Mismanaged ESOP records can trigger Internal Revenue Service (IRS) or Department of Labor (DOL) penalties — or worse, compromise your plan’s tax-qualified status. Under the Employee Retirement Income Security Act of 1974 (ERISA), employee stock ownership plans (ESOP) fiduciaries are required to maintain detailed records to protect plan participant rights and demonstrate regulatory compliance.
ESOP plan fiduciaries typically include at least the ESOP trustee and the plan administrator (often an ESOP administrative committee). These roles are critical for ensuring compliance with ERISA record retention requirements, which protect employee benefits and help mitigate financial risks.
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 company must comply with certain plan record retention requirements.
This guide breaks down what records to retain, how long to retain them, and how to keep your ESOP audit-ready using best practices recognized by the IRS and DOL.
Record Retention Considerations for HR Leadership
Proper record retention is essential for fostering transparency and trust among employee-owners. Human resources is often responsible for ensuring timely delivery of benefit statements, summary plan descriptions, and other communications that help employees understand their ESOP benefits.
Accurate records ensure employees receive clear, consistent information about their benefits. Just as important is managing participant data security. Record retention systems need to comply with applicable privacy laws when handling sensitive personal information.
Why Record Retention Matters for ESOP Financial Leaders
Robust record retention practices are key to mitigating financial risks during audits or investigations. Poor recordkeeping practices could lead to penalties or tax implications — and could even jeopardize an ESOP’s tax-qualified status.
Comprehensive, organized records can help ensure the plan is audit-ready, and reduce stress during IRS or DOL audits by demonstrating compliance with ERISA requirements. Accurate documentation also helps safeguard against penalties or disputes over benefit calculations.
A few examples of risks from poor recordkeeping include:
- Missing payroll records, which could result in inaccurate eligibility determinations
- Incomplete valuation reports, which could lead to challenges in stock price calculations
- Lack of documentation for nondiscrimination testing, which could trigger penalties
ERISA & IRS Record Retention Rules Explained
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.
ESOP Records to Retain [Checklist]
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 & Disclosure Records
These documents demonstrate compliance with federal reporting requirements, including annual IRS and DOL filings, as well as plan participant communications:
- Annual filings
- Copies of annual Form 5500
- Plan’s most recent IRS determination letter — or, if pending, the form requesting it
- Corporate income tax returns (used to reconcile deductions)
- Plan communications
- Summary Plan Descriptions (SPDs)
- Summaries of Material Modifications (SMMs)
- All other media or communications provided to ESOP participants or beneficiaries (may include documents, slide presentations, emails, web pages, etc.)
- Testing and compliance
- Copies of all nondiscrimination and coverage testing results
Benefits Determination Records
These are records that impact or document individual employee benefits and rights under the plan:
- Eligibility and participation
- Payroll records used to determine eligibility and contributions
- Supporting documentation for excluded employees
- Complete employee census data
- Hours of service and vesting determinations
- Distribution and transaction records
- Plan distribution records, including copies of Form 1099-Rs
- Documents for plan contributions, loans, withdrawals, and distributions
- Spousal consent documents
Accounting Records
These records demonstrate the plan’s financial integrity and compliance with fiduciary responsibilities, and for demonstrating the plan’s tax-qualified status:
- Financial reports
- Trustees’ reports
- Journals and ledgers
- Certified financial statement audits
- Investment analyses
- Balance sheets
- Income and expense statements
- Valuation and asset tracking
- Valuation reports
- Documents supporting the ESOP trust’s ownership of plan assets
- Bond and insurance
- Documentation of the plan’s fidelity bond
Governance Records
These documents provide transparency into the governance and oversight of the plan by documenting fiduciary decisions:
- Foundational documents
- Original signed and dated plan document
- All original signed and dated plan amendments
- Fiduciary and administrative records
- Copies of all corporate and administrative committee actions, such as board resolutions and administrative committee meeting minutes
- Governance documents related to plan oversight
- Fiduciary decisions
- Any other plan materials, including 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 under ERISA 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, with controls to prevent unauthorized access or changes, and properly indexed so they can be readily inspected and examined.
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, both when displayed on a monitor and when printed, and adequate records management practices must be established and implemented.
As for the reams of paper your plan records may generate over time, 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.
Next Steps: Organize Your ESOP Administration Timeline
The crucial 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 prepare in advance for filings and administrative tasks in the year ahead.
