Over the last decade, an increasing number of plan sponsors and third-party administrators (record-keepers) have moved to a paperless environment. Almost anything can be kept on a hard drive or in the cloud. Employee records and payroll data are often kept electronically without a hard copy being printed and stored in an employee file. Most plans now allow participants to make changes to their deferral and investment elections, or request loans or benefit payment online or over the phone with minimal oversight or review by the plan sponsor. In an electronic world, plan sponsors may not realize the importance of keeping proper documentation to support information required to be reported under ERISA or to demonstrate appropriate oversight and monitoring of the plan. The documentation does not need to be printed out and kept in hard copy form, but it should be readily available in case the plan sponsor needs to review it later to support a transaction or in the event a Department of Labor (DOL) investigation or Internal Revenue Service (IRS) audit. Keeping appropriate documentation is a great way for plan fiduciaries to show compliance with applicable laws and regulations as well as the plan’s written terms. Below are some specific areas where proper documentation should be kept by the plan sponsor related to the administration of their retirement plan. This not a comprehensive list, but it does provide details on some specific areas that are often missed.
- Hardship withdrawals. Retirement plans were created as a savings vehicle that provides preferential tax treatment for participating individuals. As such, the IRS has set specific rules surrounding when a participant can take out their funds from the plan. For the most part, participants are entitled to a distribution upon termination of employment with the plan sponsor, reaching retirement age (as defined by the plan document), or upon death or disability. In addition, some plans allow participants to take a distribution on account of a financial hardship. The plan document will stipulate whether hardship withdrawals are allowed under the plan.
A distribution on account of hardship must meet two requirements: (1) There is an immediate and heavy financial need, which is the “events” test. (2) The amount taken out is necessary to meet the need, which is the “needs” test. The IRS allows plan sponsors to adopt a general standard or a safe harbor standard to determine whether both tests are satisfied. Regardless of whether the plan sponsor uses the general standard or the safe harbor standard, the participants should supply documentation to substantiate the financial need. For example, a participant could supply receipts for medical expenses, tuition bills, contracts for purchase of a primary residence, or eviction or foreclosure notices from the potential loss of a primary residence. Plan sponsors should obtain and retain documentation to support the type and amount of each hardship distribution. The IRS expects sufficient information to be available to adjudicate a claim.
- Participant loans. Many plans allow participants to take a loan out of their account. The IRS set a maximum number of years a loan can be repaid at 5 years, unless it is used for the purchase of a primary residence, in which case the loan term may be extended up to 30 years. The plan document will dictate the actual repayment terms offered under the plan, but they cannot be longer than the repayment terms prescribed by the IRS. While having extended repayment terms is allowed, the plan sponsor must review and retain appropriate documentation to prove the loan was, in fact, taken out for the purchase of primary residence. Otherwise, the extended repayment terms would not be allowed. As with hardship distributions, the plan sponsor should also ensure appropriate documentation is reviewed and retained to support extended loan repayment terms. This is true even if the plan sponsor outsources the approval of loans to a third-party administrator. The IRS can assess penalties on plan sponsors if they are unable to provide support, indicating loan repayment terms extending beyond 5 years were for loans used to purchase a primary residence.
- Late contributions. The DOL has very strict rules surrounding timely remittance of employee deferral and loan repayments to the asset custodian for the Plan. If an employer does not forward employee deferral and loan repayments to the custodian as soon as reasonably possible, then they have committed a fiduciary breach. For example, if a plan sponsor has shown evidence that they can remit employee deferrals within two business days of the pay date, then any contribution remitted beyond two business days could come into question in the event of a DOL investigation.
If there are late contributions, the plan sponsor, oftentimes with the assistance of their third-party administrator, would then need to calculate the amount of lost earnings that would have been earned had the money been invested in participant accounts in a timely manner and remit the lost earnings to the Plan. For any remittances that take longer than what is considered normal, and the organization chooses not to self-correct, the sponsor should retain documentation supporting why they believe the remittance was not considered late. The documentation will assist the plan sponsor in answering questions about the extended funding time in the event of a DOL investigation or upon inquiry during an annual ERISA audit.
- Oversight meeting minutes. Fiduciaries of a retirement plan are required to act solely in the interest of participants. Often plan fiduciaries are involved in making important decisions related to the Plan including determining benefits offered under the Plan, and selecting and monitoring investment offerings and plan expenses. Plan fiduciaries are also often charged with selecting and monitoring service providers doing work for the Plan (e.g., record-keepers, investment advisors, etc.). If not already doing so, fiduciaries should meet on a regular basis to discuss important aspects of the Plan. Meeting minutes documenting the contents of the meeting, such as review of investment performance, discussion about plan expenses and action items should be retained. The meeting minutes will serve as a reminder to fiduciaries about action items discussed during each meeting. Additionally, the meeting minutes will also show that fiduciaries of the Plan are engaging in a prudent process for monitoring the Plan. The minutes should be readily available to deliver to DOL representatives in the event the Plan is selected for investigation.
- Service Provider Disclosures (408(b)(2) disclosures). One of the responsibilities of plan fiduciaries is to ensure only “reasonable” compensation is paid for services of the Plan. In order to determine whether reasonable fees have been paid, plan fiduciaries need to have sufficient information to make an informed decision. In order to help fiduciaries fulfill this responsibility, final regulations related to service provider disclosures under ERISA Section 408(b)(2) were issued effective July 1, 2012. The rules require covered service providers to supply plan fiduciaries with information about the compensation they charge (direct and indirect), potential conflicts of interest, as well as any additional information needed to satisfy reporting and disclosure requirements of Title 1 of ERISA. If the necessary information is not supplied, a prohibited transaction has occurred and should be reported on the Plan’s Form 5500 annual filing. Since the regulations have been finalized, DOL investigations often include a request to review the 408(b)(2) disclosures. It is important that fiduciaries not only obtain and review the information, but retain it for future needs of the organization and also in order to have it readily available to supply to DOL representatives in the event the plan sponsor is selected for investigation.
These are just some areas where it is still important to retain documentation related to your retirement Plan. As technology continues to evolve and paperless environments become the norm, plan administrators should remember that documentation to support certain transactions and oversight of the plan is still both important and necessary.