“Most employers don’t think about the fact that everything we do with vendors—documents for the plan or amendments—the employer is the one responsible for keeping it,” Bill Grossman, director of education and communications for McKay Hochman Inc., told PLANSPONSOR. (McKay Hochman focuses on compliance and education for retirement plan sponsors.)
“Every single time you restate the plan, snap on an amendment or make any kind of document change, the plan sponsor has to keep it in a master file,” Grossman said. The consequences of not doing so can be tragic, he added, and certainly expensive. “The Internal Revenue Service (IRS) has the right to examine a plan’s documents at any time,” he said. “If you don’t keep the documents, you can’t prove you have a plan.” The lack of proper plan documents can result in stiff compliance fees.
If the plan sponsor discovers it is missing documents, Rev. Proc. 2013-12,the Employee Plans Compliance Resolution Systems (EPCRS), contains a procedure for voluntarily submitting the plan for correction. This is the best way to get back into compliance and at the least possible penalty. The penalties under EPCRS are based on the number of participants in the plan: for example, $750 for a plan with less than 20 participants, to $8,000 for a plan with 501 to 1,000 participants and upward for larger plans.
If plan documents are discovered to be missing by an IRS examiner during an IRS audit, the penalties are substantial. The penalties can be eye-opening, Grossman said, and they mount higher for larger plans and for older missing documents. “Plan sponsors could be looking at a few thousand dollars to tens of thousands of dollars for missing documents,” he pointed out.
According to the Employee Plans Compliance Resolution Systems (EPCRS), a compliance fee for a plan with 20 or fewer participants might range from $2,500 to $4,500 for the nonamender failure. But the same penalty could reach $72,000 for plans with more than 10,000 participants. These are reduced fees that apply only if the failure discovered is the nonamender failure, Grossman said. Other fees could be higher.
In addition, if a plan is submitted for a determination letter and the IRS discovers that there are documents missing, according to Section 14.04 of Rev. Proc. 2013-12, EPCRS, a compliance fee for a plan with 20 or fewer participants might range from $2,500 (missing second RAP document) to $4,500 (missing TRA ’86 document) for the nonamender failure. But the same penalty could reach $72,000 (missing TRA ’86 document) for plans with more than 10,000 participants. These fees are less than what would be charged if the failure was discovered in anIRS audit and much more than would be charged than if the plan had entered the EPCRS’s Voluntary Correction Program (VCP), Grossman said.
So, if you find you are missing documents, it is best to see if the vendor you were with has them. If not, then the IRS EPCRS program’s VCP would be the best way to regain compliance. Before submitting under VCP, the appropriate missing plan document must be completed.
Penalties for Missing Documents
“Employers do not get educated about this,” Grossman said. “Plan documents are permanent. Even if a plan is terminated, the plan sponsor will still want to hold onto documents for seven years.”
CPAs might advise discarding some documents and records after six or seven years, but this does not apply to actual plan documents, Grossman said. “Those documents must be held for as long as the plan is in force.”
Grossman has heard of investigations that look for original plan documents, and levy penalties for missing documents. Plan sponsors may think that the vendor holds on to documents, but that is a myth to be busted, he said, “that the vendor will be responsible for holding them. After you leave, some vendors may hold them for a few years. Some might offer documents to the employer before destroying them—but there is no requirement for providers to keep these.”
Specific reporting and disclosure obligations for qualified retirement plans are spelled out in the Employee Retirement Income Security Act (ERISA), but McKay Hochman points out the lesser-known fact that the Act also requires plan sponsors to retain, for a fixed period of time, the records that support the information included in the 5500 filing and other reports.
Record retention has three parts: Which records should be kept? For how long? And should they be archived?
The short answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report, and the materials should be preserved in a manner and format (electronic or otherwise) that permits ready retrieval.
But the reality is that best practice suggests certain records be kept for the life of the plan. This includes all plan documents that date from the plan’s inception. The thicker the paper trail, the easier it will be for the plan sponsor to respond to any inquiry from a government agency or request for information from a plan participant.
Grossman said that appropriate document retention should definitely be part of a disaster recovery plan, and that large employers will definitely want to plan for backup of key plan documents. Legal actions from participant divorces or lawsuits from disgruntled employees could also mean the need for plan documents.
Records must be kept in a manner in which the records can be readily retrieved. If records are lost, stolen or destroyed before the end of the six-year period, the plan administrator can be required to recreate the records, unless to do so would result in excessive or unreasonable costs, McKay Hochman said.
Most original paper records may be disposed after they are transferred to an electronic recordkeeping system, but note that the original may not be discarded if it has legal significance or inherent value in its original form (e.g., notarized documents, insurance contracts, stock certificates, and documents executed under seal).
Archival Is Critical
Proper and complete archiving of plan records is essential. Because of technological advancements, many transactions do not take place on paper, which is an added challenge to recordkeeping requirements. Nonetheless, the plan’s records should be reviewed periodically, updated, and, to the extent possible, purged.
Documents that a qualified retirement plan must retain for ERISA purposes include:
- The original signed and dated plan document, and all original signed and dated plan amendments. Make sure the dates and signatures are easily visible;
- Copies of all corporate/partnership actions and administrative committee actions relating to the plan;
- Copies of all communications to employees. These include Summary Plan Descriptions, Summaries of Material Modifications, and anything else describing the plan that is provided to participants or beneficiaries. Remember to include copies of videos, slides, and e-mails;
- A copy of the most recent determination letter from the IRS, or the form to request that determination letter, if one is pending;
- All financial reports, including trustees’ reports, journals, ledgers, certified audits, investment analyses, balance sheets, and income and expense statements;
- Copies of Form 5500;
- Payroll records used to determine eligibility and contributions including details supporting any exclusion from participation. It is critical that sponsors keep complete census data, not just data on those who are eligible;
- Hours of service and vesting determinations;
- Plan distribution records, including Form 1099Rs;
- Corporate income tax returns (to reconcile deductions);
- Evidence of the plan’s fidelity bond;
- Documentation supporting the trust’s ownership of the plan’s assets;
- Copies of all documents relating to plan loans, withdrawals, and distributions. Include copies of spousal consents;
- Copies of nondiscrimination and coverage test results;
- Any other plan-related materials, such as claims against the plan.
More information about McKay Hochman is here.
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