The record
storage business is booming. A Google search yields pages
and pages of links to companies offering to safely and
securely store vital personal and/or business records.
As the regulatory environment in which businesses operate
becomes increasingly complex, the need to maintain thorough
records of various activities becomes increasingly
important. Employee benefit plans are no exception. The
rights afforded to plan participants are protected by strict
legal standards, which means plan sponsors must be able to
document that all promised benefits have been provided.
With the number of employees that come and go over time,
benefits documentation can pile up very quickly, leading
many plan sponsors to ask, "When can I get rid of all this
stuff?" As with most questions related to benefit plans, the
answer is a resounding "it depends."
The Rules
Both the Internal Revenue Service (IRS) and Department of
Labor (DOL) have rules that provide some basic guidance on
record retention. Some of these guidelines are derived from
the timeframe during which one of the agencies can conduct
an audit of an employee benefit plan. This is referred to as
the statute of limitations.
IRS Statute of Limitations
Generally speaking, the IRS statute of limitations runs
for a period of three years from the date Form 5500 is filed
for a given year. The Form 5500 must be filed no later than
the end of the 7th month following the close of a plan year.
That deadline may be extended by an additional 2½ months.
That means that a calendar year plan may file its Form 5500
as late as October 15th of the following year.
Example: A calendar year
401(k) plan files its Form 5500 for the 2007 plan year on
October 15, 2008. The IRS statute of limitations remains
open, allowing them to audit the 2007 plan year until
October 15, 2011.
Those who have been through an IRS audit of their 401(k)
plan can confirm that the information requested is quite
extensive and covers the entire range of plan operations
from plan document maintenance to properly enrolling new
participants to withholding the appropriate taxes from
distributions.
ERISA Record Retention Requirements
In addition to the IRS statute of limitations, ERISA
includes several sections focusing on record retention.
ERISA Section 107 requires that anyone filing an employee
benefit plan report, such as Form 5500, must maintain
sufficient records to support all information included on
the report for at least six years from the date the report
is filed.
Example: Using the same
assumptions from the above example, records to support all
data on the 2007 Form 5500 must be retained until October
15, 2014—7 years and 9½ months from the start of the 2007
plan year.
So, does that mean it is finally safe to clean out the
filing cabinets every 8 years? Unfortunately, ERISA makes it
a little more complicated than that. Section 209 imposes an
additional obligation to maintain all records necessary to
determine benefits that are or may become due to each
employee. In 1980, the DOL issued proposed regulations
interpreting this section to mean that records must be
retained "as long as a possibility exists that they might be
relevant to a determination of the benefit entitlements of a
participant or beneficiary."
The Devil is in the Details
The length of time records might be relevant to determine
benefits varies from plan to plan and from employee to
employee, making it very challenging for plan sponsors to
know if and when they can finally dispose of historical plan
records. There are any number of situations that may arise
well beyond the 8-year timeframe described above.
Schedule SSA/Form 8955-SSA
Consider this example. Employers are required to file
Schedule SSA with each year’s Form 5500 to report former
participants with balances remaining in the plan. Although
the Schedule SSA has been discontinued, the IRS is
developing Form 8955-SSA to replace it. While the Schedule
SSA did allow employers to "un-report" these participants
once they take distributions, it was optional to do so. As a
result, it has been somewhat common practice to only add
newly terminated employees to the list without ever removing
those who have received their benefits.
The information from the schedule is provided to the
Social Security Administration. When retirees apply for
Social Security benefits, the SSA database notifies them
that they may be entitled to benefits from the previous
employer’s plan. Without clear records showing the
participant already received his plan benefits, it can be
very difficult to convince a now-retired, former employee
(possibly from several decades ago) that the letter he
received from the government is incorrect. The matter can be
further complicated when it involves the beneficiary of a
deceased former employee.
Beyond Benefits
The need to reference historical records to determine
benefits can be triggered by issues extraneous to the plan.
Employment disputes are a prime example. The infamous court
case involving Microsoft’s misclassification of employees as
independent contractors arose from a 1989-1990 IRS
payroll-tax audit of the company.
Once it was determined these workers were employees, the
question of entitlement to benefits quickly followed. It was
not until 1999 that the Ninth Circuit Court of Appeals
settled the dispute and awarded back benefits to the
misclassified workers. The Microsoft case illustrates how a
payroll-tax issue required review of records more than 10
years old to determine benefits.
So, What is the Solution?
Because of the countless variables that exist, there is
no one-size-fits-all solution; however, there are several
steps plan sponsors can take to point themselves in the
right direction.
Take Inventory
One of the first steps to take is to determine what
records currently exist and where they are stored. Some may
be electronic; some may be in binders; and some may be in
boxes in storage. That inventory will highlight any gaps
that may need to be filled and provide some perspective to
allow the assessment of alternative retention options.
A service-provider’s recordkeeping system may be utilized
to track and house information on historical plan activity;
however, the determination of benefits is ultimately the
responsibility of the plan sponsor. Therefore, copies of all
reports generated by the recordkeeper should be maintained.
This is especially important when changing service providers
as typically they are only required to retain records for a
limited period of time.
Review Operational Policies and
Procedures
If a plan operates efficiently and consistently, there
are likely to be fewer issues that require digging into the
archives. For example, consider a review of all previous
Schedules SSA that have been filed. If any previously
reported participants have received their benefits,
un-report them on the next filing and establish a process to
do so each year.
As current employees leave the company, take steps to
process distributions quickly. Terminated participants with
vested balances below $5,000 can generally be forced out of
the plan with 30-days advance notice. Any former employees
who receive distributions prior to the filing deadline for
the Schedule SSA/Form 8955-SSA do not have to be reported.
Use Electronic Storage
Physical storage space can be expensive, so many plan
sponsors have turned to electronic storage for some or all
of their plan records. While there are no absolute
restrictions on maintaining electronic records, there are
some practicalities to consider.
Records must be easily accessible. Unreasonable delays in
retrieving information can provoke an already disgruntled
former employee to take the next step and call his attorney.
If the dispute is already being litigated, delays can have a
negative impact on the proceedings.
Security is very important. Plan records include
everything a thief needs to abscond with the identities of
all the participants: social security numbers, birth dates,
addresses, etc. Therefore, electronic storage must be
secure. This could range from placing inherently unsecure
media under lock and key to employing various forms of
encryption. Although benefit plans are primarily the purview
of federal law, many states are implementing stringent new
laws governing the protection of personal information.
Employers must be mindful of any such state laws that may be
applicable.
Technology changes...quickly. Not only have storage media
changed significantly in only the last 15 years but data
encryption has also advanced at lightning speed. Just
because plan records are securely backed-up using the
technology du jour does not mean out-of-sight-out-of-mind.
As there are advancements in technology, record retention
policies should provide for the occasional migration to more
current systems to preserve the integrity and security of
the data.
Seek Professional Assistance
Depending on the circumstances and the volume of
information in question, it may be prudent to work with an
attorney or consultant specializing in record retention
requirements. In addition to helping craft a policy, such a
professional may also be able to make recommendations for
vendors or technologies to most cost-effectively implement
the policy.
Records to Retain
Records that should be maintained include (but are not
limited to) the following:
- Plan documents, including amendments and determination
letters/opinion letters;
- Summary Plan Descriptions and Summaries of Material
Modification;
- Company resolutions declaring match and/or profit
sharing contributions;
- Participant notices and documentation of the dates and
method of delivery;
- Participant elections such as deferral and investment
elections;
- Census information including payroll data and
employment history;
- Nondiscrimination test results;
- Form 5500 including schedules and attachments;
- Plan account and financial statements;
- Recordkeeping/valuation reports at both the plan and
participant level;
- Participant loan documentation including amortization
schedules and promissory notes; and
- Participant distribution forms including special tax
notices, election forms and 1099-R forms.
Conclusion
Corralling benefit plan records may seem like a daunting
task, especially considering the relative infrequency that
information must be accessed. Beyond the required seven- to
eight-year timeframe plan records must be maintained, it
only takes one claim to demonstrate the value of an
organized system. As the saying goes, some careful planning
and knowledgeable advice will allow creation of an "ounce of
prevention" policy to minimize the likelihood of the "pound
of cure" dispute years in the future.
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