Ask any benefits professional and he or she will likely tell you the question most frequently asked by benefit plan sponsors is: “How long do I have to keep these old plan documents?”
The answer to that question depends whether the benefit plan is subject to federal law (the Employee Retirement Income Security Act or “ERISA”). Most benefit plans sponsored by private (non-governmental) employers other than churches are subject to ERISA, including plans sponsored by nonprofit entities. For those plans, some records must be maintained for at least six years, while others must be maintained so long as the plan is in existence and for a period of time after the plan has been terminated.
The basic rules. There are two primary records retention rules for private employer benefit plans. The first rule requires the documents needed to complete the annual report (Form 5500) filed with the Department of Labor (as well as the report itself and all attachments) be maintained at least six years from the due date of the return, as extended. The records commonly falling in this category include vouchers, worksheets and resolutions as well as trust statements and certifications; annual accounting and testing reports; and executed plan documents. The obligation is imposed on the plan administrator, which is usually the plan sponsor.
The second rule is much broader, requiring the employer sponsoring the plan to maintain records of all employees sufficient to determine the benefits due or to become due each employee, all in accordance with as of yet unissued Department of Labor final regulations. Proposed DOL regulations specify that individual employee records must be maintained “as long as a possibility exists that they may be relevant to a determination of benefit entitlements.” Proposed regulations are not binding on plan sponsors and administrators but they are strong evidence of the Department of Labor’s interpretation of the statute.
The type of plan involved will obviously impact the records to be maintained under this second rule. For medical plans – where a claim for benefits must be made fairly promptly (generally within one year of the date of the medical service) – the retention period for most documents will be much shorter than in plans in which a benefit may not be paid until much later, such as a 401(k) or pension plan, where a benefit may not be paid until the employee attains the normal retirement age or sometimes even later. For medical plans, the documents to be maintained under this second rule generally include records to establish eligibility; election forms; executed plan documents/insurance policies; schedules of benefits; proof of distribution of required notices (e.g., COBRA notices, etc.); and claims procedures and records of claim denials.
Examples of the retirement plan records contemplated under the second rule include participant census information (i.e., dates of hire, termination, and re-hire, compensation, hours of service, etc.); participant election and beneficiary forms; actuarial valuations (if applicable); distribution amounts and dates, completed distribution forms (including, if applicable, spousal consents), and Forms 1099R; annual accounting reports (specifically individual participant account records); trust accountings; and executed plan documents and documents for associated funding arrangements (i.e., trust agreements or annuity contracts).
Failure to retain required records. There is no specific monetary penalty for failure to maintain records under the Form 5500 rule and only a modest penalty for a failure under the second rule. Nevertheless, the failure to maintain records could constitute a breach of fiduciary duty and thereby subject the responsible party to personal liability and possible DOL enforcement action. The greater risk, however, is the potential to have to dedicate employer personnel time and resources to defend a claim or lawsuit that may be brought, including having to establish the accuracy of the benefit calculation. There is even case law that the burden of proof can shift from the participant to the employer as well as the potential for other procedural disadvantages to the employer where its records are lacking.
Isn’t records retention the recordkeeper’s responsibility? It is not uncommon, especially with 401(k) and other retirement plans, for the plan’s recordkeeper to handle some or all of the records retention duties. Despite any contractual arrangement between a plan sponsor or administrator and the recordkeeper, the employer or plan administrator has the legal obligation to retain those records and therefore remains ultimately liable for any failure to do so. Employers and plan administrators whose recordkeeper is maintaining the plan’s records must exercise oversight to assure the necessary records are in fact being maintained and are accessible, including being available after termination of the contractual relationship; the typical recordkeeping agreement seldom obligates the recordkeeper to provide copies to the plan sponsor or administrator or to even maintain plan records beyond the termination of the agreement. A prudent plan sponsor or plan administrator, therefore, will establish a periodic schedule of downloading documents and reports from its recordkeeper’s website to help it discharge its oversight responsibility.
Electronic storage rules. The good news is paper benefit plan records are not required to be maintained, as DOL regs specifically sanction the electronic storage of records. The electronic records must be maintained in reasonable order in a safe and accessible place where they can be easily inspected, examined, and reproduced. In addition, the electronic recordkeeping system must have reasonable controls to assure the integrity, accuracy, authenticity and reliability of the electronic records. In the event of any dispute or claim, the employer’s or plan administrator’s ability to rely on electronic records will be dependent upon its ability to establish satisfaction of the regulatory requirements.
Paper records may be destroyed once they are transferred to a compliant electronic recordkeeping system except in the rare instance where the electronic record would not be considered an original under applicable law. Care must be exercised to dispose of old paper records in a confidential manner to assure compliance with applicable fiduciary rules, HIPAA and any applicable state law privacy requirements.
Responding to participant requests. It is not unusual for employers to receive requests for information about retirement benefits from either employees who terminated many years earlier or their beneficiaries. When a retirement plan participant terminates from employment and does not receive a distribution of his or her benefit within a short time after termination, the amount of his or her benefit must be reported to the Social Security Administration. When he or she later applies for Social Security (or when his or her surviving spouse or dependents apply for Social Security following his or her death), the Social Security Administration advises the requesting party that he or she may be entitled to a retirement benefit from the specified plan. It is these notices that often trigger inquiries by former employees.
Until fairly recently, a retirement plan that reported a terminated participant with a deferred vested benefit was not required to later report to the Social Security Administration when that person’s benefit was paid to him or her (or his heirs), and many plans did not voluntarily do so – so those plan sponsors now have to deal with inquiries from long ago employees or their heirs. Maintenance of good records of distributions will go a long way to help the employer quickly dispatch inquiries of this nature; having a copy of the participant statements, completed distribution forms, and the IRS Forms 1099-R issued on distributions will often be sufficient to respond.
Concluding Thoughts. Records retention is difficult enough, but it is compounded where the employer has been involved in merger and acquisition transactions, changed computer systems, or even where there have been changes in personnel overseeing the benefit plans. As with so many things involving benefit plans, proper planning on the outset can avoid headaches, angst and considerable expense at a later time. Establishing and following standard procedures and controls for benefit plan records is a prime example of this principle.
Plan sponsors and administrators are encouraged to consult their benefits adviser or legal counsel for a better understanding of how these rules apply to their particular circumstances.
» Gilbert C. Van Loon is an attorney at Butler Snow’s Ridgeland office whose practice focuses on all aspects of retirement and health and welfare benefit plans.
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