If your company sponsors a 401(k) or profit-sharing plan, federal law almost certainly requires you to carry an ERISA fidelity bond. Section 412 of the Employee Retirement Income Security Act says that every person who handles funds or other property of an employee benefit plan must be bonded. Most business owners have never heard of it until a plan auditor or a Form 5500 question brings it up.

What it actually protects

Here is the part that catches people: the bond protects the plan, not your business. If someone who handles plan money steals it, the bond reimburses the plan and its participants. The company is the one buying the bond, but the company is not the beneficiary.

How much you need

The required amount is at least 10% of the plan funds handled, measured at the start of each plan year based on the prior year:

  • Minimum of $1,000
  • Maximum of $500,000
  • Maximum rises to $1,000,000 if the plan holds employer securities
  • No deductible is permitted — the bond must pay from the first dollar
  • It must be written by a surety listed on the U.S. Treasury Department's Circular 570

So a plan with $2,000,000 in assets handled needs a $200,000 bond. A plan with $8,000,000 needs $500,000, since that is the cap.

Who has to be bonded

Anyone who handles plan funds — signs checks, directs transfers, has custody of assets, or can decide where the money goes. That usually covers the owner, the CFO or controller, and anyone in payroll who moves deferrals. Most bonds are written to cover the plan itself rather than naming each person.

Which plans are exempt

Not every retirement arrangement triggers the requirement. SEP and SIMPLE IRA plans are generally exempt, because the assets sit in individual IRAs rather than a trust the employer handles. Certain governmental and church plans are also outside ERISA. If you sponsor a 401(k) with a trust, assume you need the bond.

What it is not

Three things get confused with an ERISA bond constantly:

  • Fiduciary liability insurance — covers you when someone claims you breached your duty as a plan fiduciary: bad investment choices, excessive fees, late deferrals. That is a lawsuit against you. The ERISA bond is theft coverage for the plan. Different exposure, different policy.
  • Commercial crime insurance — covers theft from your business. The ERISA bond pays the plan. A business with both a 401(k) and an accounts payable clerk needs both.
  • A license or contract bond — unrelated. Those protect whoever required them.

Why it comes up at audit

Form 5500 asks directly whether the plan is covered by a fidelity bond and for how much. Answering no, or reporting an amount below 10%, is a straightforward finding for the Department of Labor. It is also one of the least expensive items on the list to fix — these bonds cost little relative to the required amount, and can often be written for multiple years at once.

Related: Crime insurance vs. property theft coverage

Educational only — confirm against the actual bond form, the plan document, and current federal requirements.