Plan fiduciaries for employee stock ownership plans (ESOPs) typically include at least the ESOP trustee and the plan administrator (which is often an ESOP administrative committee).
The trustee is typically responsible for activities revolving around share price valuation and the purchase, ownership, and sale of stock, while the plan administrator is generally responsible for plan documentation. This includes the annual Form 5500 filing, as well as issuing participants’ annual benefit statements and summary plan descriptions. The plan administrator often handles other ESOP communications, as well.
As a qualified plan subject to the Employee Retirement Income Security Act of 1974 (ERISA), an ESOP must comply with certain plan record retention requirements.
But, is your plan better off if your record retention policy goes beyond compliance requirements?
In this article, we’ll review ERISA, Department of Labor (DOL), and Internal Revenue Service (IRS) record retention requirements and discuss how ESOPs can meet them — and always be prepared for the possibility of an audit or investigation.
Which Records Retention Rules Apply to an ESOP?
ERISA Section 107 is straightforward, requiring that records “on the matters of which disclosure is required” are retained for a six-year period.
Simple enough — but on the other hand, Section 209 states that an employer is required to maintain benefit records in accordance with the requirements of the DOL, “with respect to each of [its] employees sufficient to determine the benefits due or which may become due to such employees.” Section 209 does not articulate a time limit for record retention.
The IRS advises that plans keep records until the trust “has paid all benefits and enough time has passed that the plan won’t be audited.” But it goes on to explain that the long-term nature of a retirement plan means that plan records may cover many years of transactions, and the rules, “as amended, require plan sponsors to keep records of these transactions because they may become material in administering pension law.”
For this reason, it may be most prudent to maintain most — if not all — ESOP records indefinitely.
What’s Included Among ESOP Records That Need to Be Retained?
You won’t find a legal definition of “plan records,” but in general ESOP records include any paperwork required by ERISA law, DOL, and the IRS. Generally, there are four categories of plan records:
- Reporting and disclosure (filings with government agencies)
- Benefits determination (related to eligibility, vesting, account balances, etc.)
- Accounting (important for a number of uses, including demonstrating tax-qualified status)
- Governance (which document fiduciary decisions)
Examples of these records include:
- The original plan document, signed and dated
- All original, signed, dated plan amendments
- Copies of all corporate actions and administrative committee actions relating to the plan (such as meeting minutes, board resolutions, or governance documents)
- Copies of all communications to employees, including
- Summary Plan Descriptions
- Summaries of Material Modifications
- Any other media provided to ESOP participants or beneficiaries (this may include documents, slide presentations, emails, web pages, etc.)
- A copy of the plan’s most recent determination letter from the IRS (if pending, retain a copy of the form requesting the determination letter)
- Copies of annual Form 5500
- All plan financial reports, including
- Trustees’ reports
- Journals
- Ledgers
- Certified financial statement audit
- Investment analyses
- Balance sheets
- Income and expense statements
- Payroll records used to determine eligibility and contributions (include supporting documentation for any employees excluded from participation; complete census data is needed, not just plan-eligible employees)
- Hours of service and vesting determinations
- Plan distribution records, including copies of Form 1099-Rs
- Corporate income tax returns (used to reconcile deductions)
- Documentation of the plan’s fidelity bond
- Documents supporting the ESOP trust’s ownership of plan assets
- Copies of all documents relating to plan contributions, loans, withdrawals, and distributions (include spousal consent documents)
- Copies of all nondiscrimination and coverage testing results
- Valuations
- Any other plan materials, such as any claims filed against the plan
Sound intimidating? Fortunately, it’s a specialty of experienced third-party administrators to properly handle record-keeping.
Can ESOP Records be Retained Electronically, or Are Paper Copies Required?
The DOL’s guidance on electronic record retention includes requirements that electronic systems maintain the integrity, accuracy, authenticity and reliability of records. An electronic system must keep the records in reasonable order and in a safe and accessible place, and so they can be readily reviewed.
Electronic records need to be readily convertible into paper copies that satisfy ERISA reporting and disclosure requirements. Any electronic record system used may not compromise or limit the ability to comply with any ERISA reporting and disclosure requirement or any other ERISA obligation. All electronic records must be legible and readable, and adequate records management practices must be established and implemented.
As for the mountains of paper your plan records may generate, most original paper records may be disposed of after their transfer to a compliant electronic recordkeeping system. That said, plan administrators should be aware that original paper records may be needed should an audit arise. Originals that may not be discarded include items with legal significance or inherent value in their original form, such as notarized documents, insurance contracts, stock certificates, and documents executed under seal.
The first step toward ensuring a compliant ESOP record-keeping practice is planning your ESOP administrative timeline in advance. If you haven’t already, start now. Download our free planning tool to plan ahead for filings and administrative tasks in the year ahead. Click below to get your copy today.
