What Is An ERISA Bond?
ERISA stands for Employee Retirement Income Security Act. It is a law enacted in 1974 that establishes standards for the way pension and healthcare plan of workers in the private sector should be managed by fund managers and advisers.
Fraudulent activities by managers of pension and other funds could lead to disastrous financial loss on the part of the employees. To curb this, the government mandated that fund managers take out ERISA bonds to safeguard employee funds from fraudulent actions of fund managers.
An ERISA bond is a type of fidelity bond that protects the beneficiaries of an employee benefit plan. Companies sometimes offer employee benefits in various forms and these are handled by individuals who have access to large sums of money or property. The ERISA bond is one that covers the “employees”, protecting their funds or property from fraud and dishonest acts.
How Does An ERISA Bond Work?
An ERISA bond is a legally binding contract between three parties, the principal who is the official or officials handling the bond, the obligee which is the plan itself and by extension the employees or members of that plan, and the Surety.
ERISA requires that every person or official who handles the fund should be bonded. Not only those who handle the bond, but also people like advisers whose decisions directly affect the plan are required to be bonded. The criteria for those who handle funds include:
- Those who come in physical contact with cash or property.
- Those in charge of disbursement.
- Those who have the authority to sign checks or other financial instrument owned by the plan.
- Those who have authority to transfer funds or ownership of property to third parties.
- Those in supervisory or decision-making positions.
These tasks may be carried out by one or people, but however many people are involved in handling a plan, they must all be bonded. ERISA bonds do not apply to all employee benefit plans. This bond applies mostly to ERISA retirement plans and some other funded plans, and only pays claims up to the bonded amount. For example, if claims are about $200,000 but only $100,000 was bonded, the Surety has to pay only $100,000.