Fiduciary Liability and ERISA Bond Explained + How do I answer the line 4(e) question on IRS Form 5500?

By and | May 8, 2019

Fiduciary Liability Policies provide coverage to the sponsors and fiduciaries of employee benefit plans against claims under ERISA and similar state laws. As the name denotes, the core coverage under these policies is liability coverage. Thus the policies provide coverage for costs associated with the defense of claims (e.g., demand letters, lawsuits, arbitrations and administrative investigations or proceedings) and indemnity (i.e., settlements and judgments). ERISA § 410(b) permits the purchase of Fiduciary Liability Insurance, even though ERISA § 410(a) voids “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation or duty”. See 29 U.S.C. § 1110.

Separately, ERISA § 412 obligates every fiduciary of an employee benefit plan to be bonded, for no less than 10% “of the amount of funds handled,” except that the amount of the bond shall not be less than $1,000 nor more than $500,000. See 29 U.S.C. § 1112. In contrast to Fiduciary Liability Policies, the ERISA Bond is a form of fidelity bond that provides first-party coverage in the form of reimbursement to the employee benefit plan for theft, embezzlement, forgery and the like.

While Fiduciary Liability Policies and the ERISA Bond are distinct products providing entirely different types of coverage, clients often confuse one for the other. For example, IRS Form 5500, which is the applicable tax return for an employee benefit plan, requires disclosure of information concerning the ERISA Bond in line 4(e). But we’ve seen numerous Forms 5500 on which, in line 4(e), the employer/plan sponsor mistakenly provided information about the Fiduciary Liability Policy. The obverse issue is that clients facing lawsuits involving claims under ERISA sometimes notify the ERISA Bond carrier, expecting coverage under that product.

It is also our experience that the confusion about the two products is largely borne of the mistaken assumption that there’s only one insurance product dealing with ERISA issues. It’s only because employer/plan sponsors don’t know to look for two different types of products (which are usually clearly labelled) that they become confused. The confusion usually dissipates with the realization of the existence of the two separate products–Fiduciary Liability Policies and ERISA Bonds.

Scott Hecht

Contact Scott Hecht or Tom Dowling for more information.