October 2010 Benefit Insights® Newsletter
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."
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
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.
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.
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
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.
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.
This newsletter is intended to provide general information on matters of interest in the area of qualified
retirement plans and is distributed with the understanding that the publisher and distributor are not rendering
legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter
without first seeking the advice of an independent tax advisor such as an attorney or CPA.
© 2010 Benefit Insights, Inc. All rights reserved.