Keeping Plan Records


  • Introduction
  • Plan Documents
  • Plan Administration
  • How Long Must Files Be Kept?
  • Conclusion

  • 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:

    Type of Record Suggested
    Holding Period
    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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