ERISA stands for The Employee Retirement Income Security Act and was established in 1974 to protect employee benefit plans from losses due to acts of fraud or dishonesty. It was designed to lay out and protect a set of minimum standards for pension plans in private industry. ERISA is sometimes used to refer to the full body of laws that regulate employee benefit plans. These extensive rules govern and manage the federal income tax effects of any transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:
- Requiring the disclosure of financial and other information concerning the plan to beneficiaries;
- Establishing standards of conduct for plan fiduciaries;
- Providing for appropriate remedies and access to the federal courts.
Why is this important to your business? Because it is the law!– The Employee Retirement Income Security Act of 1974 (ERISA) requires that each person who “Handles funds or other property” of an employee benefit plan to be bonded.(Source: Department of Labor).
Too often as agents we see small businesses that either have not purchased an ERISA bond or have not increased the value of the bond as their plan value has increased. Generally, the statute requires that those handling funds or property of the employee benefit plans be bonded for 10% of that plan value with a minimum bond value of $1,000 and a maximum of $500,000. Not having an ERISA bond can have a significant financial impact on the business owner and the plan participants. If there was ever an ERISA claim, the business owner can be held personally liable for the losses of the plan Paying for the losses out of their own pockets because they do not have the financial liquidity to cover the cost of the claim. This leaves the participants of the plan without coverage, which is a morale hazard.
For larger businesses, unlike smaller companies, this becomes less of an issue because often they have already met the $500,000 maximum threshold. For more information on understanding your fiduciary responsibilities when it comes to your retirement plan, you can read this article or speak to one of our Risk Advisors about your current plan.