Employers who maintain qualified retirement plans are familiar with the annual Form 5500 filing requirements. For calendar year plans, a Form 5500 for the 2008 calendar year was required by July 31. Employers could obtain an extension until Oct. 15 by filing IRS Form 5558 on or before July 31.

Companies with more than 100 participants as of the first day of any plan year are required to obtain an accountant’s opinion. The accountant’s opinion is not required if an employer’s plan fluctuates between 80 and 120 participants.

This is a special rule that allows employers to file the same Form 5500 as the prior year and lets some small businesses avoid the annual audit requirement. Employers with fewer than 100 employees are not required to obtain an accountant’s opinion but must nevertheless file a Form 5500. 

Whether an employer is required to obtain an accountant’s opinion or not, Form 5500s contain a Schedule SSA form, where employers must report terminated employees who are entitled to deferred vested benefits under a retirement plan.

It’s important for employers to complete this form accurately and file it with the annual Form 5500. Relatively simple to complete, Schedule SSA is forwarded by the Internal Revenue Service to the Social Security Administration. Social Security Administration, in turn, keeps a detailed listing of all employees who are entitled to vested retirement benefits. When employees turn 65, the Social Security Administration issues a letter to their last known address, informing them that they may be entitled to a retirement benefit. 

Administrative hassles

This simple process often results in significant work for employers. For example, say a 45-year-old employee terminates employment with ABC company in 1989. In 2009, 20 years later, the employee receives a letter from the Social Security Administration stating that they “may” be entitled to benefits from the ABC retirement plan. Of course, the employee contacts ABC to question the value of their benefit.

In many cases, businesses have been sold, employers have changed retirement plan vendors and records regarding the distribution of benefits are difficult to obtain. Also, employers often have to prove that a distribution of benefits occurred, since record of an account balance may not exist for a specific individual.

This process may involve tracing recordkeepers for a typical 401(k) plan for 20 years, as well as reviewing employer or prior entity records to confirm whether or not a distribution occurred after filing Form SSA.

In a perfect world, an employer can provide an employee with a Distribution Election Form and a cancelled check that reflects a distribution was made or the employee’s account balance was rolled over to an IRA or new employer’s plan. However, such records frequently cannot be found.

When employees are frustrated that they cannot receive adequate information confirming a distribution, they often write to their member of Congress, who contacts the Department of Labor on their behalf. Therefore, employers that cannot prove employees received prior distributions may receive a call from DOL. 

The need to prove a distribution occurred is even more difficult when an employee has passed away, and a Social Security Administration letter is sent to a spouse or dependent child who has no records or recollection regarding whether or not a distribution has been made. These letters cause significant angst for employers and family members.

Absent clear and convincing evidence of a distribution, all parties can spend significant time responding to inquiries that can get nasty if and when attorneys get involved.

Hold those records

The lesson is that employers must keep all records regarding qualified retirement plans forever!  The need to prove a distribution of benefits is only one example. Employers also can be questioned about the compensation used to calculate 401(k) or pension benefits, the amount of contributions made to a retirement plan, and can be required by both the IRS and DOL to correct errors. The good news is that both the agencies maintain programs to correct administrative errors.

The IRS Voluntary Compliance Program, contained in the Employee Plans Compliance Resolution System Program, announced in Rev. Proc. 2008-50 the most up-to-date information on corrective programs. Similarly, DOL sponsors the Voluntary Fiduciary Corrections program. 

Unfortunately, neither of these programs will help employers in dispute with an employee about whether a prior distribution was made. Therefore, employers should maintain documents that can prove participants received distributions from their retirement plans.

Frank Palmieri can be reached at fpalmieri@p-ebenefitslaw.com. Any advice in this summary concerning a federal tax issue is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding any tax penalties that can be imposed by the Internal Revenue Service, or for promoting, marketing or recommending any tax-related matters addressed herein in accordance with IRS Circular 230.

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