Knowing the difference between a fidelity bond and a fiduciary bond is very important if you are a fiduciary of a funded employee benefit plan.
An Employer Retirement Income Security Act (ERISA) requires funded plans to have a fidelity bond to protect the Plan against losses due to fraud or dishonest acts. A fiduciary bond is optional and protects the fiduciary against claims of
Mismanagement or breaches of fiduciary duty.
The definition of fidelity is a faithfulness demonstrated by continuing loyalty and support to a cause such as retirement savings in an employee benefit plan. A fiduciary is a person who holds a legal relationship of trust with one or more other parties such as an employee benefit plan.
A fidelity bond must be in the name of the plan and is required to cover every fiduciary of an employee benefit plan and every person who handles funds or property of a plan. A fiduciary bond is generally in the name of the company or individual who acts as a fiduciary responsible for the Plan.
Every individual who has physical contact with cash and/or checks and has check writing and disbursement authority must be covered by a fidelity bond. Every individual that has the power to exercise physical contact or control over plan assets and can withdraw funds or other property from the Plan account must be covered by a fidelity bond. Supervisors or individuals with decision-making responsibility over anyone listed above must also be covered by a fidelity bond.
Fidelity bonds have specific coverage requirements and fiduciary bonds coverage is at the discretion of the fiduciary. Fidelity bonds must cover ten-percent (10%) of plan assets with a minimum of $1,000 and a maximum of $500,000. The Pension Protection Act of 2006 increased the bonding amount to the maximum coverage of one million ($1,000,000) for Plans with illiquid assets such as employer securities.
Small plans, (plans with less than 100 participants,) that hold nonqualifying plan assets, may be required to attach an audit report to their Form 5500 if they do not have sufficient fidelity bond coverage. The fidelity bond coverage must be the greater of $500,000 or the amount of nonqualifying plan assets. If the plan holds employer securities, the amount is the greater of one million ($1,000,000) or the amount of nonqualifying plan assets.
A fidelity bond may be provided as a rider on the employer bond if it separately names the Plan as the beneficiary, provides adequate coverage and is provided by an IRS approved insurance carrier. A fiduciary bond can also be a rider on the employer bond to cover the fiduciary and can be provided by any insurance carrier.
The cost of a fidelity bond may be paid from plan assets because the purpose of the bonding requirement is to protect employee benefit plans. The cost of a fiduciary bond may not be paid from plan assets because the purpose is to protect plan officials.
Contact one of our 5500Tax Group professionals to discuss your particular situation.
