SATISFYING ERISA BOND
REQUIREMENTS WITH EMPLOYEE THEFT COVERAGE
(February 2026)
Individuals with
fiduciary responsibilities over pension, profit-sharing, or employee welfare
plan funds are required to be bonded against fraud or dishonesty, as specified
by the Employee Retirement Income Security Act of 1974 (ERISA). They can obtain
a separate bond or add it as an endorsement to their employee theft coverage.
Additionally, the plan name should be included as a named insured on the
Commercial Crime Declarations, thereby designating the plan as a named insured
solely for crime coverage under the policy.
This discussion
includes excerpts from the U.S. Code concerning ERISA bonding rules. Only parts
of the code are included here. Consult Subchapter I–Temporary Bonding Rules under
the Employee Retirement Income Security Act of 1974, part 2580–Temporary
Bonding Rules, Subparts A through G for the complete set of these rules.
NOTE: A review and analysis by the Department
of Labor identified certain deficiencies in the protection offered to ERISA
plans by the Commercial Crime Coverage Form, Commercial Crime Policy, and any
Employee Theft and Forgery Policy. Now, CR 25 47 09 17—U.S. Department of Labor
– ERISA Plan Coverage endorsement must be attached to these coverage forms and
policies whenever an employee benefit plan is listed as a named insured, to
ensure proper coverage.
The words in italics are the actual words in the Act.
Section 13(a) of the
Welfare and Pension Plans Disclosure Act of 1958, as amended, states, in part,
that:
Every administrator,
officer and employee of any employee welfare benefit plan or of any employee
pension benefit plan subject to this Act who handles funds or other property of
such plan shall be bonded as herein provided; except that, where such plan is
one under which the only assets from which benefits are paid are the general
assets of a union or of an employer, the administrator, officers and employees
of such plan shall be exempt from the bonding requirements of this section.
* * * Such bond shall
provide protection to the plan against loss by reason of acts of fraud or
dishonesty on the part of such administrator, officer, or employee, directly or
through connivance with others.
The commercial crime forms include this coverage. A key point is the
'Termination of Coverage as to Any Employee or ERISA Plan Official' condition
found in the crime coverage form. If an employee responsible for an ERISA plan
has been terminated because of past dishonest acts, that employee cannot
continue to hold such responsibilities if the insured wishes to remain in
compliance with the ERISA statute.
The bond required under
Section 13 is limited to protection for those duties and activities from which
loss can arise through fraud or dishonesty. It is not required to provide the
same scope of coverage required in faithful discharge of duties bonds under the
Labor-Management Reporting and Disclosure Act of 1959 or in the faithful
performance bonds of public officials.
The bond need not be a faithful performance bond, meaning that the
standard employee theft insuring agreement in the government and commercial
crime coverage parts and policies are acceptable.
The term ‘‘fraud or
dishonesty’’ shall be deemed to encompass all those risks of loss that might
arise through dishonest or fraudulent acts in handling of funds as delineated
in §2580.412–6. As such, the bond must provide recovery for loss occasioned by such
acts even though no personal gain accrues to the person committing the act and
the act is not subject to punishment as a crime or misdemeanor, provided that
within the law of the state in which the act is committed, a court would afford
recovery under a bond providing protection against fraud or dishonesty. As
usually applied under state laws, the term ‘‘fraud or dishonesty’’ encompasses
such matters as larceny, theft, embezzlement, forgery, misappropriation,
wrongful abstraction, wrongful conversion, willful misapplication or any other
fraudulent or dishonest acts. For the purposes of section 13, other fraudulent
or dishonest acts shall also be deemed to include acts where losses result
through any act or arrangement prohibited by title 18, section 1954 of the U.S.
Code.
The Fidelity—Employee
Theft Insuring Agreement provides coverage for losses involving money,
securities, and other property resulting from employee theft. This coverage
applies even if the particular employee responsible cannot be identified. The
employee may work alone or in collusion with others.
Theft, as defined in
the crime coverage part of the policy, includes safe burglary and robbery, but
is not restricted to them. The only requirements are that the property is taken
and the insured is deprived of it. The definition of theft in the Fidelity
Employee Theft Insurance Agreement is even broader by including forgery.
Section 13 provides
that ‘‘any bond shall be in a form or of a type
approved by the Secretary, including individual bonds or schedule or blanket
forms of bonds which cover a group or class.’’ Any
form of bond which may be described as individual, schedule or blanket in form
or any combination of such forms of bonds shall be acceptable to meet the
requirements of section 13, provided that in each case, the form of the bond,
in its particular clauses and application, is not inconsistent with meeting the
substantive requirements of the statute for the persons and plan involved and
with meeting the specific requirements of the regulations in this part.
Position or schedule
bonds can be used to provide coverage, but they might not be the best fit for
ERISA-related risks. Adding new positions, modifying existing ones, or employee
changes during the year could create gaps in bonding coverage, potentially causing
the insured to violate ERISA law and requirements. A more effective strategy
might be to rely on standard employee theft coverage that satisfies the
statutory minimum criteria, then attach a position bond as excess coverage for
particular individuals or roles with higher risks.
Section 13 requires
that the amount of the bond be fixed at the beginning of each calendar, policy
or other fiscal year, as the case may be, which constitutes the reporting year
of the plan for purposes of the reporting provisions of the Act. The amount of
the bond shall be not less than 10 per centum of the amount of funds handled,
except that any such bond shall be in at least. the amount of $1,000 and no
such bond shall be required in an amount in excess of $500,000: Provided, That
the Secretary, after due notice and opportunity for hearing to all interested
parties, and after consideration of the record, may prescribe an amount in
excess of $500,000, which in no event shall exceed 10 per centum of the funds
handled. For purposes of fixing the amount of such bond, the amount of funds
handled shall be determined by the funds handled by the person, group, or class
to be covered by such bond and by their predecessor or predecessors, if any,
during the preceding reporting year, or if the plan has no preceding reporting
year, the amount of funds to be handled during the current reporting year by
such person, group, or class, estimated as provided in the regulations in this
part. With respect to persons required to be bonded, section 13 shall be deemed
to require the bond to insure from the first dollar of loss up to the requisite
bond amount and not to permit the use of deductible or similar features whereby
a portion of the risk within such requisite bond amount is assumed by the
insured. Any request for variance from these requirements shall be made
pursuant to the provisions of section 13(e) of the Act.
The fundamental
guideline is to write coverage at no less than 10 percent of the previous
year’s plan funds, up to a maximum limit of $500,000. The insured might also
consider purchasing a separate ERISA compliance employee theft policy if the
plan account holds substantial funds but the employee theft risk is relatively
small.
The employee benefits
plan coverage should comply with both of the following additional provisions of
the Act:
All bonds must be
issued by a Treasury Department approved bonding company (Dept. circular #
570).
Section 13(c) prohibits
the placing of bonds, required to be obtained pursuant to section 13, with any
surety or other company, or through any agent or broker in whose business
operations a plan or any party in interest in a plan has significant control or
financial interest, direct or indirect. An interpretation of this section has
been issued (§2580.412–36 of this chapter).
(a) Under 13(c), an
agent, broker or surety or other company is disqualified from having a bond
placed through or with it if a ‘‘party in interest’’ in the plan has any
significant control or financial interest in such agent, broker, surety or
other company. Section 3(13) of the Act defines the term ‘‘party in interest’’
to mean ‘‘any administrator, officer, trustee, custodian, counsel, or employee
of any employee welfare benefit plan or a person providing benefit plan
services to any such plan, or an employer any of whose employees are covered by
such a plan or officer or employee or agent of such employer, or an officer or
agent or employee of an employee organization having members covered by such
plan.’’
The concern was whether
13(c) prohibits persons from placing a bond through or with any "party in
interest" in the plan. The language in 13(c) appears to suggest that
Congress intended to eliminate situations in which a "party in interest"
(agent, broker, surety, or other company) may be biased in providing a bond or
in bonding personnel who administer a plan.
The language suggests
that a party in interest may be legitimately involved in a bond transaction.
The main question is whether this party can make bonding decisions while
maintaining an “arm’s-length” business relationship. Such a relationship can
remain valid even if the party in interest offers additional services to the
bond recipient. If the party regularly supplies bond-related services to its
clients, the transaction is likely valid. However, if the service provided is
outside its usual offerings, it could signal undue influence.
The two subsections above focus on the agent. An agency or brokerage firm
must have its own ERISA coverage. If so, 'party in interest' issues need to be
addressed. The simplest solution is to have a different agent write the named
insured agency’s 401(k) or pension plan, ensuring bonding that meets ERISA
requirements.
If the insured agency
also sells bonds to other clients—so the ERISA bond for the insured’s 401(k) or
pension plan isn’t its only ERISA bond—and wishes to write its own ERISA
coverage, it must adhere to the 'party in interest' provisions. This is achieved
by treating the transaction as an arm’s length deal, which means no
preferential rates or underwriting concessions are given to the insured
agency’s bond.
Problems can become more complicated if
the insured insurance agency also owns or controls other businesses, such as
rental properties or real estate firms with their own pension or welfare and
benefit plans. It is advisable to consult an attorney experienced in this area
to review any proposed actions if there are doubts or questions.