The facts

The case involved an ERISA-covered employee benefit plan and an administrator's allegedly improper handling of plan funds across plan accounts. The administrator was a person responsible for processing benefit transactions and managing transfers between dedicated plan sub-accounts.

The plan or its successor brought claims against the surety on the plan's fidelity bond, asserting that funds had been misallocated in a manner that constituted dishonesty within the meaning of the bond. The surety contested coverage, arguing among other defenses that the conduct alleged did not amount to "handling" plan funds in the sense Section 412 contemplates, or that the conduct fell outside the bond's defined covered acts.

Procedural posture

The matter proceeded in federal court under ERISA's exclusive jurisdiction over plan claims involving fidelity bond coverage.

The issue

The principal issue in this category of case is whether an administrator who moves plan funds between accounts — without taking those funds out of the plan structure but in a manner adverse to the plan or particular participants — has engaged in conduct covered by the standard fidelity bond.

The framing matters because Section 412 and the bond forms written to satisfy it are oriented toward dishonest misappropriation — taking plan funds for unauthorized purposes. Misallocation between plan sub-accounts may benefit some participants at others' expense without any external taking of funds, raising the question whether such conduct constitutes "handling" within the bonded acts.

The holding

The decision addresses the functional scope of "handling" plan funds — the principle that bond coverage attaches based on the bonded person's actual control over plan funds, regardless of formal title or whether the misappropriation took funds outside the plan structure.

Coverage attaches based on the bonded person's actual control over plan funds, regardless of formal title or whether the misappropriation took funds outside the plan structure. The court construed "handling" broadly enough to capture conduct that disadvantages the plan or its participants through misallocation, where the conduct involves the same dishonest mental state the bond was designed to address.

The court's reasoning

The court's reasoning turned on three points:

  1. Functional reading of "handling."Section 412 and the bond forms incorporate a functional concept of who handles plan funds. A person who exercises practical control over the disposition of plan funds is a handler for bond purposes, whether or not the formal trustee role attaches.
  2. Dishonesty does not require external taking.The bond covers acts of dishonesty causing loss to the plan. Loss can occur even if the funds remain within the plan's overall trust structure, where misallocation deprives particular accounts or participants of funds to which they were entitled.
  3. Bond's "covered acts" language.Most modern fidelity bond forms list covered acts including misappropriation, willful misapplication, and similar conduct. Misallocation between plan accounts can fit within those defined terms when accompanied by the requisite mental state.

Takeaway for trustees

For plan trustees, the practical lesson — assuming the case stands for the principle described — is that the bond's coverage of "handlers" is broader than the formal trustee roster. Any person whose duties involve practical control over plan fund movement should be considered for naming on the bond, even if the person does not bear a fiduciary title under plan documents.

For coverage analysis after a loss, trustees and counsel should not assume the surety will deny coverage simply because the dishonest conduct kept funds within the plan structure. Misallocation that benefits one participant or account at another's expense may still be a covered loss.

For bond form selection, this category of decision is one reason modern blanket bond forms are preferable to scheduled bond forms. The blanket form covers all employees in defined positions regardless of title; the scheduled form requires individual naming and can leave functional handlers uncovered.

Cooper v. Hewlett-Packard Co.
Addresses the related question of what constitutes "plan funds" for bond purposes — companion analysis to the "who is a handler" question presented here. Read brief →
Montour v. Hartford Life & Accident Ins. Co.
Addresses standards of review applied to bond coverage disputes — relevant procedural context for litigating the substantive scope-of-handling question. Read brief →
Rasenack v. AIG Life Ins. Co.
Addresses the interplay between bond claims and fiduciary breach claims — the coverage line between dishonesty (bond) and breach (fiduciary policy). Read brief →