Should Nonprofits Be Bonded?

Bonding may not be the first thing to come to mind when insuring your nonprofit, but insufficient fidelity bonding is a common problem among nonprofits with small retirement plans. Without this bonding, plan fiduciaries would be personally liable for losses due to internal fraud or embezzlement, which a bond would have covered. Unless your plan is exempt from bonding, it makes sense to tackle this safeguard before any incidents arise.

If your nonprofit offers or sponsors a retirement plan, pension law under the Employee Retirement Income Security Act requires plan fiduciaries or others who handle plan funds to be bonded. Fiduciaries have discretionary authority to manage and administer the funds in the plan. Such individuals may also provide investment advice for a fee. Bonding usually is a requirement for any employee who handles cash or other assets such as stock certificates. The bond amount should be at least 10 percent of the plan assets, subject to change as the assets increase.

Nonprofits have a variety of fidelity bonds to choose from, depending on their needs. A name schedule fidelity bond requires designating specific persons to be covered and proof must be established that one of those individuals took from the company. With blanket position bonds and primary commercial blanket bonds, all employees are covered and proof that any one individual stole is not needed. The latter type of blanket bond differs from the first in that any perpetrators are treated as one unit rather than as individual cases.

Fidelity bonding for nonprofits should not be confused with fidelity liability insurance. Whereas in pension law, a fidelity bonus is required of plan fiduciaries, fidelity liability insurance is an optional method of insuring against employee wrongdoing. The latter might include coverage for conflicts of interest, negligent investment practices, underreporting and computational errors. Fidelity bonds may be part of an overall package policy offered to nonprofits or a standalone policy.

While getting bonded may be mandatory for nonprofits where employees handle funds, it is not a substitute for basic procedures designed to forestall fraud before it has a chance to emerge. To this end, your nonprofit can step up the fight by establishing a system of internal controls, including assigning specific authority to persons signing or depositing checks, and segregating the duties of various money-handlers in the organization. Further, your organization should promote an environment that deters fraud by having employees adhere to a Code of Conduct in which they attest to their honesty.