QUESTION: We are reviewing our record retention policy for our 401(k) plan and fringe benefits. For IRS purposes, how long should we maintain the nonpermanent records of those plans?
ANSWER: We suggest that nonpermanent records relating to the federal tax treatment of a 401(k) plan or a fringe benefit be retained for at least five years. (As noted below, the retention period required for nonpermanent records relating to ERISA disclosures is longer.) We calculate this five-year rule of thumb for tax-related records by rounding up from the date that is four years after the last employment tax for that year is due or would ordinarily be paid.
Our suggestion takes into account the statutory period in which the IRS can assess additional tax liability. Generally, the IRS has three years after an income tax return is filed to assert additional tax liability for the year covered by the return (longer for fraud), so tax-related records should be retained for at least that period. But the IRS record retention requirement for employment tax purposes is typically longer—it requires that records relevant to the amount of federal employment taxes, and any other information reported on a federal employment tax return (generally, Form 941), be retained for at least four years after the later of the due date of the tax or the date the tax is actually paid. IRS summaries describe the four-year rule as applying to all employment tax records, which include all records of the amounts and dates of all wage, annuity, and pension payments paid to employees.
In light of the employment tax rule, and because the four-year retention period for employment tax records is arguably incorporated into the income tax record retention rule (which requires that records be retained so long as they are “material in the administration of any internal revenue law”), we suggest applying a five-year rule of thumb to nonpermanent records. This ensures that the sponsor will retain its employment and other tax records long enough to satisfy both retention rules and respond to plan-related issues that might arise during an IRS audit.
Of course, some records (as your question suggests) will need to have a longer retention period. The IRS’s position on plan qualification records for 401(k) plans and other qualified plans is that they should be kept permanently—or at least until the trust has paid all benefits and enough time has passed that the plan will not be audited. Those permanent records should include not only plan and trust documents and amendments but also participant records related to plan qualification. According to the IRS, such records include “census data, account balances, contributions and earnings, loan documents and information, compensation data and participant statements and notices.” And if ERISA applies, a longer period will be needed for some nonpermanent records, such as the records necessary to support information reported on Form 5500. (For information about ERISA’s recordkeeping requirements, see our Question of the Week.)
While it is a common practice for plan records to be maintained by third-party service providers or recordkeepers, sponsors must ensure that they will have access to all plan records necessary to demonstrate compliance with the Code’s requirements, including the qualification requirements of Code § 401. For this reason, you will want to take steps to be sure that your service providers follow whatever retention policies you establish.
For more information, see EBIA’s 401(k) Plans manual at Section XXVIII.E (“Retaining Plan Records”) and EBIA’s Fringe Benefits manual at Section II.I (“Record Retention Requirements for Fringe Benefits”).
Contributing Editors: EBIA Staff.