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Benefits

Who Must Be Bonded for Our ERISA Welfare Plan?

EBIA  

EBIA  

QUESTION: Our ERISA welfare benefit plan is self-insured, and we use a third-party administrator (TPA) to administer the plan’s benefits. We understand that there is a bonding requirement for welfare plans—but who exactly must be covered by our welfare plan’s bond?

ANSWER: In short, ERISA § 412 requires every plan fiduciary (including named fiduciaries, plan administrators, trustees, and functional fiduciaries), and every other person who “handles” plan funds or other property, to be bonded. This type of bond, commonly referred to as a fidelity bond, protects the plan against loss due to fraud or dishonesty by fiduciaries, employees, and other persons who handle plan funds. (Note that this is not the same as fiduciary liability insurance, which provides broad coverage to those performing fiduciary functions and which typically excludes coverage for fraud or dishonesty.) To make sure that your plan’s fidelity bond covers the necessary persons, you should understand what plan funds are and what it means to handle them.

  • What Are “Plan Funds” for Bonding Purposes? Under DOL regulations, plan “funds or other property” include “all property which is used or may be used as a source for the payment of benefits to plan participants.” Generally, employer contributions and participant salary withholding contributions first become plan funds when they are actually separated from the employer’s general assets, paid to a trust, or used to purchase benefits. (Keep in mind that the terms “plan funds” and “plan assets” have different meanings. Contributions withheld from participants’ pay become plan assets when they can reasonably be segregated from employer general assets, but those amounts only become plan funds if they are, in fact, segregated from the employer’s general assets.) Participant contributions that are not salary withholding amounts—such as COBRA premiums—are plan funds when they are received on the plan’s behalf. If employer contributions or salary withholding amounts are placed in a separate account, the cautious approach would be to ensure that your ERISA bond covers those persons handling the separate account funds (even if the amounts remain subject to the employer’s general creditors). For insured plans, bonding is generally not required if the premiums are paid directly from the employer’s general assets to the insurance carrier. And if a plan is treated as unfunded under DOL Technical Release 92-01 because benefits are offered through a cafeteria plan, it is treated as unfunded for bonding purposes as well.
  • What Does It Mean to “Handle” Plan Funds? Handling funds occurs when a person has the ability to affect the disposition of plan funds; it is not limited to physical control. Handling includes any duty or activity that creates a risk that the funds could be lost due to the handler’s fraud or dishonesty; examples include receipt of funds and their safekeeping, signing or endorsing checks, and authorizing or directing disbursements. Thus, your plan’s bond may be required to cover a number of your company’s employees who carry out plan administrative functions, not just the plan’s fiduciaries. Service provider employees that handle funds also must be bonded. For example, if your plan’s TPA pays benefits by means of checkwriting authority over amounts held in a separate account in the employer’s name, the TPA’s employees are handling plan funds and are likely subject to the bonding requirement. While your company is not required to cover the employees of your TPA (or other service providers) on the plan’s bond or purchase bond coverage for them, your plan’s fiduciaries are responsible for ensuring and monitoring that the service provider’s employees are properly bonded. Note, however, that certain regulated entities, such as banks, trust companies, insurers, and similar organizations are exempt from the bonding requirement.

Because, as a practical matter, all ERISA pension plans (including 401(k) plans) require a bond (see our Question of the Week), plan sponsors often find that a retirement plan bond can be extended to cover the sponsor’s welfare plan.

For additional information about ERISA’s bonding requirement, including types of bonds, the required bond amount, and rules governing what companies can issue fidelity bonds, see EBIA’s ERISA Compliance manual at Section XVIII (“ERISA Bonding Requirement”). See also EBIA’s Self-Insured Health Plans manual at Section XXI.E.1 (“Fidelity Bond Required Where Plan ‘Funds or Other Property’ Are Handled”).

 

Contributing Editors: EBIA Staff.

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