Fiduciary liability insurance and the fidelity bond protect against different things.
One protects the plan from dishonest handling of funds. The other can help cover fiduciary breach claims. This page sets out what each does under ERISA and the Department of Labor’s guidance, and what it does not do.
Start With The Overview.
General information, not legal or tax advice. Check the cited sources before you act.
ERISA Prohibited Transactions Overview
Start here for the whole picture: the rule, who it reaches, the exemptions, the consequences and the coverage questions.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Consequences of a Prohibited Transaction
Personal liability, Department of Labor penalties, the Code excise tax question and correction.
Required, And Aimed At Dishonesty.
ERISA section 412, 29 U.S.C. 1112, requires every plan fiduciary and every person who handles plan funds or other property to be bonded unless an exception applies. The amount is at least 10 percent of the funds handled, with a $1,000 minimum and a $500,000 maximum. The Department of Labor describes the bond as protection for the plan against loss from fraud or dishonesty, such as theft, embezzlement, forgery and misappropriation.
Section 412(a) exempts plans whose benefits are paid only from the general assets of an employer or union. The Department’s group health publication says group health plans paid from general assets may be eligible for exemption from the bonding requirement, and notes that in a self-funded plan, assets are generally not plan assets except for participant contributions withheld or received. Our bond pages cover how that applies.
On who must be bonded, the Department says handling includes physical contact with cash or checks, power to transfer plan funds, check-signing or disbursement authority, and supervisory responsibility over those activities. It says this usually includes the plan administrator and employees who handle funds, and that service providers must be bonded if they or their employees handle plan funds. Fiduciaries who do not handle plan funds generally do not need a bond.
Allowed, Not Required.
ERISA section 410(b), 29 U.S.C. 1110(b), permits three arrangements. A plan may buy insurance for its fiduciaries, or for itself, covering liability or losses from fiduciary acts or omissions, but only if the policy permits recourse by the insurer against the fiduciary for a breach of fiduciary obligation. A fiduciary may buy insurance for the fiduciary’s own liability, paid from and for the fiduciary’s own account. An employer or employee organization may buy insurance covering the people who serve as fiduciaries.
Section 410(a) is the companion rule: an agreement that tries to relieve a fiduciary of responsibility or liability under the fiduciary rules is void as against public policy, with limited exceptions written into section 405. Insurance does not take away the duty. It is a way to pay for a loss.
Two Tools, Two Jobs.
The bond covers dishonest acts by people who handle plan money. The Department says fiduciary liability insurance covers losses from fiduciary breaches, is not required, and does not satisfy the fidelity bonding requirement. A plan with one needs the other only if the facts call for it.
Neither one makes a prohibited transaction lawful. A policy responds, if at all, to a claim or loss under its own terms, and an exemption or correction is what deals with the legality of the transaction.
For a small employer, the practical sequence is to confirm first whether the bond is required for the plan, then decide separately whether fiduciary coverage makes sense given who serves as a fiduciary and how decisions are made. The two decisions use different rules and often involve different advisers.
Policies We Did Not Research.
Other business policies, such as crime, cyber or employment practices coverage, are separate products. We did not research their terms and make no claim about whether any responds to a fiduciary breach or a prohibited transaction. We also make no claims about any insurer, product or price.
If a policy is already in place for the company, ask whether it extends to the benefit plan at all. A policy for the business does not automatically mean the plan or its fiduciaries are insured.
Read The Policy Before Relying On It.
Ask in writing whether the policy covers claims brought by the Department of Labor or by participants, whether civil penalties or excise taxes are excluded, whether the cost of a voluntary correction is covered, who counts as an insured fiduciary, and how the recourse provision in section 410(b)(1) works if the plan buys the policy. Ask also whether premiums are to be paid by the plan or the employer, and take the legal question of paying from plan assets to counsel.
Related Rules And Tools.
ERISA Fidelity Bond for Employer Health Plans
The bond requirement as it applies to employer health plans.
ERISA Fidelity Bond Requirement: Employer Guide
An employer guide to who must be bonded and for how much.
ERISA Fiduciary Duties for Employer Health Plans
A practical guide to the duties of the people who run an employer health plan.
Laws And Sources
ERISA section 410, 29 U.S.C. 1110: Section 410, exculpatory provisions and permitted insurance.
ERISA section 412, 29 U.S.C. 1112: Section 412, the bonding requirement and its amounts and exemptions.
Department of Labor, Protect Your Employee Benefit Plan With an ERISA Fidelity Bond: Department of Labor publication on the fidelity bond and how it differs from fiduciary liability insurance.
Department of Labor, Understanding Your Fiduciary Responsibilities Under a Group Health Plan: Department of Labor guidance on bonding for group health plans paid from general assets.
General information, not legal or tax advice.
Quick Answers.
Short replies on this page’s topic, each tied to a fuller guide.
Does fiduciary liability insurance satisfy the ERISA bond requirement?
No. The Department of Labor says fiduciary liability insurance is not required and does not satisfy the fidelity bonding that ERISA requires.
Does a self-funded group health plan need an ERISA bond?
Section 412 exempts plans paid only from the general assets of an employer or union, and the Department says group health plans paid that way may be eligible for exemption. Participant contributions are treated separately, so check our bond pages and ask counsel.
Can a plan pay for fiduciary liability insurance?
Section 410(b)(1) permits a plan to buy it if the policy permits recourse by the insurer against the fiduciary for a breach. Whether paying premiums from plan assets is appropriate in a given case is for counsel.
The Rest Of This Series.
What ERISA Section 406 Prohibits
The two lists in the statute: transactions with parties in interest, and fiduciary self-dealing.
Who Is a Party in Interest
The statutory list of people and businesses around a plan, with plain examples labeled as our reading.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Consequences of a Prohibited Transaction
Personal liability, Department of Labor penalties, the Code excise tax question and correction.
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