When clutter in the back file room gets overwhelming (or yet another server is needed to handle a growing set of electronic files), a proverbial question often arises: when can you toss (or delete) those records?

For management of employee benefit plans, the answer is not necessarily the same as for other company records. There are several factors to take into consideration. One of the most oft-cited factors is the record retention mandated by the regulatory agencies with authority over employee benefit plans. However, document retention related to benefit plans goes far beyond just the regulatory requirements. Plan sponsors should also take into consideration their fiduciary responsibilities and possible litigation exposure under the Employee Retirement Income Security Act of 1974 (ERISA) when establishing such a policy.

From a fiduciary standpoint, plan sponsors will want to retain documents in order to support all plan activities. It is important to understand that hiring a third party service provider does not alleviate the plan sponsor’s fiduciary responsibilities when it comes to providing documentation support for benefits. Documents are also required as audit evidence during a plan audit. The lack of sufficient appropriate audit evidence may lead to a modified auditor’s report or even a disclaimer opinion. Generally, the Department of Labor (DOL) will reject Form 5500, Annual Return/Report of Employee Benefit Plan, filings that contain modified opinions other than the limited-scope disclaimer that is permitted under the DOL Rules and Regulations for Reporting and Disclosure under ERISA.

The absence of documents in defense of litigation can have unintended consequences, such as significant costs, fees and unfavorable judgments. There have been numerous judgments against plan sponsors attributed to lack of documentation supporting the participant benefit calculations.

Regulatory Guidance

The regulators, including the DOL, the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC), have provided guidance regarding the retention of records.

ERISA contains two provisions that address document retention.

• ERISA Section 107 mandates that every person subject to a requirement to file any report or to certify any information shall maintain records to provide sufficient detail to verify, explain, clarify and check for accuracy and completeness. Such documents shall be retained for at least six years from the date the report is filed.
• ERISA Section 209 states that an employer should “maintain records with respect to each of its employees sufficient to determine the benefits due or which may become due to such employees.” Proposed DOL regulations issued years back state that participant benefit 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.” While the DOL issued a notice several years later indicating that it anticipated withdrawing the proposed regulations and issuing revised amendments, plan sponsors are still waiting for the revised guidance. Until the amendments are published, plan sponsors should consider whether benefit plan records need to be maintained indefinitely.

The IRS statute of limitations runs for a period of three years from the date the tax form is filed for a given year. Additionally, the PBGC requires that each plan sponsor of a terminating plan (in both standard and distress terminations) must maintain all records necessary to demonstrate compliance with the plan termination provisions. Such records must be maintained for six years after the date when the post-distribution certification is filed with the PBGC.

Electronic Storage

DOL regulations allow a plan to dispose of original paper records once they have been transferred to an electronic recordkeeping system, unless the resulting electronic records would not constitute a duplicate or substitute record under the plan’s terms and federal or state law. Electronic storage of data is more convenient and cost effective for plan sponsors. There are no restrictions on maintaining electronic records but plan management should consider the following:

• Electronic storage security – this is very important since employee benefit records contain personal information particularly desirable to identity thieves. Protection of such data may range from server room lock and key to various forms of encryption. Plan sponsors should also consider any applicable state laws governing the protection of personal information.
• Ease of access to records - delays in providing information for a participant request or during litigation may result in negative consequences.
• Continued advances in technology – there are continuing developments in both electronic storage and data encryption methods (for example, the “cloud”). The plan’s document retention methods should allow for migration to more current storage systems to assure the long-term preservation of the data integrity and security.

Creating a Policy

Plan sponsors should consider the ERISA requirements in their overall document retention policy. A practical suggestion is to determine the records that currently exist and sort them into two categories: 1) reporting and disclosure records and 2) benefit determination records. Plan sponsors should also consider the format in which the records are retained (e.g., electronically or in paper form) and where the records are stored (e.g., on-site or off-site). Plan sponsors often rely on service provider records regarding the historical plan activity. As the determination of the benefits is ultimately the responsibility of the plan sponsor, it would be prudent for the plan sponsor to maintain copies of all reports generated from service provider systems. This step is even more crucial when there are changes in service providers.

ERISA regulatory guidance does not stipulate the types of records required to be retained. It is important to note that a single type of documentation might serve a variety of purposes. Therefore, it is possible that a record might be eligible for disposal under Section 107, but may still need to be retained under Section 209 requirements.

Penalties

Under ERISA Section 107, there are no specific monetary penalties associated with the record retention requirements. Failure to retain documents under Section 209 results in a civil penalty of $10 for each employee with respect to whom such failure occurs, unless it is shown that the failure is due to reasonable cause.

Conclusion

So, back to the original question, how long should records be retained? Depending on the types of record, the best practice may be “indefinitely.”

Have other questions about your Employee Benefit Plan? We can help! Steve Beasy, CPA, is a partner based out of our Elkhart office. He has over 20 years of public accounting experience with a concentration in benefit plan audits and tax filings. Call him at 574.264.2247 or send him an email.