What small business owners need to know about 401(k) fidelity bonds

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There are plenty of different types of insurance the average person is likely to have: life insurance, health insurance, car insurance, etc. However, many small business owners begin the process of sponsoring a 401(k) plan and hear for the first time that they may be required to purchase a bond to serve as insurance on behalf of their 401(k) plan. Fidelity bonds are just one of many key parts of being a responsible plan sponsor, so you’ll want to make sure you understand the basics of fidelity bonds and why you may need to purchase one for your 401(k).

Five things employers need to know before obtaining a fidelity bond (h2)

1. What is a 401(k) fidelity bond?

A fidelity bond, or ERISA bond, is an insurance policy that provides a 401(k) plan with protection from losses caused by any fraudulent behavior—such as embezzlement, theft, larceny, and misappropriation by those who have access to the plan’s funds. The fidelity bond will step in to counteract any losses due to the fraudulent activity.

A fidelity bond is different from fiduciary liability insurance, sometimes referred to as a fiduciary bond. Fiduciary liability insurance insures plan officials (and sometimes the plan) against losses caused by breaches of fiduciary responsibility. However, fiduciary liability insurance is not required—while a fidelity or ERISA bond is required at the start of a 401(k) plan.

2. Does my 401(k) plan require an ERISA fidelity bond?

A fidelity bond is required as soon as you start your 401(k) plan. ERISA requires every person who handles funds or other property for an employee benefit plan, including 401(k) plans, to be bonded. 

3. How much fidelity bond coverage is required?

At the beginning of each plan year, the coverage amount of the bond must be at least 10 percent of the amount of funds handled. The minimum bond amount is $1,000 and, in most cases, is not required to be more than $500,000. However, the plan can purchase a bond for a higher coverage amount, if appropriate.

For new plans, a fidelity bond should be in place by the time the plan is set up. Estimated plan contributions are used to determine the exact bond amount, but employers can plan on it being at least $1,000 in coverage.

4. Where do I get a fidelity bond for my 401(k) plan?

Fidelity bonds are obtained through a surety or reinsurer that is named on the Department of Treasury’s (DOT) Listing of Approved Sureties.

5. What happens to a plan with no fidelity bond?

You are required to report that you have a fidelity bond on your annual Form 5500 filing. The Department of Labor (DOL) regularly monitors plans that report no fidelity bond coverage—and if you do not have a bond, or the bond you have does not have sufficient coverage for the plan’s assets, you are at risk for triggering a DOL audit. Failure to have a bond is a fiduciary breach, resulting in plan fiduciaries being  personally liable for any losses due to fraud or dishonest practices that would have been covered by the fidelity bond.

What you need to know about Fidelity Bonds
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Sponsoring a retirement plan is a great step towards retirement readiness for you and your employees. While there are quite a few things to check off the list as you get your plan set up and ready to start accepting contributions, it’s important to make sure you’ve got the bases covered. Make sure to read any resources your 401(k) plan administrator sends to guide you through setup.

To learn more about starting a 401(k) or similar retirement plan for your business, contact our retirement specialists at 800-345-6363.