Benefits and Compensation – Page 2 – Setnor Byer Insurance & Risk

The Affordable Care Act’s Individual Mandate

The Affordable Care Act’s Individual Shared Responsibility provision requires nonexempt individuals to obtain minimum essential coverage for themselves and any nonexempt dependents. Starting January 1, 2014, those failing to get the required health insurance will have to pay a monthly penalty.

Who is subject to the penalty?

The penalty, which is calculated monthly, applies to individuals of all ages, including senior citizens and children. An individual is liable for the penalty assessed against any other individual who can be claimed as a dependent for federal income tax purposes. If an individual files a joint return, that individual and their spouse are jointly liable for the penalty. Penalties will be paid by including them with an individual’s tax return.

What is Minimum Essential Coverage?

Minimum essential coverage generally includes:

Employer-sponsored coverage (including COBRA coverage and retiree coverage)
Coverage purchased in the individual market
Grandfathered health plans
Medicare and Medicaid coverage
Children’s Health Insurance Program (CHIP) coverage
Certain types of Veterans’ health coverage
TRICARE (Department of Defense health care program)

How much is the penalty?

The Individual Shared Responsibility penalty is calculated monthly by using a flat dollar amount or a percentage of household income, whichever is greater. Under the flat dollar amount method, each nonexempt individual is penalized a fixed amount. For individuals under the age of 18, the penalty is one-half the fixed amount. If an individual is responsible for multiple dependents, the total penalty cannot be more than 300% of the applicable fixed amount.

The fixed amounts used to calculate the penalty are:

$95 in 2014 ($7.92 per month)
$325 in 2015 ($27.08 per month)
$695 in 2016 ($57.92 per month)
$695 + cost-of-living increase in 2017 and beyond.

Under the percentage of income method, the penalty is a percentage of an individual’s household income, less specific deductions. To calculate household income, add the individual’s modified adjusted gross income to the modified adjusted gross incomes of the individual’s family members.

The percentages used to calculate the penalty are:

1% in 2014
2% in 2015
2.5% in 2016 and beyond.

For example, in 2014, the annual penalty will be $95 per adult and $47.50 per child, but no more than $285 (300% of $95) or 1% of the household income, whichever is greater.

Is there a maximum limit for the penalty?

Yes. The Individual Shared Responsibility penalty cannot be more than the national average premium for bronze-level (covering 60% of costs) qualified health plans offered through Affordable Insurance Exchanges. The Congressional Budget Office estimates that in 2016, the national average will be approximately $5,000 for individuals and $12,500 for families of four.

Are there any exemptions from the Minimum Essential Coverage requirement?

Yes. The following individuals are not required to obtain Minimum Essential Coverage:

Members of a religious sect that is legally recognized as being conscientiously opposed to accepting any insurance benefits.
Members of a recognized health care sharing ministry.
Individuals who are not U.S. Citizens, U.S. Nationals or lawfully present aliens.
Individuals incarcerated following disposition of criminal charges.
Members of a recognized Indian tribe.
Individuals with income below the threshold for filing a tax return.
Individuals whose required contribution for coverage exceeds 8% of their household income.
Individuals who have been certified as suffering a hardship.
Individuals with a gap in health insurance coverage of less than three consecutive months during the year.

Though proposed regulations explaining the Individual Shared Responsibility penalty have been published by the Internal Revenue Service and the Department of Health and Human Services, they are not final and may change.

At Setnor Byer Insurance & Risk, we are committed to guiding you through Health Care Reform. Check back with us periodically for future informational updates about the Affordable Care Act. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

If you’d like to subscribe to our weekly newsletters please click here.

Affordable Care Act Notice Requirement Delayed

To help individuals understand their health insurance options under the Affordable Care Act (Act), employers are required to give employees written notice about Affordable Insurance Exchanges. The Act’s March 1, 2013 deadline for employers to start giving this notice to all employees was recently pushed back by the Department of Labor (DOL).

Under the Act, the DOL is required to define the scope of the notice requirement and provide guidance on how the requirement can be satisfied by issuing regulations. Unfortunately, these regulations aren’t finished yet, and the DOL has taken the position that employers should not be required to comply with the Act’ notice requirement until the regulations are done.

According to the DOL, “the timing for distribution of notices will be the late summer or fall of 2013, which will coordinate with the open enrollment period for Exchanges.”

So what is the reason for the delay? According to the DOL, efforts need to be coordinated with the Department of Health and Human Services and the Internal Revenue Service. The DOL is considering the possibility of including model, generic language in the regulations that could be used to satisfy the notice requirement and also allowing employers to satisfy the notice requirement by providing employees with an employer coverage template. Regardless of their final form, the DOL expects the regulations to provide employers with flexibility and adequate time to comply.

Until the Act’s notice requirement becomes effective, Setnor Byer Insurance & Risk can be your source of information about health insurance. Be sure to check back with us periodically for future updates. In the meantime, if you have specific questions about your health insurance or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, please contact us.

Finding Safe Harbor from the Employer Mandate

Under the Affordable Care Act’s Employer Shared Responsibility provisions, “large” employers with at least 50 full-time equivalent employees may be subject to an annual $2,000 or $3,000 penalty (tax) per qualifying employee. An employer may avoid the penalty by offering health coverage to at least 95% of its full-time employees (and dependents) under an “affordable” plan that provides “minimum value.”

A plan will generally satisfy the “minimum value” requirement if it covers at least 60% of health care costs. To be considered “affordable,” the employee’s required contribution for employee-only coverage cannot be more than 9.5% of the employee’s household income for the taxable year.

In the context of determining whether a plan satisfies the affordability requirement, the Internal Revenue Service recognized the likely inability of employers to ascertain the household income for each of its employees. As a result, the proposed regulations recently published by the IRS allow employers to take advantage of three safe harbor provisions.

Form W-2 Safe Harbor

Application of the Form W-2 Safe Harbor, which is determined after the calendar year on an employee-by-employee basis, takes into account the employee’s Form W-2 wages and the employee contribution.

An employer will not be assessed a penalty for an employee if the required annual contribution for the employer’s cheapest employee-only coverage plan is not more than 9.5% of that employee’s Form W-2 wages from the employer. If an employee is not offered coverage for an entire calendar year, the Form W-2 wages can be adjusted to reflect the period for which coverage was offered.

To avoid manipulation, the proposed regulations provide that the employee’s required contribution must remain consistent during the calendar year and that an employer cannot make discretionary adjustments to the required employee contribution for a pay period.

Rate of Pay Safe Harbor

Under the Rate of Pay Safe Harbor, an employer:

takes the rate of pay for each hourly employee who is eligible for coverage under the plan as of the beginning of the plan year; and
multiplies that rate by 130 hours (the benchmark for monthly full-time status) to compute the employee’s monthly wages.

If the employee’s monthly contribution amount for the cheapest employee-only coverage plan is not more than 9.5 percent of the computed monthly wages, then the coverage is considered affordable. For salaried employees, the monthly salary would be used to determine affordability.

The Rate of Pay Safe Harbor allows employers to prospectively determine affordability without having to analyze every employee’s wages and hours. However, it may only be used for those employees who did not have their hourly wages or monthly salaries reduced by the employer during the year.

Federal Poverty Line Safe Harbor

Under the Federal Poverty Line (FPL) Safe Harbor, coverage is considered affordable if the employee’s cost for the cheapest employee-only coverage plan is not more than 9.5% of the FPL for a single individual. Under the regulations, employers may use the most recently published poverty guidelines for the first day of the plan year.

These safe harbors are optional. Large employers may use one or more of these for all employees or for any reasonable category of employees, provided they are used uniformly and consistently for all employees in a category.

The IRS will be accepting comments on these proposed regulations until March 18, 2013.

At Setnor Byer Insurance & Risk, we are committed to guiding you through what is sure to be a bumpy ride. Check back with us periodically for future informational updates about the Affordable Care Act. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

If you’d like to subscribe to our weekly newsletters please click here.

Health Care Reform by the Numbers

As Health Care Reform makes its way through the health insurance landscape, many employers are finding it difficult to keep up. Unfortunately, the size and complexity of the Affordable Care Act (Act) doesn’t help. Nevertheless, a general understanding of the Act’s more significant provisions can help employers adjust to past changes and prepare for future ones.

Since numbers play a big part in determining how the Act will impact a particular employer, here are some figures that employers can use to see where they fit in the big picture.

0 Number of employers explicitly required by the Act to offer employee health care coverage

50 Number of full-time equivalent employees required to trigger the Act’s tax on employers

$2,000 Annual tax large employers must pay for each full-time employee (in excess of 30) if the employer does not offer health benefits to its employees

$3,000 Annual tax that large employers must pay for each full-time employee receiving a credit for purchasing health insurance from an Exchange if the employer offers health benefits to its employees

30 Average number of hours an employee must work to be considered a full time employee for purposes of determining large employer status

$0 Annual tax that large employers must pay for each part-time employee, regardless of whether the employer offers health coverage to employees

85% Minimum percentage of premium revenue that a large group health insurance issuer must spend on health care claims and quality improvement to avoid issuing a rebate to enrollees

80% Minimum percentage of premium revenue that a small group or individual market health insurance issuer must spend on health care claims and quality improvement to avoid issuing a rebate to enrollees

200 Maximum number of full-time employees that an employer may have before the Act’s automatic enrollment requirement is triggered

9.5% Maximum percentage of employee’s household income that the employee’s self-only health plan contribution may be to qualify as affordable under the Act

60% Minimum percentage of costs that must be covered by an employer’s health plan to be considered adequate under the Act

249 Maximum number of W-2 Forms an employer may file during the previous calendar year to avoid reporting the cost of coverage under an employer-sponsored group health plan on Form W-2

35% Maximum tax credit available to eligible small employers through 2013

24 Maximum number of full-time equivalent employees an employer may have to be eligible for the Act’s small employer tax credits

$49,999 Maximum average annual wages an employer may pay to be eligible for the Act’s small employer tax credits

50% Minimum percentage of employees’ premium cost for single (not family) health care coverage an employer must pay to be eligible for the Act’s small employer tax credits

100 Maximum number of employees an employer may have to be eligible to purchase insurance through Small Business Health Options Program (SHOP) Exchanges

TBD Number of newly insured Americans

TBD Affordability of health insurance under the Act

TBD Effect of Act’s provisions on employers and employees

At Setnor Byer Insurance & Risk, we are committed to guiding you through what is sure to be a bumpy ride. Check back with us periodically for future informational updates. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

New Health Insurance Notice Requirements for Employers

Thanks to the Affordable Care Act, the Fair Labor Standards Act (FLSA) is moving beyond its traditional role as the nation’s principal wage and hour law. In addition to establishing minimum wage, overtime pay, recordkeeping and youth employment standards, the FLSA now deals with health insurance.

Under the amended FLSA, employers must notify employees that:

Affordable Insurance Exchanges exist, along with a description of the services provided by Exchanges and how to request assistance from an Exchange
If their employer’s health plan pays less than 60% of allowed costs the employee may be eligible for a premium tax credit and a cost sharing reduction if the employee purchases a qualified health plan through an Exchange
If the employee purchases a qualified health plan through the Exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer

Employers must distribute this notice to every current employee by March 1, 2013. Employees hired after this date must receive their notice upon being hired.

The precise form and content of the notice, as well as acceptable means for providing the notice, are not yet certain. The law states that employers must provide notice “in accordance with regulations promulgated by the Secretary.” Presumably, these regulations will clarify what should be included in the notice and how it can be provided to employees.

Despite the current lack of regulations, it is reasonable to assume that the FLSA’s broad definition of “employer” means that most employers will need to comply with the new notice requirement. Similarly, the FLSA’s broad definition of “employee” means that every employee, regardless of status, will likely be entitled to receive this notice.

Consequently, employers need to be ready to comply with the notice requirement by March 1, 2013, especially since the penalty for violating this requirement is unknown.

At Setnor Byer Insurance & Risk, we are committed to guiding you through what is sure to be a bumpy ride. Check back with us periodically for future informational updates about health care reform. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

Health Care Reform: What are SHOPs?

To help small businesses provide health insurance to their employees, the Affordable Care Act created Small Business Health Options Programs, or SHOPs. Starting in 2014, SHOPs will be available to eligible businesses with up to 100 employees—although states can limit participation to businesses with up to 50 employees until 2016.

Once up and running, it is anticipated that SHOPs will help small businesses by:

Simplifying Choices. SHOP plans will provide essential health benefits like those covered by a typical employer health plan. These plans will be placed in four “tiers” depending on the coverage provided. SHOPs will provide side-by-side comparisons of available plans, with information about benefits, premiums, and quality. SHOPs will also enroll employees and consolidate billing.
Expanding Options. SHOPs will allow eligible employers to offer a variety of Qualified Health Plans from several insurers. These employees will then be able to choose a plan that best fits their needs and budget.
Preserving Control. Small businesses will be able to decide whether and when to participate in SHOPs, to choose their own level of employee contribution and to make a single monthly payment to the SHOPs rather than to multiple plans.
Lowering Costs. SHOPs will be designed to save money by spreading insurers’ administrative costs across more businesses. Additionally, small businesses using SHOPs may be eligible for tax credits.

Since SHOPs will be a part of the Affordable Insurance Exchanges, states have flexibility in determining how they will be structured. Until decisions are made and Exchanges are implemented, we will not know if these SHOPs will accomplish everything they are designed to do.

Affordable Care Act and its Impact on your Bottom Line

All employers, both large and small, are concerned about the rising cost of healthcare. It is the belief of many that the Affordable Care Act will ultimately resolve both the issue of affordability and availability. Yet, there are others who may very well represent the majority of business owners, who suggest that the Affordable Care Act was designed and implemented in haste, providing broader benefits to a greater population of U.S. residents without, first, driving at the triggers to cost in our American healthcare system.

Fortunately or unfortunately, the debate about the Affordable Care Act will not be resolved for quite some time. In the interim, it is probable that health insurance costs will continue to rise. For this reason, every employer needs to work closely with their professionals to monitor the impact of the Affordable Care Act on their health insurance costs, and remain informed about creative options, including High Deductible Plans and Self-Insurance.

For small employers, the new Health Insurance Exchanges set to be operational by 2014, may present yet another option. These Exchanges remain ill-defined and their ability to improve the group benefits shopping experience is questionable given the complexity of the product(s) and the question of who exactly will be engaged or employed by government to help field inquiries. Fortunately, many insurance professionals have built Healthcare Advocacy teams to assist in the navigation of the new Exchanges.

In the next several years, there will be many changes to our healthcare system, including a laser focus on wellness, primary care delivered by nurse practitioners, reductions in costly screenings for low-risk individuals, new challenges to medical treatments, shifting providers, and more. Human Resources and Benefits Coordinators need to be prepared to communicate these changes and manage the ‘emotionally charged’ aftermath.

With all the changes anticipated, some good, and some bad, the following are particularly noteworthy:

Through 2013, businesses with fewer than 25 full-time equivalent employees, which pay average annual wages below $50,000 and provide health insurance, may qualify for a small business tax credit of up to 35% (up to 25% for non-profits) to offset the cost of insurance.
Starting in 2014, the small business tax credit goes up to 50% (up to 35% for non-profits) for qualifying businesses.
Under the Act, employer-based plans that provide health insurance to retirees ages 55-64 can get financial help through the Early Retiree Reinsurance Program, which is designed to lower the cost of premiums for all employees and reduce employer health costs.
In 2014, small businesses with generally fewer than 100 employees can shop in an Affordable Insurance Exchange. These Exchanges are designed to create a new marketplace where individuals and small businesses are guaranteed health plans regardless of medical history. Health benefit plans must meet certain benefits and cost standards to be available through an Exchange.
Employers with fewer than 50 employees are exempt from the Act’s employer responsibility provisions, which assess a penalty on larger businesses that fail to insure their employees in certain circumstances.
In 2014, businesses with 50 or more full-time employees will generally be required to offer adequate health insurance or pay a penalty assessment.
Businesses with more than 200 full-time employees will have to automatically enroll new employees in their health insurance plan and provide an opportunity to opt out of coverage.

At Setnor Byer Insurance & Risk, we are committed to guiding you through the next several years of change. Check back with us often for updates on the American Healthcare System and the Affordable Care Act by calling us directly at 1-888-253-8498 or by emailing specific questions to HealthAgents@setnorbyer.com

Clearing a High Health Insurance Hurdle: the Pre-Existing Condition Insurance Plan (PCIP) Program

There is a new option for those who are uninsured because of a pre-existing condition—the Pre-Existing Condition Insurance Plan (PCIP) program. Created by the Patient Protection and Affordable Care Act (the health reform law), the PCIP is designed to make health coverage available to those with pre-existing conditions. Importantly, the PCIP does not cost enrollees more just because of their medical condition.

The U.S. Department of Health and Human Services runs the PCIP program in twenty-three states and is contracting with a national insurance plan to administer the program. These states are: Arizona, Alabama, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Nevada, Nebraska, North Dakota, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, Wyoming, as well as the District of Columbia.

The remaining states are running their own pre-existing condition insurance plan programs. As a result, application procedures, costs and benefits for these state-run programs may differ not only from the federally-run PCIP, but also from other states.

Under the federally-run PCIP program, a broad range of health benefits are covered, including primary and specialty care, hospital care and prescription drugs. Benefits provided by these PCIPs are available even if they are used to treat a pre-existing condition.

To qualify for coverage under the PCIP program, a person:

Must be a United States citizen or legal resident;
Must have been without health coverage for at least the previous six months; and
Must have a pre-existing condition or have been denied coverage because of health a condition.

The PCIP program offers three plan options:

The Standard Plan;
The Extended Plan; and
The HSA Plan.

Each plan has its own premiums, calendar year deductibles, prescription deductibles, and co-payment requirements. However, all three plans pay for preventive care at 100%, with no deductible when a preventive diagnosis is indicated by an in-network doctor. Preventive care includes annual physicals, flu shots, routine mammograms, and cancer screenings. For non-preventive care, insureds staying in-network will pay 20% of their medical costs after satisfying the deductible.

Despite being a federally-run program, PCIP premiums may vary by state. For example, premiums are higher in Texas than they are in Florida.

In Florida, the monthly premiums for people 18 years old or younger are $118 for the Standard Option, $158 for the Extended Option, and $122 for the HSA Option. In Texas, the premiums are $133 for the Standard Option, $179 for the Extended Option, and $138 for the HSA Option. Similarly, those living in Florida ages 35 to 44 years old will pay $211 for the Standard Option, $284 for the Extended Option, and $220 for the HSA Option. In Texas, the monthly premiums are $239 for the Standard Option, $323 for the Extended Option, and $248 for the HSA Option.

Under this program, the first premium payment is due within 30 calendar days from the date an approval letter is received; otherwise the application will be cancelled. The effective date of coverage depends on the date the application and all supporting documents are received by the PCIP. If the documentation is received on or before the 15th of the month, coverage will be effective on the first day of the next month. If documentation is received after the 15th of the month, coverage will be effective on the first day of the second month.

If an application for coverage under the PCIP is denied, the applicant will receive a letter explaining the reasons for such denial. These applicants have 45 days to file an appeal of their denial, if they so desire. Otherwise, they are free to re-apply for PCIP coverage upon meeting the eligibility requirements.

The PCIP program is only available until 2014. This is because in 2014, insurance companies will be prohibited from refusing to sell coverage or renew policies because of a person’s pre-existing condition. Additionally, in 2014, individuals whose employers don’t offer them insurance will be able to buy insurance directly in a health insurance exchange.

For those who have been unable to get health insurance due to a pre-existing condition, the PCIP program may be the solution they have been looking for. However, given the disagreement and uncertainty surrounding health care reform, even after the Supreme Court upheld nearly every provision of the law, only time and experience will tell if the PCIP program is in fact what it was designed to be.

At Setnor Byer Insurance & Risk, we are committed to guiding you through the rapidly changing health care landscape. Be sure to check back with us periodically for future informational updates. In the meantime, if you have specific questions about health care reform or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

Healthcare Reform Prompts Many to Explore Alternatives to Health Benefit Programs

The passage and continued implementation of Healthcare Reform, as well as its uncertain political future, have placed employers in a precarious position with their health benefit programs. Nevertheless, employers continue to do their best to balance the need to attract smart and sophisticated employees by offering well-rounded health benefit programs with the costs of providing such programs.

It is important that employers succeed in their balancing act because health benefit programs remain pivotal in attracting and retaining top-notch employees. According to a study performed by MetLife, employees make the financial security and protection of their families a top priority, and many believe that this requires sound health benefit programs. According to the study, employees who are satisfied with their health benefit programs are more likely to remain satisfied with their jobs from year to year.

Research done by the Personal Group revealed that 40% of employers plan to review their health benefit programs, and that employers are beginning to explore the various options that will (or may) be available to their employees under Healthcare Reform. According to a Towers Watson’s 2012 HealthCare Trend Survey, in 2014, when healthcare exchanges are scheduled to become available, employers will begin to reconsider and redefine their role in providing healthcare benefit programs in light of the new options. Since healthcare exchanges will give employers an alternative to the traditional sponsoring of health benefit programs, many employees are beginning to view individual health care plans as a viable option.

At Setnor Byer Insurance & Risk, we have been successful in finding attractive solutions for those of our clients exploring new options. We would be pleased to have the opportunity to assist you in effectively navigating this transitional period, as well. Please visit our website at http://www.setnorbyer.com to view and compare our various health plan options.

Why Your ERISA Fidelity Bond is NOT Enough: The Case for Fiduciary Liability Insurance

A surprising number of employers offering employee benefit plans to their employees, including 401(k) plans, are refusing to purchase fiduciary liability insurance. Despite the dubious wisdom of refusing the insurance, the decision must be accepted if it was made with a complete and accurate understanding of all the facts. However, a significant number of employers may be deciding to forego fiduciary liability insurance because they believe their ERISA fidelity bond provides all the protection they need. Unfortunately, such a belief is wrong.

By virtue of offering an employee benefit plan, employers find themselves within the purview of the Employee Retirement Income Security Act (ERISA), thereby exposing their organization to significant risk. Although many of these risks can be covered by a fiduciary liability insurance policy, confusion and misunderstanding may prevent the employer from making an informed decision about whether to purchase the insurance. As a result, the employer rejects insurance that would otherwise have been accepted if the correct information was known and considered.

Given the significance of refusing such insurance, it is helpful to debunk some of the myths surrounding the meaning, need, and purpose of ERISA fidelity bonds and fiduciary liability insurance, so that those who may be in need of one or both of them, may make an informed decision.

Myth: There is little difference between a fidelity bond under ERISA and a fiduciary liability insurance policy. Fact: Although both may ultimately operate to replace a plan’s assets that were lost due to a wrongful act, any perceived similarities between the two are mostly superficial. The actual differences between the two, in terms of the purpose of the coverage, who is covered, what is covered, and coverage triggers, may render fidelity bonds and fiduciary liability insurance mutually exclusive in some cases.

Myth: Under ERISA, the fiduciary of a 401(k) plan has the option of purchasing a fidelity bond.

Fact: Fidelity bonds are mandatory. ERISA provides that “every fiduciary of an employee benefit plan and every person who handles funds or other property of such plan…shall be bonded.” ERISA generally requires the bond to be in an amount equal to at least 10 percent of the plan’s assets, as determined at the start of each fiscal year. However, the amount of the bond is subject to ERISA’s minimum of $1,000 and maximum of $500,000. [Note: Though not discussed in this article, ERISA does have defined exemptions to the bonding requirement.]

Myth: Every person involved with a plan must be bonded.

Fact: ERISA’s bonding requirement only applies to those described in the statute. If a person does not qualify as a fiduciary of an employee benefit plan or a person who handles funds or other property of the plan, then a bond is not required such person.

Myth: Fiduciary liability insurance is required by ERISA.

Fact: Although ERISA does not prevent a plan, a fiduciary, or an employer from purchasing fiduciary liability insurance, obtaining such insurance is not required by ERISA.

Myth: A fidelity bond protects a plan’s fiduciaries against liability.

Fact: Under ERISA, a fidelity bond must protect “the plan against loss,” not the fiduciaries. Although a fiduciary’s actions may serve as the trigger for coverage under the fidelity bond, the plan itself is the named insured.

Myth: A fidelity bond protects a plan against all losses, regardless of the cause.

Fact: A fidelity bond under ERISA protects the plan against losses caused only by “acts of fraud or dishonesty” on the part of a plan’s fiduciaries. If the cause of a loss is anything other than fraud or dishonesty, it will not be covered by the fidelity bond.

Myth: A fidelity bond protects plan fiduciaries from personal liability.

Fact: Under ERISA, a fidelity bond is limited to protecting only the plan against a loss, not the fiduciaries. This limitation is problematic for plan fiduciaries, since ERISA provides that “any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties…shall be personally liable to make good to such plan, any losses to such plan resulting from each such breach.”

Myth: I am not listed as a plan fiduciary, so I do not need to worry about fiduciary liability.

Fact: Under ERISA, a person may be deemed a fiduciary if that person uses discretion in administering and managing the plan, or controlling the plan’s assets. Indeed, fiduciary status is based on the functions performed for the plan, not just a person’s title with respect to the plan. Those who rely on their title to determine their own status may discover that, for purposes of ERISA liability, they are in fact a fiduciary.

Myth: It is unlikely that the fiduciary of a plan will ever breach the standards of conduct required by ERISA, so a fiduciary liability insurance policy is not necessary.

Fact: Since the responsibilities and loyalties of a fiduciary are strict and demanding, the chances of experiencing a breach cannot be fairly categorized as unlikely. The nature of the relationship requires that a fiduciary discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. For more information about the nature of a fiduciary’s obligations, read An Employer’s Liability under ERISA for 401(k) and Other Employee Benefit Plans.

Myth: Since the greatest risks to a plan’s assets always involve fraud or dishonesty, a fidelity bond is usually all that is needed to cover any losses.

Fact: While fraud and dishonesty pose a real threat to a plan’s assets, they are by no means the only threats. Breaches of the fiduciary duty can come in many forms which do not involve fraud or dishonesty, including: negligent errors and omissions; improper disclosures to plan participants; remiss investment advice; imprudent choice of outside service provider (OSP); faulty advice of counsel; and improper amendments to plan documents. None of these examples would be covered by a plan’s fidelity bond.

In addition to clearing up any confusion caused by the foregoing myths, these facts reveal that fiduciary liability insurance is necessary to maximize the level protection enjoyed by the plan’s fiduciaries, as well as the plan’s assets. The frequency of ERISA litigation involving employee benefit plans continues to increase as the economy remains sour. Expenses associated with defending these lawsuits, regardless of whether the plan breached its duties, can deplete critical assets. Moreover, in the event of litigation, plans electing to observe the statutory cap for fidelity bonds may discover the unfortunate fact that $500,000 is not nearly enough to protect the plan’s assets.

While the benefits associated with a fidelity bond should not be minimized, they should also not be exaggerated to justify a risk management profile that relies solely on the fidelity bond. In today’s financial climate, it is likely that a plan’s investments will decrease experience a decrease in value, with the predictable result being litigation. By combining a fiduciary liability insurance policy with any required ERISA fidelity bonds, two of the most significant vulnerabilities to the plan, fraud/dishonesty and a breach of fiduciary duty, have been addressed, so the plan’s fiduciaries are free to focus on increasing the value of the assets.