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What is "Handling Funds" Under ERISA's Fidelity Bond Regulations?

By Elizabeth Ysla Leight, Esq., SPBA Director of Government Relations The ERISA fidelity bond requirements has raised several questions namely, what is considered "handling" assets or funds for ERISA purposes? Secondly, who must be bonded under the Act? This publication provides you with background information on fidelity bonds, including a discussion on "handling" plan assets under ERISA. ERISA requires that those "handling" employee benefit funds be bonded. The language was adopted by the Department of Labor (DOL) in 1975 when it issued temporary regulations that incorporated by reference the bonding regulations and exemptions that the DOL had issued under the Welfare and Pension Plans Disclosure Act (WPPDA). ERISA specifies that "fiduciaries must be bonded...in the amount...no less than 10 per cent of the amount of funds handled, except that such bond shall be in at least the amount of $1000 and no such bond shall be required in an amount in excess of $500,000." The interpretation of the regulations indicate that every official and employee of any plan subject to ERISA who handles funds or other property of such plan must be bonded when there is a risk of loss of the funds or property through fraud of dishonesty by such persons. Of course this would mean that government and church plans which are not subject to ERISA would not become subject to the bonding requirement. The Labor regulations state in pertinent part that "a determination of whether persons falling within the definition of administrator, officer or employee are required to be bonded depends on whether they "handle" funds or other property...with respect to the duties or powers of an administrator, officer or employee of a covered plan." Therefore it is critical to define "funds handled" for ERISA purposes, and how the person "handling" those plan funds or assets is identified. A plan administrator, officer or employee is considered to be handling plan assets or other property if, due to their duties or activities, there is a risk of loss to the plan in the event of fraud or dishonesty ...whether he acts alone or in collusion with others. Risk of loss to the the plan requiring bonding would take place in the following situations: Actual physical contact with cash, checks or similar property If a person has access to cash, checks or similar property, i.e. signature authority on a bank accounts. A person who has the power to transfer funds or other property from the plan to oneself or to another party or to negotiate such funds for something of value must be bonded. Persons who disburse funds in any form must be bonded. Check signing authority or the ability to execute a negotiable instrument. Even though more than one person's signature is required on a check, all cosigners must be bonded. A person with supervisory or decision-making responsibility if that supervisory authority controls such matters as determining investments of disbursements. However, a supervisor who plays a ministerial or consultancy nature would not be handling plan funds. If the supervisor conducts periodic or sporadic audits, advises in general on investment policy, makes general decisions on disbursements, is a bank or corporate trustee or serves in the nature of a Board of Directors of a corporation, they are not considered to be handling funds for ERISA purposes and do not need to be bonded. This discussion on fidelity bonds should in no way be confused with fiduciary liability and fiduciary duty requirements under ERISA are addressed and for which there is separate insurance coverage. The Labor Department has provided us with further clarification as to their interpretation of handling plan funds which are useful for TPAs. For example: If a TPA draws insurance carrier drafts to pay claims to beneficiaries, bonding is not required if the TPA is acting as agent of the insurance carrier (and the carrier, not the plan, maintains the risk of loss). If a TPA pays claims on direction of an employer, the employer, TPA and the plan must each be bonded. If TPAs perform services considered to be ministerial or clerical in nature, and which do not involve physical contact or power over checks, cash or plan property, no bonding is required. What Type and Amount of Bond is Necessary? The amount of the fidelity bond must be at least $1000.00 and must never be less than 10 percent of the amount of funds handled. The bond, however, may not exceed $500,000 although the Secretary of Labor may prescribe a greater amount subject to the 10 percent limitation. Individual or schedule bonds may be written in terms in which the bond amount for each person must represent no less than 10% of the funds handled by the named individual or by the person in the position. Therefore, when individual or schedule bonds are written, the bond amount for each person must represent no less than 10% of the highest amount handled by the named individual or by the person in that position. When a blanket bond is written, the amount of the bond must be at least 10% of the highest amount handled by any plan officer. If an individual or group or class is covered under a blanket bond, and one person handles a large amount of funds or property, while the remaining bondable persons handle smaller amounts, it is permissible to obtain a blanket bond in an amount which sufficiently meets the 10% handling amount of the group excluding the one person handling the large amount. As to that individual, bond coverage that sufficiently covers the amount of assets he handles will be necessary. The time period of the bond is based on each fiscal year of the plan. This does not mean that a new bond must be obtained every year, rather that the bond must reflect the beginning and end of each reporting year in which it is subject to the amounts handled. As to the types of bonds necessary, ERISA says generally that the bond must be of a type approved by the Secretary of Treasury. The regulations stipulate further that the bond must adequately protect the plan from losses resulting through fraud or dishonesty of the part of plan officials. The basic types of bonds are: the individual bond, which covers a named individual in a stated penalty, i.e. fiduciary liability coverage; a name schedule bond that covers a number of named individuals with the respective amounts set opposite their names; a position schedule bond that specifically covers individuals in that position, i.e. Board of Trustees; blanket bonds that cover all the insured's officers and employees with no schedule or list. A blanket bond automatically covers all new officers and employees Can A TPA Indemnify the Plan and Still Satisfy the Bonding Requirement? Agreements that serve to exclude or relieve a fiduciary from liability are void under ERISA, however indemnification agreements in which the fiduciary remains fully responsible and liable, but that permit another party to satisfy any liability incurred by the fiduciary in the same manner as insurance purchased are valid under ERISA. Therefore, a fiduciary may be indemnified by an employer, by an affiliate of the employer or any employee organizations whose employees are covered by the plan. A fiduciary may indemnify employees who actually perform services for a plan. The Department of Labor has strict requirements prohibiting indemnification of a fiduciary of an employee benefit plan by the plan because effectively, this type of arrangement would remove the fiduciary of responsibility of liability to the plan. What Is the DOL Attempting to Do with the Bonding Rule? According to our sources in DOL, they want to make sure the plan has a direct method of recovery in the event there is loss to the plan through fraud or dishonesty by plan fiduciaries. Whether or nor an entity considers themselves a "fiduciary" as to the plan, the bond requirement stems from the handling of plan assets. The Last Word, Hopefully Finally, so long as a bonding program satisfies the statutory and regulatory requirements, other issues such as whether persons or plans required to be bonded separately or under a group or blanket bond are left to the judgment of the parties concerned, namely the plan administrator, plan sponsor and TPA.