Every so often, a
pension consultant is asked the following question by a client: "How
long do we have to keep documents and other records for our
retirement plan?" A really safe answer might be "until every
participant and all of their immediate family members pass away." On
the other hand, a more common reply would be "for seven years."
However, for most plan records, the prudent response lies somewhere
in between.
Employers who sponsor qualified retirement plans may be subjected
to a random audit from time to time by the Internal Revenue Service
(IRS) or the Department of Labor (DOL). During such audits, the
employer will be required to furnish numerous documents to prove
that the plan has been administered in a qualified manner. Failure
to produce the necessary documents could result in penalties, loss
of tax deductions for plan contributions or disqualification of the
entire plan. This is just one of a number of reasons why good record
keeping habits are essential for the proper administration of a
qualified plan.
This article will discuss the plan records that a plan sponsor
should maintain, the length of time they should be kept and the
reasons why such records are so important.
Plan Documents
A retirement plan is officially adopted when the employer
executes a plan document which contains the governing provisions of
all aspects of the plan. It may include provisions for the
establishment of a trust to hold plan assets, or a separate trust
agreement may be executed.
A corporate or partnership resolution is usually required,
authorizing the plan adoption by such entities. A copy of the
resolution, or an officer/partner’s certification that the
resolution was adopted, should be kept along with the plan documents
in the plan’s permanent files.
A summary plan description (SPD) must be distributed to each
participant summarizing the significant features of the plan. It is
not intended to carry the legal weight of the plan document itself,
and may even include a disclaimer that the document will prevail
where a conflict exists with statements made in the SPD.
Nevertheless, courts have increasingly given legal significance to
language provided in the SPD, especially where employees have relied
on it to their detriment. Consequently, much care should be given in
the preparation of the SPD.
From time to time a plan may be partially amended or completely
restated, either at the discretion of the employer or as required by
changes in the law. Such amendments/restatements and their
corresponding adopting resolutions should be kept with the original
plan documents. A summary of material modifications (SMM) or a
revised SPD must be prepared and distributed to participants
explaining the nature of the changes.
A new or revised document may be submitted to the IRS requesting
a determination letter (ruling) that the plan satisfies the relevant
provisions of the Internal Revenue Code (IRC). A plan is usually not
required to obtain a letter, but any letter that is obtained should
be kept in the plan document file so that it can be shown to an
agent during an audit. This includes the IRS letter that is issued
to a pre-approved document.
Other documents that should be kept in the plan’s permanent files
may include a union contract, insurance policies, evidence of the
purchase of a fidelity bond, loan procedures, QDRO (qualified
domestic relations order) procedures and notices to interested
parties.
Plan Administration
Records must be kept that relate to the determination of
participants’ benefits under the plan. In addition, certain
compliance testing must be done each year to insure that the plan
does not exceed any limitations or violate the nondiscrimination
requirements of the IRC.
At least one valuation date must be established each plan year,
which is normally the last day of the plan year. Some plans have
quarterly or semi-annual valuations, where participants are provided
with benefit statements at such intervals. Many self-directed plans
have daily valuation of account values that can be obtained on the
Internet or by contacting the trustee or custodian.
Although frequent valuations are helpful in providing
participants with more current account values, the limitation and
nondiscrimination testing only needs to be performed once a year.
Following is a description of the information that is needed for
annual plan administration purposes:
Census Information
The employer must prepare a full census report at the end of each
plan year. The census includes the name, social security number,
birth date, hire date, termination date (if applicable), hours
worked and total compensation of every employee. This information
will be used to determine eligibility, contribution allocations and
limitations, vesting and nondiscrimination testing.
Assets and Transactions
The trustee or custodian of the plan must provide the plan
administrator with periodic statements showing the market value of
plan assets as well as financial transactions that have taken place.
Such statements are usually provided on a monthly or quarterly
basis, although for some investments annual statements may be
sufficient.
Valuation Report
The annual valuation report, usually prepared by the plan’s third
party administrator, may include the following items:
- Census information upon which it is based
- List of plan assets
- Summary of transactions
- Account balances and account activity (defined contribution
plans)
- Projected and accrued benefits (defined benefit plans)
- Actuarial report (defined benefit plans)
- Vesting percentages
- Top heavy test
- Annual additions test
- Deferral and contribution nondiscrimination tests (401(k)
plans)
- Minimum participation and coverage tests
- Participant benefit statements
Distributions and Plan Loans
Distribution election forms, notices and calculations should be
maintained as well as applications and documentation related to
participant loans.
Participant Notices
Each participant must be given a copy of the summary annual
report each year, which summarizes form 5500. Certain plans, such as
safe harbor 401(k) plans and SIMPLE plans, must provide a notice to
employees prior to the start of each plan year concerning the
contributions provided under the plan.
Government Reporting
Certain annual returns are required to be filed with the IRS, DOL
or PBGC (Pension Benefit Guaranty Corporation) on behalf of a
qualified plan. They include the following:
- Form 5500 – Annual Report
- Form 1099-R – Reportable distributions
- Form 945 – Reporting tax withholding
- Form 5330 – Excise tax on prohibited transactions,
underfunding, etc.
- PBGC Form 1 – Premium payment for federal insurance program
(defined benefit plans)
In addition, forms 5300, 5307 and 5310 may be filed with the IRS
requesting a determination letter for the establishment, amendment
or termination of a plan. Form 5310-A may be filed notifying the IRS
of a plan merger. All forms filed with a government entity should be
kept in the plan’s permanent files.
How Long Must Files Be Kept?
There really is no definitive time period for which plan records
must be kept. But there are good reasons for keeping certain
documents over an extended period of time. One reason is to be able
to confirm the value of each participant’s benefit. Another reason,
as stated above, is the possibility of a plan audit.
The IRS and DOL perform random audits of qualified plans. An
audit may also be triggered by a reportable violation, an unusual
entry on form 5500 or a complaint filed by a participant with the
DOL. An agent will normally make an appointment to visit the
employer’s office, requesting to see almost all of the documents
described above that relate to a particular plan year or years. With
an IRS audit, the following additional items must also be provided:
- Employer’s federal tax return
- Employer’s quarterly federal and state returns
- Employer’s W-2 and 1099-MISC forms
- Copies of cancelled contribution checks
An audit by the DOL would likely focus on fiduciary issues,
prohibited transactions and participant disclosure information.
Documents that are only required for a plan audit, such as
cancelled contribution checks, need only be kept for about seven
years. Plan audits rarely go back beyond that period and the statute
of limitations for many plan violations expires after six years. But
other plan records should be kept longer. Consider the following
example:
Bill Smith was a participant in the ABC Profit Sharing Plan. He
terminated employment in 1990 at age 50, and received a lump sum
distribution of $25,000. Since the plan did not have an annuity
option, no spousal consent was required. In 2004 Bill passed away at
age 64. His wife, Jane Smith, found his last benefit statement from
the ABC plan dated 1990. Not remembering (or not knowing) that Bill
previously received a distribution of $25,000, she contacts the ABC
Company, claiming that she should be entitled to Bill’s plan benefit
as his beneficiary. The plan administrator is now in the position of
trying to prove that Bill’s benefit was previously distributed to
him. With files that go back to 1990, this would be easy to do.
Here is a suggested timeframe for keeping various types of plan
records:
|
Original plan document, restatements, amendments, SPDs,
corporate resolutions, union contracts, plan procedures,
employee notifications |
Plan inception until seven years after plan termination |
|
Valuation reports, census information distribution and plan
documentation |
Seven years after plan termination |
|
Asset statements, benefit statements |
Seven years |
|
Final defined benefit valuation report |
Life of the employer* |
|
All forms filed with government agencies |
Seven years after plan termination |
|
Employer’s federal and state returns, payroll records,
cancelled checks, etc. |
Seven years |
|
*A new defined benefit plan might have to consider benefits
accrued under prior defined benefit plans. |
Conclusion
Record keeping is an essential component of the administration of
a qualified retirement plan. A plan sponsor may be required to
produce certain documents during an audit by the IRS or DOL, or
confirm benefit calculations to participants. Without these
documents the employer’s tax deduction and the entire qualification
of the plan might be in jeopardy.
While some plan records can be safely discarded after
approximately seven years, others should probably be kept much
longer. An employer never knows when a question might arise
pertaining to a prior plan year, and it’s better to be safe than
sorry.
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