responsibilities, failure to maintain bonding required by ERISA §412 constitutes a fiduciary breach under ERISA §404(a)(1)(A)-(B), which exposes fiduciaries breaching these obligations to DOL civil penalties, personal liability for losses arising from non‑compliance, and other liabilities.

Who Must Be Bonded

ERISA’s fidelity bonding requirement applies to two categories of persons:

• Plan fiduciaries, and

• Non‑fiduciaries who ‘handle’ plan funds within the meaning of 29 C.F.R. §2580.412‑6.

For purposes of determining the individuals and entities subject to ERISA’s bonding requirement, keep in mind that ERISA functionally defines a “fiduciary” as including any person that:

• Exercises any discretionary authority or discretionary control respecting management of the plan or the management or disposition of its assets,
• Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or
• Has any discretionary authority or discretionary responsibility in the administration of such plan. See ERISA Section 3(21).

Consequently, if an individual or entity functionally possesses or exercises authority or responsibility over the plan or its assets, it is a fiduciary subject to the bonding and other fiduciary requirements of ERISA regardless of whether that party is a named fiduciary or disclaims fiduciary status in an agreement.

Likewise, the ERISA bonding requirement for parties that handle funds also is based on the functional realities. Under DOL Regulations, a person is deemed to handle plan assets if their role creates a risk of loss due to fraud or dishonesty. Examples include:

• Physical possession of cash, checks, or assets.
• Power to transfer assets or negotiate instruments.
• Authority to sign checks or initiate electronic fund transfers.
• Supervisory authority over individuals who handle assets.

Non‑fiduciary service providers and other members of the plan workforce who do not handle plan funds are not subject to ERISA §412. For instance, DOL Field Assistance Bulletin 2008‑04 states that third‑party administrators that do not control or possess plan assets and cannot authorize disbursements are not required to be bonded. Similarly, other nonfiduciary contractors providing legal, actuarial, consulting, claims‑processing, or IT services fall outside the bonding requirement unless they have direct authority over plan assets. See also 29 C.F.R. §2509.75‑8 without discretionary authority over plan assets generally does not ‘handle’ funds and therefore are not subject to ERISA §412 bonding unless they otherwise are named or function as fiduciaries.

When applying these distinctions for purposes of ERISA’s bonding rules, plan fiduciaries and service providers should look beyond contractual characterizations of the character and nature of the service provider and based their decision regarding whether to require and acquire a bond based on the functional realities. While non‑fiduciary service providers are only required to be bonded if they handle plan funds as defined by ERISA §412 and the DOL regulations, functionally evaluated, certain non‑fiduciary service providers sometimes become subject to bonding if their activities constitute functional “handling” of plan funds. For example:

• A payroll vendor that transmits employee contributions is handling assets.
• A recordkeeper with authority to initiate distributions must be bonded.

Conversely, a TPA adjudicating claims but without power to pay benefits is not required to be bonded. service providers and others granted functional authority that exposes plan assets to risk of loss are required to be bonded as individuals that handle funds.

When evaluating whether a service provider or other party “handles funds” for purposes of assessing the applicability of the ERISA bonding requirement in investigations or audits, the DOL usually asks if the party or its employees have:

• Physical possession of Plan assets?
• The power to obtain physical possession of plan assets?
• The power to transfer assets?
• The authority to disburse Plan funds directly or indirectly?
• The authority to endorse checks?
• The authority to make investments?

The DOL Enforcement Manual indicates that “handling” of Plan funds is indicated and bonding is required for each individual or party that (a) has any of these authorities or (b) if the assets are held by a corporate trustee, for any service provider or other party that can direct the payment of benefits or direct the investments to be made by the corporate trustee.

Bond Amount and Coverage Requirements

Where ERISA requires a fidelity bond, ERISA §412(a) and 29 C.F.R. §2580.412‑11 require that the fidelity bond must be at least 10% of the amount of plan funds handled by the individual in the preceding plan year, with a minimum of $1,000 and a default maximum of $500,000 per plan (or $1,000,000 for plans holding employer securities under §412(g)).

An ERISA fidelity bond is a specific type of insurance that protects the plan against losses caused by acts of fraud or dishonesty. The fidelity bond required under ERISA specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) by persons who handle plan funds or property. Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, and other acts. Deductibles or other similar features are prohibited for coverage of losses within the maximum amount for which the person causing the loss is required to be bonded. While obtaining fiduciary liability insurance also generally is recommended, the bonding requirement is not satisfied by the purchase of fiduciary liability.

The fidelity bond purchased must fulfill the specific requirements of ERISA. For instance, the bond should be issued by a bonding company listed in Treasury Circular 570 and must cover the Plan for loss due to fraud or dishonesty as defined in 29 C.F.R. §2580.412‑9. Fiduciaries should confirm the bond provides for payment to the Plan in the event of loss, name the Plan as an “insured” and have the pay over rider attached unless the Plan is the sole insured under the bond. The definition of employee in the bond must cover all persons who “handle” funds including officers, directors, trustees, employees and the other parties required to be covered by the bond. If the bond contains a deductible, an elimination of deductible rider with the respect to the plan also is needed. Since bonds purchased by third party administrators, financial advisors or other plan service providers to meet state law or professional standards generally do not fulfill these and other ERISA requirements, plans generally should require specific contractual assurances to comply with the ERISA bonding requirements and should obtain and confirm the adequacy of the bonds for service providers and others subject to ERISA bonding requirements.

Liability For ERISA Bonding Violations

Failure to secure a fidelity bond under ERISA can lead to significant legal and financial consequences. Plan sponsors and fiduciaries are required by ERISA to obtain a fidelity bond to protect employee benefit plans from losses due to fraud or dishonesty. Noncompliance can lead to a range of consequences, including auditors’ admonitions, court mandates for removal as plan fiduciaries, plan fiduciary personally liability for losses that should have been covered by a fidelity bond, and EBSA administrative penalties for breach of fiduciary duty. See DOL’s Protect Your Employee Benefit Plan With A Fidelity Bond; Getting It Right: Know Your Fiduciary Responsibilities.

Managing Bonding And Bonding Risks

To avoid violating the bonding requirements, fiduciaries and service providers should both review service agreements and the functional realities to confirm whether any party “handles” funds and to ensure compliance with ERISA bonding requirements.

Service providers that engage in the performance of activities that involve or are likely to be recharacterized as involving the exercise of discretion or the handling of funds should give serious consideration to arranging to maintain a fidelity bond that meets ERISA’s requirement, whether or not the service provider acknowledges or disclaims its status as a fiduciary or handler of plan funds.

Since noncompliance with the bonding requirement is a breach of the fiduciary responsibility requirements of ERISA that could render the fiduciary personally liable for unbonded losses, plan fiduciaries generally should conduct and retain a documented analysis capturing their consideration of whether they and other fiduciaries, service providers, and other members of the plan workforce ar required to be bonded and if so, the actions taken to require and monitor compliance with applicable bonding requirements. Examples of best practices include:

• Include bonding requirements in plan documents and contracts;
• Conduct and maintain a documented assessment of the applicability of the bonding requirements when appointing or renewing the appointment of a fiduciary, third party service provider or workforce member to participate in the management or operations of the plan or its assets; and
• Obtain and review bonds obtained to cover fiduciaries and service providers to verify their currency and adequacy;

When the factual realities raise the possibility that an individual or a party might possess or exercise fiduciary discretion or handle funds, fiduciaries generally will want to err in favor of requiring bonding to protect the plan and to protect themselves against the personal liability that can arise under ERISA Section 502(l) for violation of the bonding requirements, unbonded plan losses arising from fraud or loss by the service provider or both.

About the Author

Cynthia Marcotte Stamer is a Martindale-Hubble AV-Preeminent (highest/top 1%) practicing attorney recognized as a “Top Woman Lawyer,” “Top Rated Lawyer,” and “LEGAL LEADER™” in Health Care Law and Labor and Employment Law; among the “Best Lawyers In Dallas” in “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law recognized for her experience, scholarship, thought leadership and advocacy on health and other employee benefits, insurance, healthcare, workforce, HIPAA and other data and technology and other compliance in connection with her work with health care and life sciences, employee benefits, insurance, education, technology and other highly regulated and performance-dependent clients.

Board certified in labor and employment law by the Texas Board of Legal Specialization and a Fellow in the American College of Employee Benefits Counsel, Ms. Stamer is nationally recognized for her decades of leading edge experience on the design, sponsorship, administration and defense of health and other employee benefit, workforce, insurance, healthcare , data and technology and other operations to promote legal and operational compliance, reduce regulatory and other liability and promote other operational goals.

Along with her decades of legal and strategic consulting experience, Ms. Stamer also contributes her leadership and experience to many professional, civic and community organizations. She currently serves as Co-Chair of the ABA Real Property Trusts and Estates (“RPTE”) Section Welfare Plan Committee, Co-Chair of the ABA International Section International Employment Law Committee and its Annual Meeting Program Planning Committee, Chair Emeritus and Vice Chair of the ABA Tort Trial and Insurance (“TIPS”) Section Medicine and Law Committee, and Chair of the ABA Intellectual Property Section Law Practice Management Committee. She also has served as Scribe for the Joint Committee on Employee Benefits (“JCEB”) annual agency meetings with the Department of Health and Human Services and JCEB Council Representative, International Section Life Sciences Committee Chair, RPTE Section Employee Benefits Group Chair and a Substantive Groups Committee Member, Health Law Section Managed Care & Insurance Interest Group Chair, as TIPS Section Medicine and Law Committee Chair and Employee Benefits Committee and Workers Compensation Committee Vice Chair, Tax Section Fringe Benefit Committee Chair, and in various other ABA leadership capacities. Ms. Stamer also is a former Southwest Benefits Association Board Member and Continuing Education Chair, SHRM National Consultant Board Chair and Region IV Chair, Dallas Bar Association Employee Benefits Committee Chair, former Texas Association of Business State, Regional and Dallas Chapter Chair, a founding board member and Past President of the Alliance for Healthcare Excellence, as well as in the leadership of many other professional, civic and community organizations. She also is recognized for her contributions to strengthening health care policy and charitable and community service resolving health care challenges performed under PROJECT COPE Coalition For Patient Empowerment initiative and many other pro bono service involvements locally, nationally and internationally.

Ms. Stamer is the author of many highly regarded works published by leading professional and business publishers, the ABA, the American Health Lawyers Association, and others. Ms. Stamer also frequently speaks and serves on the faculty and steering committee for many ABA and other professional and industry conferences and conducts leadership and industry training for a wide range of organizations.

For more information about Ms. Stamer or her health industry and other experience and involvements, see http://www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.

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