You just launched a 401(k) plan for your cannabis company’s employees and they couldn’t be more thrilled. This will help with morale and recruitment by encouraging employees to grow their nest egg with minimal effort.
But with no fiduciary liability insurance or fidelity bonds, your cannabis company can be risk. That’s because employee benefit plans can open the door for potential lawsuits.
Confused? We get it. Let’s start with the basics. ERISA fidelity bonds and fiduciary liability insurance share a common thread: both focus on employee benefit plans.
What’s an employee benefit plan?
An employee benefit plan is any program sponsored or administered by an employer which provides income or other benefits to its employees. This is defined by the Employee Retirement Income Security Act of 1974 (ERISA).
Both 401(k) and pension plans are considered employee benefit plans (since they provide income post-retirement). Welfare plans (which cover other costs like health or disability benefits) are also included under the umbrella of employee benefit plans, as are employee stock ownership plans.
What is ERISA and why does it matter to your cannabis company?
ERISA is a federal law that sets the rules for employee benefit plans. The law contains several key provisions designed to safeguard the savings of employees.
Here are two such provisions:
- Fiduciaries can be held personally responsible for the mismanagement of employee benefit plans.
- Fiduciaries must be covered by a fidelity bond equal to 10% or more of all plan assets.
Who is a fiduciary?
If you have discretion in administering and/or managing a plan or controlling the plan’s assets, then guess what? You’re a fiduciary. And it’s not only limited to those who manage transactions. People in a variety of roles could be considered influential enough to be bound by certain fiduciary duties.
For example, plan sponsors and plan administrators (the investment manager) would both be considered fiduciaries.
OK, so it looks like I’m a fiduciary. What should I do?
According to ERISA, you must be bonded in an amount equal to (or greater than) 10% of the plan assets at any given time. If your plan doubles in value over the course of a year, your bond’s value must keep pace (to the maximum amount of $500,000).
Luckily, the value of most ERISA fidelity bonds increases automatically. So let’s say you launch a 401(k) with assets of $250,000, you’ll be required to get a $25,000 ERISA fidelity bond. (Assuming your bond’s value increases automatically, you should still be in compliance.)
So yes, you need to get an ERISA fidelity bond…but you should get fiduciary liability insurance too.
Wait…what’s the difference between fiduciary liability insurance and ERISA fidelity bonds?
ERISA fidelity bonds protect the benefit plan participants from loss based on fraud or dishonesty. If employee funds magically disappear, the bond will reimburse the loss.
Fiduciary liability insurance protects the cannabis company from legal liability arising from the sponsorship of a plan. The policy will pay out the defense costs and any judgements, if the company is held liable. It’s not required by law and wouldn’t cover fraudulent acts.
Fidelity bonds are similar in nature to insurance policies. They’re both contracts that last a certain period of time (usually one year). They’re also agreements sold by a financial institution who will pay on your behalf in the event of a specified loss. Both require you pay the institution a premium for this service.
The difference is based on the risks they cover: Are you trying to protect your employees from criminal acts or protecting your company from legal liability?
Let’s take an example:
Your job at CannabisCo is to arrange a 401(k) plan for its employees. You choose the administrator and the company starts contributing to this plan. CannabisCo hires RetireCo to administer the plan. They’re in charge of managing investments and reporting to the participants.
Three years later, an employee of RetireCo is busted for skimming from the plans over a period of time. What’s to become of this plan and the employees who bought into it?
Fortunately, both RetireCo and CannabisCo have already invested in ERISA fidelity bonds (since both are considered fiduciaries). CannabisCo’s bond doesn’t cover the claim since the bad actor wasn’t an employee. Investo’s surety kicks in to reimburse the stolen funds and sue the bad actor.
CannabisCo employees are safe again…but that doesn’t mean they’re happy. In fact they’re angry…at you!
How did you let this happen? Why didn’t you perform due diligence on this company before you gave them our hard-earned money? How can we trust you or them in the future?
The next step: employees file a lawsuit against CannabisCo alleging mismanagement in connection with the stolen money. All of the costs cascade upon your cannabis company: legal fees, settlements or judgements against the company and more.
Here’s an important part: as part of the suit they also make allegations of mismanagement that were completely unrelated to the theft.
Will the ERISA bond respond? No, this is a matter of legal liability.
Will the fiduciary liability respond? Yes and no! Most good policies would cover costs that are not associated with the theft. Remember fraud and criminal acts are not covered by fiduciary liability insurance. But those costs that can be allocated to the other, covered parts of the claim should be paid by the carrier.
Even if CannabisCo is proven innocent, they still need to pay out a great deal before removed from the suit. Bonds don’t pay these expenses; fiduciary liability insurance does.
On a final note:
Both fiduciary liability insurance and ERISA fidelity bonds complement each other with little overlap. (They also happen to be two of the most affordable policies on the market.)
Both policies can protect cannabis companies from a range of risks faced by plan sponsors. Mistakes in contributions, enrolling, reporting, record handling and counseling–all are insurable risks with potentially serious financial impacts.
Perpetually adhering to legal minimums is not the most prudent way to manage risk. Well-prepared cannabis companies look at all exposures they face, then make a decision.
As a result, the combo of fiduciary liability insurance and ERISA fidelity bonds offer the holistic risk management program you need.
Ready to learn more about fiduciary liability insurance and ERISA fidelity bonds for your cannabis company?
Contact us at Alpharoot to get started on a quote for an ERISA fidelity bond or fiduciary liability insurance.