While commonly confused as the same thing, a fidelity bond is separate and distinct from fiduciary liability insurance. A fidelity bond is specifically required by ERISA § 412(a) for any “plan official” For this purpose, a “plan official” is a fiduciary of an employee benefit plan and/or a person who handles funds or other property of such a plan. Each plan official must be bonded for at least 10% of the maximum plan assets that he or she handles. Unlike a fidelity bond, fiduciary liability insurance is not mandated by ERISA.
A fidelity bond is fixed at the beginning of each year for each plan official covered by the bond, and guards the applicable plan against losses due to fraud or dishonesty – for example, theft – by any covered plan official. Fiduciary insurance, on the other hand, is designed to insure the plan against losses caused by breaches of fiduciary responsibilities and, simultaneously, protect the covered fiduciary or fiduciaries from any personal liability resulting from such breaches. The cost of the fidelity bond generally can be paid from plan assets. The same is true of fiduciary liability insurance only if the insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by the fiduciary.
In addition to ensuring that the fidelity bond meets certain criteria under ERISA, the fidelity bond carrier must also report the fact that it has coverage and the amount of such coverage annually on the applicable plan’s IRS Form 5500. Thus, before you file your next Form 5500, it might be a good time to make sure your plan is maintaining an appropriate fidelity bond covering all the appropriate individuals in the mandated amounts.
A special thanks to our spring extern, Ann Lut, for her valuable assistance in drafting this blog entry.