ERISA Bonds
The Employee Retirement Income Security
Act of 1974 (ERISA) is a federal law that sets minimum standards for most
voluntarily established pension and health plans in private industry to
provide certain protections for individuals in these plans. ERISA protects
the plan's assets by requiring that those persons or entities who exercise
discretionary control or authority over plan management or plan assets,
anyone with discretionary authority or responsibility for the administration
of a plan, or anyone who provides investment advice to a plan for compensation
or has any authority or responsibility to do so are subject to certain
fiduciary responsibilities.
Bonding for ERISA Plans
One of the elements of ERISA that directly affects the investment community
is the bonding requirement spelled out in Section 412. This section requires
that "every fiduciary of an employee benefit plan and every person
who handles funds or other property of such a plan shall be bonded"
against fraud or dishonesty by its employees or the entity. The term "fraud
or dishonesty" includes such events as larceny, theft, embezzlement,
forgery, misappropriation, wrongful abstraction, wrongful conversion,
willful misapplication or any other fraudulent or dishonest acts.
An investment advisor who has the "right" or power to make investment decisions for ERISA plans must be bonded. Section 412(a) of the Employee Retirement Income Security Act of 1974 (ERISA), requires that a bond be obtained for 10% of each plan's assets under management subject to a maximum limit per plan of $500,000 and a minimum bond amount of $1,000 per plan. The amount of the bond shall be fixed at the beginning of each fiscal year of the plan.
Plans
Here are examples of the types of plans that are subject to ERISA and
require a fiduciary to be bonded per Section 412 of ERISA:
Defined Benefit Pension Plans, Money Purchase Pension Plans, Profit Sharing Plans, 401 (K) plans, stock bonus plans, employee stock ownership plans (ESOPs) and Keogh or H.R. 10 plans that have employee participants.
Employer-sponsored welfare plan trust funds exempt from federal income tax under Internal Revenue Code Section 501(c) (9) (VEBAs).
Employer-sponsored Simplified Employee Pension
(SEP) plans and group IRA's that are sponsored by an employer or employee
association.
Simple IRA plans
Union-sponsored plans of the types listed
above.
Plans established under IRS Code Section 457 that provide deferred compensation
arrangements for employees of certain non-government tax exempt organizations.
Employer-sponsored deferred compensation plans not qualified for federal income tax exemption, including "secular" trust, Section 402 (b) trusts, and funded excess benefit plans.
Plans established under IRS Code 403 (b) that are employee benefit plans under ERISA either because the employer contributes to the program or because the employer has more than limited involvement in administration of the program.
