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
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
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
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.
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
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
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
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
- Summary Plan Descriptions and Summaries of Material
- Company resolutions declaring match and/or profit sharing
- Participant notices and documentation of the dates and
method of delivery;
- Participant elections such as deferral and investment
- Census information including payroll data and employment
- Nondiscrimination test results;
- Form 5500 including schedules and attachments;
- Plan account and financial statements;
- Recordkeeping/valuation reports at both the plan and
- 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.