Fidelity Bonds

Fidelity bonds are a critical compliance requirement for retirement plans. Under the Employee Retirement Income Security Act (ERISA), any plan official who “handles” plan funds or property must be protected by a fidelity bond issued by an approved surety company. The bond protects the plan against acts of fraud or dishonesty.

Required Coverage

The bond must generally equal at least 10% of plan assets as of the last day of the previous plan year. In addition:

  • The bond cannot be less than $1,000
  • It is not required to exceed $500,000 (increased to $1,000,000 if the plan holds employer securities).
  • Plans covering only an owner and spouse or partnership partners are not required to obtain a fidelity bond.

Qualifying vs. Non-Qualifying Assets

The required amount of the fidelity bond amount may increase—or an independent audit may be needed—if at least 5% of plan assets are non-qualifying assets.

Qualifying plan assets include:

  • Insurance and annuity contracts
  • Participant loans
  • Assets held by a regulated financial institution
  • Mutual fund shares
  • Individually directed participant accounts with annual statements from a regulated financial institution

Non-qualifying assets may trigger additional coverage or audit requirements. These include:

  • Limited partnerships
  • Collectibles
  • Real property
  • Non-publicly traded securities not in participant-directed accounts

Reporting and Maintaining Coverage

Fidelity bond coverage is reported annually on Form 5500, filed with the Employee Benefits Security Administration (EBSA). Your insurance agent can help:

  • Purchase an appropriate bond
  • Ensure compliance with annual requirements
  • Endorse an existing business fidelity bond to cover plan obligations at little or no extra cost

Plan fiduciaries may consider purchasing additional coverage above the minimum required amount to:

  • Cover future contributions and earnings
  • Avoid the hassle of increasing coverage each year.
  • Alternatively, plan sponsor may select a bond that automatically increases each year to the required 10% coverage level.

Key Takeaways

  • Fidelity bonds protect retirement plans from fraud and dishonesty.
  • Coverage must meet ERISA minimums but can be increased for added protection.
  • Non-qualifying assets may trigger additional bonding or audit requirements.
  • Annual reporting on Form 5500 is mandatory.
  • Insurance agents can help select or adjust bonds efficiently.