Glossary term
Fidelity Bond
A fidelity bond protects against losses caused by dishonest acts, such as theft or fraud, by covered employees or plan officials.
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What Is a Fidelity Bond?
A fidelity bond is coverage that protects a business, employee benefit plan, or other organization against certain losses caused by dishonest acts by covered people. Despite the word bond, it functions more like insurance than a loan or debt instrument.
The term is especially important for employers and retirement plans because federal law requires many people who handle ERISA plan funds or property to be bonded. Fidelity bonds can also be used by businesses that want protection against employee theft, forgery, or similar internal fraud risks.
Key Takeaways
- A fidelity bond covers specified dishonest acts, not ordinary business losses.
- ERISA plans generally need fidelity bond coverage for people who handle plan assets.
- Fidelity bonds are different from fiduciary liability insurance.
- Coverage limits, covered people, exclusions, and claim triggers matter more than the label.
What the Bond Covers
Coverage depends on the contract, but fidelity bonds are commonly designed around theft, embezzlement, forgery, misappropriation, or fraud by covered employees or officials. For an employee benefit plan, the core purpose is to protect plan assets from dishonest handling.
Coverage type | Primary risk addressed |
|---|---|
Employee dishonesty coverage | Theft or fraud by covered employees. |
ERISA fidelity bond | Loss to an employee benefit plan from dishonest handling of plan funds or property. |
Fiduciary liability insurance | Claims alleging mistakes or breaches of fiduciary duty, which is not the same as fidelity bonding. |
Where It Shows Up
Small businesses may encounter fidelity bonds when a client contract requires them, when employees handle cash or sensitive property, or when the business wants to insure against internal theft. Plan sponsors may encounter them while setting up or administering a retirement or welfare benefit plan.
The practical question is whether the bond amount, covered persons, and covered acts match the actual risk. A policy that excludes the person handling funds or sets a limit far below the assets at risk may leave the organization exposed.
The Bottom Line
A fidelity bond is a protection tool for dishonesty risk. It does not replace strong controls, clear segregation of duties, or fiduciary liability coverage, but it can be an important backstop when employees or plan officials handle money or property.