Written by Kristian Kananen & Christopher Tipper
Over the years Plan Sponsors, Plan Administrators and Plan Trustees, (the Plan Fiduciaries) can amass a large amount of data and records. What to keep and what to destroy of those records is an annual dilemma as many determine if they are going to hoard qualified plan information or to streamline.
There are rules which govern record retention for qualified retirement plans. These rules are included in ERISA in Sections 107 and 209. Basically, Section 107 covers records needed to provide sufficient detail to verify, explain, clarify and check for accuracy and completeness of the plan’s government filings. This information is most needed if the plan comes under a government audit. While Section 209 specifies that maintained records be sufficient to determine the benefits due or which may become due to such employees.
On the surface these appear to be simple requirements and easily attained. However, the devil is in the details of the information that goes into filing government forms as well as accruing and paying benefits.
The records that need to be retained fall into four categories:
- Plan Governance – the documents used by the fiduciaries to make decisions or to document the decisions made such as the plan document and any amendments, actuarial valuation reports, Board resolutions, discrimination and coverage testing reports.
- Accounting – where the money is, contributions received, distributions and expenses, income received, change in value of investments for the year.
- Benefits Determination – participants’ account balances and vested account balances, allocation of contributions, distributions to terminated participants.
- Reporting and Disclosure – what information went into completing the annual Form 5500 filing and other government filings for a plan year.
Three of the four categories are directly involved in filing the annual 5500 Series forms for the plan. Accounting, as the 5500 Series requires the total assets and any liabilities as of the beginning and ending of the plan year, as well as a reconciliation of the plan income and expenses for the plan year. Plan governance records are the documents that govern fiduciary decisions, such as the plan document which specifies the type of plan being maintained and the benefits and characteristics available under the plan. An actuary’s report would be included in Governance records as it is the basis for the fiduciary funding decision for a defined benefit plan. Benefit determinations are also included in the completion of the government filing even though there is no employee specific information reported.
In preparing the 5500 Series, for example, the preparer will refer to the plan document for the:
- Name, address, phone number and EIN for the Plan Sponsor;
- Name, address, phone number and EIN for the Plan Administrator;
- Plan Characteristics;
- Plan Benefits;
- Eligibility to determine the participant count
Accounting Records are used to determine:
- Assets held for the plan year;
- Commissions paid by the plan;
- Financial institutions holding the plan assets;
- Contributions made for the plan year;
- Distributions taken for the plan year;
- Loans made;
- Loan payments made;
- Loans deemed distributed;
- Income earned;
- Expenses paid;
- Corrective distributions;
- Corrective deposits; and
- Realized and unrealized gain/loss on investments.
The preparer will also need proof of the fidelity bond, the Coverage and Discrimination tests to support the corrective distributions as well as the participant counts and copies of any notices, such as a Blackout Notice, that were distributed to the participants.
The goal of retaining this information is to be able to reconstruct the filing if necessary if the plan were to be audited by the IRS and/or DOL, or to justify the answers included in the filing. Section 107 requires the data to be retained for 6 years following the filing date for the form. A plan with a plan year ending in December 2020, which extends its filing until 10/15/2021 and files on that date, will need to retain all of the information used to prepare the filing until 10/15/2027. And, of course, a signed copy of the actual filing should also be retained.
While the Section 107 record retention requirements may seem daunting, they fade in comparison with the Section 209 retention requirements. Basically, Section 209 requires an employer to maintain benefit records to be able to determine the benefits due or which may become due to employees.
The records required to be maintained include:
- The plan document which includes all restatements, all adoption agreements and all
- Summary Plan Descriptions and Summary Material Modifications that were distributed to participants and beneficiaries
- Census data by plan year that would include compensation information that conforms to the definition(s) of compensation used in the document, dates of birth, dates of hire, dates of termination, dates of rehire, deferral elections, hours credited and employer contribution calculations.
- Coverage and Discrimination testing
- Participant account records for defined contribution plans or actuarial accrued benefit records for defined benefit plans
- Documentation for plan loans, withdrawals and distributions
- Board or administrative committee minutes and resolutions
- Trust documents
These records do not have the 6-year retention requirement of Section 107. Instead, these records must be retained basically for as long as the plan exists. The purpose for these records is to have the ability to determine a benefit owed or payable to a participant at any point. Consider the following:
ABC Enterprises adopts a 401(k) plan effective 1/1/1999. Over the years, employees made deferrals and the employer contributed a matching contribution at one point and a safe harbor non-elective contribution at a different point in time as well as a profit sharing contribution. The company has reasonable turnover and terminated participants have been paid their vested account balances. And life goes merrily along. Then ABC Enterprises receives a call from the son of a former employee who claims his father should have been included in the plan according to his reading of the Summary Plan Description. In reviewing the plan document, employee census and the participant account information, the Plan Sponsor and the TPA determine a group of employees were treated as not eligible for several years. However, there was no exclusion for the group in the plan document. While researching omitted employees, an accounting error was also discovered which resulted in the underpayment of several distributions made over the years.
The retained records since the plan was first adopted, enabled the Plan Sponsor and TPA to go back and determine the benefits that should have been contributed for the omitted employees over the years and to correct the accounting error. Without it there would have been no way to make an accurate correction and the Plan Fiduciaries would have been at risk for a lawsuit by the omitted employees as well as penalties by the DOL or IRS.
Or conversely, consider:
The Plan Administrator receives a call from the beneficiary of a participant who terminated several years ago explaining that they wanted to receive their distribution from the plan. The Plan Administrator checks the most recent Administration Report and determines the participant is not listed with an account balance. A review of the retained records shows that the participant received his full distribution over 10 years before. The proof of the distribution was easily provided to the former participant, thus ending any further claims.
It would be prudent to retain plan records pertaining to benefit calculations for a 6-year period after the plan has been terminated and all assets have been distributed. This will ensure any claims or issues can be easily handled should a long-time terminated employee surface again. If the Plan Sponsor is acquired by another company and the new owner adopts the plan, all retained records need to be transferred to the new Plan Sponsor. The acquisition talks should include a discussion of the handling of any liability for any errors that may have occurred before the new Plan Sponsor took over the plan.
While it is tempting to destroy plan related documents after the 6 years mentioned in section 106, one should resist. Retained records can save the day for Plan Fiduciaries. However, the burden of retaining those records becomes the pressing question. Paper deteriorates, or burns or dissolves. Digital records have their own issues. Stay tuned for next month’s white paper when we discuss cyber record requirements.
Click Here to view our Tuesday Topic on this subject.