Employers sometimes ask how long they should retain retirement plan. Retirement Plan Record Retention Review

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1 VOLUME 43, NUMBER 4 JOURNAL of PENSION PLANNING & COMPLIANCE Editor-in-Chief: Bruce J. McNeil, Esq. WINTER 2018 JPPC Retirement Plan Record Retention Review DANIEL SCHWALLIE Daniel Schwallie, JD, PhD is an attorney with Aon Hewitt s Retirement Legal Consulting & Compliance practice. His areas of consulting include the design and administration of qualified pension and profit-sharing plans, 403(b) and 401(k) plans, and 457(b) nonqualified deferred compensation plans. He has published numerous articles on plan design and compliance and is the primary author of the Cash Balance Plan Answer Book, 3rd ed. (New York: Wolters Kluwer, 2016). Employers sometimes ask how long they should retain retirement plan records. The prudent answer, it turns out, is generally a very long time. This article reviews relevant rules under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act (ERISA) and related guidance, as well as related court decisions. INTRODUCTION Record retention can be costly, whether by means of paper or electronic storage. However, failure to retain necessary retirement plan records can also be costly,

2 2 / JOURNAL OF PENSION PLANNING & COMPLIANCE whether due to overpayment or repeat payment of benefits, litigation, or audit penalties. Plan sponsors generally want to maintain appropriate records to properly pay plan benefits. Nevertheless, bottom line considerations result in employers looking to efficiently maintain records and minimize the costs of record retention. The mere passage of time and changes in personnel, not to mention mergers and acquisitions, can work to weaken the effectiveness of record retention. Regardless, from a compliance perspective, retention of retirement plan records is critical. INTERNAL REVENUE CODE RECORD RETENTION REQUIREMENTS Code Section 6001 requires that, Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary [of the Treasury] may from time to time prescribe. Treasury regulations under Code Section 6001 provide that any person subject to federal income tax or any person required to file a return of information with respect to income must keep records sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. 1 The regulations go on to require that the records be kept at all times available for inspection by authorized internal revenue officers or employees and must be retained so long as their contents may become material in the administration of any internal revenue law. 2 These rules apply to retirement plans qualified under Code Sections 401(a), 403(b), and 457, as well as individual retirement arrangements (IRAs), simplified employee pensions (SEPs), savings incentive match plans for employees (SIMPLE IRAs), and, presumably, nonqualified retirement plans. 3 In an Internal Revenue Service (IRS) video on plan recordkeeping, it is suggested that a retirement plan sponsor should retain plan records until all benefits have been paid, the trust has been dissolved, and the plan is no longer subject to audit. 4 Although the IRS may not be able to impose penalties beyond a plan s open tax years under Code Section 6501, which are generally those tax years for which three years have not elapsed since the applicable tax return was filed, the IRS may require plan records for earlier years, even back to the plan s inception, in considering whether the plan is qualified or not under the applicable sections of the Code. 5 ERISA RECORD RETENTION REQUIREMENTS Two sections of ERISA directly address plan record retention. ERISA Section 107 deals with plan reporting and disclosure. ERISA

3 RETIREMENT PLAN RECORD RETENTION REVIEW / 3 Section 209 deals with plan benefit determination. Other sections of ERISA arguably invoke record retention as well. Record Retention under ERISA Section 107 ERISA Section 107 requires that every person required to file any report under Title I of ERISA (such as Form 5500) must maintain a copy of such report and records on the matters for which disclosure is required that provide, in sufficient detail, the necessary basic information and data from which the documents may be verified, explained, or clarified, and checked for accuracy and completeness. Such records, which include vouchers, worksheets, receipts, and applicable resolutions, must be kept available for examination for at least six years after the filing date of the documents, based on the information they contain. 6 The statutory language says to retain the records for at least six years but provides no limitation on the ability of the U.S. Department of Labor (DOL) to audit more than six years back. 7 An employer should carefully consider whether to dispose of all such records more than six years old, even though most DOL audits do not go back more than six years, as such older records may be needed in defense of litigation against the plan and its sponsor for benefit claims, breach of fiduciary duties, or otherwise. Record Retention under ERISA Section 209 ERISA Section 209 requires that every employer maintain records, in accordance with such regulations as required by the DOL, with respect to each of the employer s employees sufficient to determine the benefits due or which may become due to such employees. Failure to maintain required records for any plan year may result in a civil penalty of $10 for each employee with respect to whom such failure occurs, unless it is shown such failure is due to reasonable cause. Proposed regulations under ERISA Section 209, issued in 1980, require that records be maintained with respect to each employee covered under a plan and be sufficient to determine the benefits which are, or may become, due to such employee and shall include the name and address of each such employee. 8 The proposed regulations require the records be retained as long as any possibility exists that they might be relevant to a determination of benefit entitlements. The records are required to be maintained in a reasonable order in a safe and accessible place at the main office of the plan administrator or the employer, or at recordkeeping offices established by the employer or the plan and customarily used for the maintenance of records. When it is no longer possible that the records might be relevant to a determination of benefit entitlements, the records may be disposed of,

4 4 / JOURNAL OF PENSION PLANNING & COMPLIANCE unless they are required to be maintained for a longer period under any other law. 9 Among those courts that have considered the requirement for an employer to maintain plan records under ERISA Section 209, some have concluded that the failure to maintain adequate plan records shifts to the employer the burden of proving what benefits are due. 10 More precisely, if plaintiffs produce evidence raising genuine issues of material fact about the accuracy of the employer s plan records, the burden shifts to the employer to provide evidence of what benefits are due. If the employer cannot meet this burden, then the issue becomes whether the evidence presented by the plaintiffs is sufficient to show what benefits are due as a matter of just and reasonable inference. 11 Record Retention for Benefit Claims under ERISA Section 502(a)(1)(B) ERISA Section 502(a)(1)(B) permits a plan participant or beneficiary to bring a civil action to recover benefits due under the terms of the plan, enforce rights under the terms of the plan, or clarify rights to future benefits under the terms of the plan. 12 Although the statute and corresponding regulations do not expressly provide for record retention, they also do not expressly limit the period during which a participant or beneficiary may bring such an action. 13 This suggests that ERISA Section 209 would apply in setting a record retention policy; absent some applicable statute of limitations that might limit the period plan records would be needed to defend against an action brought under ERISA Section 502(a)(1)(B). Federal common law provides the statute of limitations with respect to an action brought under ERISA Section 502(a)(1)(B). 14 Most federal circuit courts of appeal have applied the forum state s statute of limitations for written contract actions, although some have applied the forum state s statute of limitations for recovery of wages or breach of employment contract. 15 The result, depending on the forum state and circuit court of appeals involved, has been statute of limitations on actions brought under ERISA Section 502(a)(1)(B) ranging from two to 10 years or more. 16 Further, while some courts have permitted a plan, by its terms, to impose a shorter period by which an action may be brought, they may not enforce a plan s limitation that specifies when the cause of action accrues. 17 Thus, determining a specific record retention period based on defending against a claim for benefits can be difficult, especially for plans that could be subject to legal actions in multiple states. 18 It is not uncommon for terminated employees, survivor beneficiaries, or alternate payees to claim they are due plan benefits many years after a participant

5 RETIREMENT PLAN RECORD RETENTION REVIEW / 5 terminates employment, dies, or is divorced or even after the plan is terminated. Record Retention for Breach of Fiduciary Duty Claims under ERISA Section 413 ERISA Section 413 provides that no action with respect to a fiduciary s breach of any responsibility, duty, or obligation under the fiduciary responsibility provisions of ERISA (Part 4) may commence after the earliest of Six years after the date of the last act that constituted a part of the breach; Six years after the latest date the fiduciary could have cured a breach due to omission; or Three years after the earliest date on which the plaintiff had actual knowledge of the breach. However, in the case of fraud or concealment, no action may commence more than six years after the date of discovery of the breach. Although six years is nominally the statute of limitations for breach of fiduciary duty claims, a plan sponsor intending to defend against such claims would be well advised to retain plan records longer than six years, given the rather nebulous date on when the statute of limitations might start. The lack of key records may suggest obfuscation or concealment and may eliminate probative evidence in support of the fiduciary s acts or omissions. Record Retention for PBGC Audit under ERISA Section 4003 The Pension Benefit Guaranty Corporation (PBGC) has the authority to conduct investigations and is required to annually audit a statistically significant number of terminating defined benefit plans. 19 To meet its statutory requirement of a statistically significant sample, the PBGC currently selects all plans with a participant count of more than 300 for audit. For plans with a participant count of 300 or fewer, the PBGC randomly selects plans to audit. The PBGC also audits all plans that distribute plan assets before or without filing a Standard Termination Notice (Form 500) in accordance with the standard termination regulations and reserves the right to take any other appropriate action in such circumstances. If participants or beneficiaries did not receive all of the benefits to which they were

6 6 / JOURNAL OF PENSION PLANNING & COMPLIANCE entitled, the plan administrator (generally, the plan sponsor) must distribute additional benefits. If the plan administrator does not cooperate in correcting errors, the PBGC has the authority to nullify the plan termination or may ask a court to direct that additional payments be made. 20 Civil actions by the PBGC may not be brought after the latest of Six years after the date on which the cause of action arose; Three years (six years in the case of fraud or concealment) after the earliest date on which the PBGC acquired or should have acquired actual knowledge of the existence of the cause of action; or Three years (six years in the case of fraud or concealment) after the date the PBGC became a trustee with respect to the plan, if the PBGC brings the action as a trustee. 21 For purposes of the PBGC audit and possible PBGC litigation with respect to the plan termination, the plan sponsor would want to retain all records of the plan termination for at least six years from the date all plan assets are distributed in satisfaction of all plan liabilities. But many, if not all, records from the plan termination, such as notices of plan benefits and participant elections, would also need to be retained under ERISA Section 209. ELECTRONIC RECORDS Electronic records must generally satisfy the requirements of Code Section 6001 described above. In addition, there must be the ability to retrieve, manipulate, and print on paper (hardcopy) the electronic records and produce output on electronic media from the electronic records. In this regard, the employer must provide the necessary resources at the time of an IRS examination. Revenue Procedure details the basic requirements the IRS considers essential with respect to electronic records. 22 Use of a third party in connection with electronic records does not relieve the employer of its recordkeeping responsibilities under Code Section 6001 and Revenue Procedure Guidance on the electronic storage of hardcopy records is provided in Revenue Procedure DOL regulations issued in 2002 provide that electronic media may be used in complying with the record retention requirements of ERISA

7 RETIREMENT PLAN RECORD RETENTION REVIEW / 7 Sections 107 and 209, provided that the following four conditions are satisfied: Reasonable Controls The recordkeeping system has reasonable controls to ensure the integrity, accuracy, authenticity, and reliability of the records kept in electronic form. 2. Organized and Safe The electronic records are maintained in reasonable order, in a safe and accessible place, and in such manner as they may be readily inspected or examined. For example, the recordkeeping system should be capable of indexing, retaining, preserving, retrieving, and reproducing the electronic records. 3. Convertible into Hardcopy The electronic records can be readily converted into legible and readable paper copy as may be needed to satisfy reporting and disclosure requirements or any other obligation under Title I of ERISA. 4. Properly Managed Adequate records management practices are established and implemented. For example, procedures for labeling of electronically maintained or retained records are followed; a secure storage environment is provided; back-up electronic copies are created and an off-site storage location is selected; a quality assurance program is followed, as evidenced by regular evaluations of the electronic recordkeeping system, including periodic checks of electronically maintained or retained records; and paper copies of records that cannot be clearly, accurately or completely transferred to an electronic recordkeeping system are retained. The electronic recordkeeping system cannot be subject to any agreement or restriction that would, directly or indirectly, compromise a person s ability to comply with any reporting and disclosure requirement or any or other obligation under Title I of ERISA. 25 According to the DOL, the duty to maintain records in accordance with Title I of ERISA cannot be avoided by contract, delegation, or otherwise. If the employer arranges with a service provider to perform functions with respect to a plan and, pursuant to the arrangement, the service provider

8 8 / JOURNAL OF PENSION PLANNING & COMPLIANCE creates, maintains, retains, or prepares the plan s records, or keeps physical custody of those records, the requirements relating to such records remain with the employer, and the employer must make such agreements and arrangements with the service provider as are necessary to ensure that the records are properly maintained and retained. 26 At least one court has concluded that employers cannot delegate their ERISA Section 209 record retention duties to a third party in full possession of electronic plan records. 27 Original paper records may be disposed of any time after they are transferred to an electronic recordkeeping system that complies with the above requirements, except that such original records may not be discarded if the electronic record would not constitute a duplicate or substitute record under the terms of the plan and applicable federal or state law. 28 CONCLUSION It is more prudent to err on the side of retaining plan records indefinitely, but that must be considered alongside the cost of record retention. As electronic retention has improved and generally become less expensive, the case for more limited retention periods has arguably weakened. Plan sponsors may want to review their record retention practices and procedures, including discussion and review with any third-party administrators of their plans, and establish formal retention policies if none currently exist. Employers should request plan records as part of any acquisition due diligence and, to the extent possible, review them for reasonableness. Plan sponsors may want to seek service guarantees requiring record retention when employing third-party plan administrators and have upfront conversations about future transferability of electronic records, should the sponsor want to change service providers. NOTES 1. See Treas. Reg (a). 2. See Treas. Reg (e). Proposed Treasury regulations under Code 414(n) provided a recordkeeping exception with respect to leased employees that shifted the burden of determining whether an individual is a leased employee from the employer to the individual (Prop. Treas. Reg (n)-3). These proposed regulations were withdrawn for reasons unrelated to the exception, but a number of employers submitted determination letter applications after they were withdrawn, including plan language for the exception and calling out the exception in the cover letter to the IRS, and received favorable determination letters on their plans. The legislative history of the Tax Reform Act of 1986 included a description of how the exception

9 RETIREMENT PLAN RECORD RETENTION REVIEW / 9 should work and informal comments from a senior IRS official in 2002 indicated that the exception could be included in a Code 401(a) qualified plan despite withdrawal of the proposed regulations, which appears to have been born out based on favorable determination letters received on plans with language reflecting the exception. Of course, the exception has its own requirements and does not entirely eliminate recordkeeping with respect to leased employees. 3. See Maintaining Your Retirement Plan Records on the IRS Web site at: retirement-plans/maintaining-your-retirement-plan-records. 4. See Plan Recordkeeping on the IRS Web site at: RetirementPlans/PlanRecordkeeping. The IRS video and its transcript provide a long list of records the IRS indicates should be retained. 5. See Hollen v. Commissioner, 50 Employee Benefits Cases 1777 (U.S. Tax Court, 2011), aff d, 437 Fed. Appx. 525 (2011), cert. denied, 566 U.S (2012). 6. See ERISA 107. The regulations under ERISA 107 do not expressly enumerate the records that must be retained, but a 1963 DOL interpretative bulletin relating to record retention requirements under the Welfare and Pension Plan Disclosure Act of 1958 (WPPDA), a predecessor of ERISA, provided guidance on the types of records to be retained. The language in WPPDA 11 is virtually identical to that in ERISA 107. There is no indication that the requirement for the retention of these types of records was changed by the enactment of ERISA. See United States v. S & Vee Cartage Co., 704 F. 2d 914 (6th Cir. 1983), cert. denied, 464 U.S. 935 (1983). 7. As noted later in this article, ERISA 413 generally limits commencement of actions with respect to a fiduciary s breach of any responsibility, duty, or obligation to six years. 8. In a request for information (RFI) published in the Federal Register on December 27, 1993, the DOL indicated it anticipated withdrawing the proposed regulations and publishing revised proposed regulations based on information furnished in response to the RFI (58 Fed. Reg ). To date, no revised proposed regulations have been published. 9. See Prop. C.F.R See, e.g., Michigan Laborers Health Care Fund v. Grimaldi Concrete, Inc., 30 F. 3d 692 (6th Cir. 1994) and Central Pension Fund of International Union of Operating Engineers v. Ray Haluch Gravel Co., 695 F. 3d 1 (1st Cir. 2012). 11. See Trustees of Michigan Laborer s District Council Pension Fund v. Van Sullen Construction, Inc., 825 F. Supp. 165 (E.D. Mich. 1993). 12. See ERISA 502(a)(1)(B). ERISA 502 also permits civil actions to enjoin acts or practices that violate ERISA or to obtain various types of relief, some permitted to be brought by participants or beneficiaries, the DOL, or both. ERISA 502 also permits civil actions by the DOL to enforce compliance or assess civil penalties under ERISA. 13. See Federal Common Law and Gaps in Federal Statutes: The Case of ERISA Plan Limitation Periods for Section 502(a)(1)(B) Actions, J. Greiner, 93 Michigan Law Review 382, 383 (1994); The Perilous and Ever-Changing Procedural Rules of Pursuing an ERISA Claims Case, K.J. Kennedy, 70 University of Missouri-Kansas City Law Review 329, 356 (2001); and Benefit Disputes and Enforcement Under ERISA, panel discussion, 6 Drexel Law Review 409, 433 (2014). 14. See Federal Common Law and Gaps in Federal Statutes: The Case of ERISA Plan Limitation Periods for Section 502(a)(1)(B) Actions, J. Greiner, 93 Michigan Law Review 382, 384 (1994).

10 10 / JOURNAL OF PENSION PLANNING & COMPLIANCE 15. See Federal Common Law and Gaps in Federal Statutes: The Case of ERISA Plan Limitation Periods for Section 502(a)(1)(B) Actions, J. Greiner, 93 Michigan Law Review 382, 384 (1994) and The Perilous and Ever-Changing Procedural Rules of Pursuing an ERISA Claims Case, K.J. Kennedy, 70 University of Missouri-Kansas City Law Review 329, 357 (2001). 16. See Federal Common Law and Gaps in Federal Statutes: The Case of ERISA Plan Limitation Periods for Section 502(a)(1)(B) Actions, J. Greiner, 93 Michigan Law Review 382, 385 (1994) and The Perilous and Ever-Changing Procedural Rules of Pursuing an ERISA Claims Case, K.J. Kennedy, 70 University of Missouri-Kansas City Law Review 329, 357 (2001). 17. See The Perilous and Ever-Changing Procedural Rules of Pursuing an ERISA Claims Case, K.J. Kennedy, 70 University of Missouri-Kansas City Law Review 329, 357 (2001). 18. Plans not subject to ERISA, such as governmental or church plans, may possibly be subject to the same state statutes of limitations for actions brought in state court. 19. See ERISA 4003(a). 20. See Standard Terminations on the PBGC Web site at: standard-terminations. 21. See ERISA 4003(e)(6). 22. See EP Team Audit (EPTA) Program Taxpayer Documentation Guide What Records Should Be Preserved for Access During an Audit? on the IRS Web site at: gov/retirement-plans/ep-team-audit-epta-program-taxpayer-documentation-guide-what-recordsshould-be-preserved-for-access-during-an-audit. 23. See Rev. Proc , Section 3.02(5). 24. See C.F.R (b). 25. See C.F.R (b)(4). 26. See 67 Fed. Reg (April 9, 2002). 27. See Tomlinson v. El Paso Corp., 245 F.R.D. 474 (D.C. Colo. 2007). 28. See C.F.R (d) CCH Incorporated. All Rights Reserved. Reprinted from Journal of Pension Planning & Compliance, Winter 2018, Volume 43, Number 4, pages 26 35, with permission from Wolters Kluwer, New York, NY, ,