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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