Phil Pavarini is a licensed insurance producer and is compensated when a bond is placed through this site. This page is general information, not legal, tax or fiduciary advice, and it is not a substitute for reading your plan document or contract or for advice from your own counsel. Figures shown are current as of the date on this page.
The formula is short enough to state in a sentence. The bond must be for at least 10 percent of the amount of funds handled, but never less than $1,000 and never more than $500,000. If the plan holds employer securities, the ceiling rises to $1,000,000.
The part that is not short is "funds handled," and the part people get wrong is when you measure it.
The formula, with the numbers that matter#
| Plan funds handled | 10 percent | Required bond |
|---|---|---|
| $5,000 | $500 | $1,000 (the floor applies) |
| $60,000 | $6,000 | $6,000 |
| $450,000 | $45,000 | $45,000 |
| $1,200,000 | $120,000 | $120,000 |
| $4,800,000 | $480,000 | $480,000 |
| $9,000,000 | $900,000 | $500,000 (the cap applies) |
| $9,000,000 with employer securities | $900,000 | $900,000 (cap is $1,000,000) |
Round up rather than down. A bond written at exactly the calculated figure is fine, and a bond written above it is fine, so the only way to be wrong is to be under.
The timing rule, which is where the mistakes live#
The amount is fixed at the beginning of each plan year, based on the highest amount of funds handled by that person during the preceding plan year. Not today’s balance. Not the balance on the last statement. Last year’s peak.
Two consequences follow, and they pull in opposite directions.
First, a plan that grew sharply last year needs a bigger bond this year, even if the market has since fallen. Second, if the plan grows during the current year, you are not required to increase the bond mid-year. The DOL said so directly in Field Assistance Bulletin 2008-04. You pick it up at the next plan year.
For a brand new plan with no preceding year, use a reasonable estimate of the funds that will be handled during the first year. Estimate generously. The cost of being $20,000 high is a couple of dollars. The cost of being $20,000 low is a finding.
Know the amount you need? Apply for this bond, or read the full bond details.
What counts as funds handled#
The regulation at 29 CFR 2580.412-6 defines handling broadly: physical contact with cash or checks, the power to transfer funds to oneself or a third party, signature authority, disbursement authority, decision-making authority over disbursement, and supervisory authority over someone who has any of those.
For an ordinary participant-directed 401(k) with a bundled recordkeeper, the practical answer is that funds handled equals total plan assets, plus contributions in transit. Sponsors sometimes try to argue down from that on the theory that no individual ever touches the whole pot. It is not a fight worth having over a premium difference measured in tens of dollars.
Where it genuinely matters is a plan with multiple unrelated entities handling funds, or a plan where an individual’s authority is genuinely limited to a segregated account. There, the 10 percent applies to what that person handles, not to the plan total.
The employer securities exception#
The $1,000,000 ceiling applies to a plan that holds employer securities. It came in with the Pension Protection Act and took effect for plan years beginning on or after 1 January 2008. The regulation is 29 CFR 2550.412-1.
The distinction that catches people: it applies to a plan holding actual employer securities, such as an ESOP or a 401(k) with a company stock fund. It does not apply because a diversified mutual fund inside the plan happens to own some of your employer’s stock. The DOL addressed that directly and the answer is no.
Below $5,000,000 in funds handled the exception changes nothing, because 10 percent is under $500,000 either way. It only bites on larger plans.
A note on buying more than the minimum#
The statutory figure is a floor, not a recommendation. A plan with $40,000,000 in assets carries a $500,000 bond and is fully compliant, and is also carrying coverage equal to just over one percent of the money at risk. Whether that is enough is a business judgment rather than a compliance question, and the answer for a large plan is often no.
Raising the bond above the statutory amount is cheap, does not change the compliance analysis, and is reported the same way. If the plan is large, or if a small number of people have broad disbursement authority, it is worth pricing the next tier up before defaulting to the minimum.
Common questions
Is the 10 percent based on this year’s assets or last year’s?
Last year’s. The bond amount for a plan year is fixed at the start of that year, based on the highest amount of funds handled during the preceding plan year. If you are setting up a bond for a new plan with no prior year, use a good faith estimate of what will be handled in the first year.
Do I have to increase the bond if the plan grows during the year?
No. The DOL confirmed in Field Assistance Bulletin 2008-04 that an increase in plan assets during the year does not require you to adjust the bond mid-year. You reset it at the next plan year. Some carriers offer an inflation guard that raises the amount automatically, which is permitted and which takes the calendaring problem off your desk.
What is the maximum ERISA bond I can be required to carry?
$500,000 for a plan with no employer securities, and $1,000,000 for a plan that holds them. The Secretary of Labor has authority to require more than $500,000 in a particular case after notice and a hearing, which is rare and which you would know about because it would be happening to you.
The plan is tiny. Can the bond be under $1,000?
No. $1,000 is a hard floor regardless of how small the plan is. A plan with $4,000 in it still needs a $1,000 bond. In practice the minimum premium a carrier will write is usually reached well before the bond amount is, so the floor rarely costs anything extra.
Does each trustee need a separate bond?
Not necessarily. One bond can cover multiple plan officials, and a schedule or blanket form covering everyone who handles funds is the normal approach. What matters is that every person who handles funds is covered and that the amount satisfies the 10 percent test for the funds each of them handles.
Get the bond filed today
Answer a few questions and see pricing for this bond. A standard ERISA fidelity bond is usually written without a personal credit check and is often issued quickly, because the bond protects the plan rather than guaranteeing your performance.
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