Best Practices for Retention of Retirement Plan Records
How Long Do I Need to Keep All of This Paperwork?
Today, we’re going to share our position on what may seem to be a black-and-white (if not also mundane) retirement plan-related topic - that of record retention. It’s one that we’ve been asked about hundreds of times, and understandably so: For one thing, it involves a lot of files, whether hard copy or electronic. Also, the requirements and guidelines from various government agencies can often seem to conflict.
Most importantly, though, it has gotten plenty of well-meaning plan sponsors into some hot water, both financially and legally. There have been numerous instances when it turned out the guidelines weren’t enough to protect employers from costly legal disputes. Read on to find out more.
Government Guidance
Guidance from the Internal Revenue Service (IRS) states that records should be kept until an audit period expires, generally three (3) years after filing a tax return. Seems straightforward enough, right? Yes, except that all qualified[1] retirement plans are also governed by the Department of Labor (DOL), which operates separately from the IRS. Specifically, the DOL’s Employee Retirement Income Security Act (ERISA) mandates that plan records, including Form 5500s, plan documents, and any related supporting data that might be needed to verify the accuracy and completeness of reports, must be retained for a minimum of six (6) years from the date of filing, or essentially seven (7) years.
To complicate things even further, the IRS guidance comes with a caveat: The IRS expects records to be maintained for “as long as necessary”. This means that, during an IRS audit, examiners may request data well beyond the three-year window to ensure accurate benefit calculations, particularly for pension plans, defined benefit plans, and cash balance plans. In fact, the data request can go as far back as the origination date of the Plan.
Beyond these regulatory requirements, Plan Administrators/Employers who maintain a qualified retirement plan must file Form 8955-SSA annually to report any separated (in other words, former) participants that have deferred vested benefits still residing in the employer’s plan. As individuals near retirement age, the government cross-references Form 8955-SSA to determine if any prior employer benefits might be available to them, along with their federal Social Security benefits. Former employees may receive letters from the Social Security Administration, indicating they may have unclaimed funds in a former employer’s plan.
Potential Legal Challenges
Since many years may have lapsed between leaving a company and when they receive these letters, individuals often erroneously pursue these “unclaimed” funds which are actually just previously received distributions.
The result is an influx of calls from past employees to the employer or plan administrator, demanding payments they believe they’re owed but that have actually already been made. This underscores the importance of having complete and accurate records, as these claims can result in potential legal challenges.
When an employer cannot produce payment records beyond the legally required seven years, they may struggle to defend against these types of claims from former employees who insist they never received their retirement benefits payout. Despite a statute of limitations on such claims, there are cases of determined individuals hiring legal counsel, creating costly legal battles and / or settlements for the employer.
What are Best Practices for Employers?
In short, to mitigate risks, we recommend employers:
- Retain all benefit payment records indefinitely.
- Retain all historical base data that was used to calculate pension benefits indefinitely.
- Maintain electronic backups of critical documents.
- Ensure Form 8955-SSA filings are accurate and up-to-date.
- Verify record retention policies align with both ERISA and IRS requirements.
By following these practices, employers can protect themselves from disputes and ensure compliance with federal regulations. Working with a pension administrator who securely stores all the records for all their clients is one way to build in a safeguard in case your backups fail.
[1] A qualified retirement plan is an employer-sponsored plan that meets Internal Revenue Service (IRS) and U.S. Labor Department requirements and offers certain tax benefits to employees and employers. Examples of qualified retirement plans include traditional pensions, 401(k) plans, and profit-sharing plans.
