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.
FAQs
An ERISA fidelity bond is a type of insurance that protects a 401(k) plan from losses caused by acts of fraud or dishonesty (e.g., theft, embezzlement or forgery) by “plan officials.” ERISA fidelity bonds can only be purchased from a surety or reinsurer that's named on the Department of the Treasury's Listing of ...
What are the fidelity bond requirements for 401k? ›
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.
Who is exempt from a fidelity bond? ›
The following plans are exempt from ERISA's fidelity bond requirement: Church plans and government plans. Plans that are completely unfunded (that is, benefits are paid from an employer's general assets) Section 125 cafeteria plans.
How does 401k work for small business owners? ›
Traditional 401(k) Plan
If you decide to contribute to your 401(k) plan, you have options. You can contribute a percentage of each employee's compensation (a nonelective contribution), you can match the amount your employees contribute (a matching contribution), or you can do both.
How does fidelity bond work? ›
A fidelity bond is a form of business insurance that offers an employer protection against losses that are caused by its employees' fraudulent or dishonest actions. Also known as an honesty bond, this form of insurance can protect against monetary or physical losses.
Should I put all my 401k into bonds? ›
Bottom Line. Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
How much does a fidelity bond cost? ›
The cost of a fidelity bond is usually a small percentage of the bond's total amount of coverage. For example, a bonding company might decide to charge you 1% of the total bond amount. That would mean a $2,000 bond would cost $20, and a $10,000 bond would cost $100 annually.
Which employee would need to be covered by a fidelity bond? ›
One of ERISA's requirements is that people who handle plan funds and other property must be covered by a fidelity bond to protect the plan from losses due to fraud or dishonesty.
Is there a penalty for not having a fidelity bond? ›
Although maintaining a sufficient bond is a regulatory requirement, there is no penalty when coverage falls below the minimum amount. However, plans that are consistently under-bonded may raise red flags with government agencies that could result in an investigation to ensure there are no other problems.
What is the difference between fidelity bond and fidelity liability? ›
The ERISA fidelity bond protects the plan, while fiduciary liability insurance protects the people who are in charge of the plan in the case that something happens to these funds that's not a direct result of acts of fraud or dishonesty on the part of the trustee.
The SECURE 2.0 Act of 2022 (SECURE 2.0) became law on December 29, 2022. The new law makes sweeping changes to 401(k) plans – particularly plans sponsored by small businesses. It includes provisions intended to expand coverage, increase retirement savings, and simplify and clarify retirement plan rules.
What is the best retirement plan for a small business owner? ›
Many smaller companies opt for SEP IRAs because they are cost-effective and relatively simple to run while still allowing the business owner to help their employees save for retirement. In this plan, business owners can make contributions to IRAs they set up for themselves and their employees.
How much can an LLC owner contribute to a 401k? ›
If your LLC is a single-member entity, your maximum profit sharing contribution may be up to 20% of your net compensation (as shown on line 14 of Schedule K-1). If your LLC is a multi-member entity, your maximum profit sharing contribution may be up to 25% of your net compensation (as shown on line 14 of Schedule K-1).
What do you need for a fidelity bond? ›
The fidelity bond must be no less than 10% of the amount of funds handled, with a minimum of $1,000 and a maximum of $500,000. There are exceptions, however, including: maximum amount: There is an exception to the $500,000 maximum for retirement plans that hold employer stock or employer securities.
Why might a business person purchase a fidelity bond? ›
Why Are Fidelity Bonds Used? Fidelity bonds cover your business against fraudulent and dishonest acts by employees that cause financial harm. Examples of situations in which a fidelity bond might help help a business include: Embezzlement.
What are the two main types of fidelity bonds? ›
There are two types of fidelity bonds: first-party bonds (which protect companies from harmful acts by employees or clients) and third-party bonds (which protect companies from the harmful acts of contracted workers).
What is the principal 401k fidelity bond? ›
If you've never heard of the term before, a 401(k) fidelity bond is the same thing as an ERISA bond, and both terms refer to a kind of insurance protection against any kind of mishandling or fraud perpetrated by individuals in charge of handling 401(k) accounts.
Do I need a surety bond for my 401k? ›
ERISA requires this bond, and you are not in compliance with Department of Labor regulations until you have one. It can be a “red flag” on your Form 5500. If you don't get one, the DOL may impose sanctions, and the IRS may require you to have the plan audited by a public accounting firm each year.
Can I buy treasury bonds through fidelity 401k? ›
Newly issued Treasuries can be purchased at auctions held by the government, while previously issued bonds can be purchased on the secondary market. Both types of orders can be placed through Fidelity.
What are the ERISA bonding requirements for investment advisors? ›
The ERISA bond must be equal to no less than ten percent (10%) of the asset value in the plan when those assets are “qualified”. Plans containing non-qualified assets require fidelity bonding of one hundred percent (100%) of the asset balance.
