Creating a Compliance-Friendly Filing System
The manner in which IRA hard copy paperwork is filed can make it easier to assure sound compliance practices.
Filing IRA paperwork separately by IRA type is a good start; however, file folders with separate sections for the different types of IRA paperwork can make it even easier to verify compliance. One method of organization might be to separate file paper work as follows:
• Plan document information and amendment status
• Beneficiary designations/changes
• Customer correspondence
• Transaction requests (nonreportable transactions, such as transfers and investment changes should be separated from reportable transactions such as contributions and distributions).
• Required reporting section (RMD notices, withholding notices (most recent on top), annual account statements, FMV statements, 1099-R, and 5498). Some of this information may be stored in a master file, but it would be helpful if there was documentation in each file stating where each required report is stored.
Master Files vs. Storing In Individual Files
Because file space is usually at a premium, most financial organizations opt to store certain IRA related informa-tion in a master file rather than individual files in order to conserve space. As there is no statute of limitainforma-tions on IRA reporting penalties, a master file is a good place to store at least five years worth, at a minimum, of the fol-lowing items:
• Form 1099-R
• Form 5498
• RMD Notices
• Withholding Notices sent out to satisfy regulatory requirements (not those associated with random distributions)
• Annual Account Statements
• A note as to how the FMV reporting requirement was satisfied
In addition to retaining a hard copy of each of these reporting documents, a note should be attached to each set as to when the documents were actually sent to customers or submitted to the IRS, as applicable.
The master file is also a good place to keep a copy of each amendment that goes out to customers as well as a list of who received the amendment and the cover letter that was sent to clients explaining the purpose of the amendment.
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Ability to Prove Compliance/Archival Procedures
IRA compliance is really two fold. First the IRS requirements must be followed and the proper reports and state-ments must be completed correctly and timely. Compliance with IRS rules, regulations, and procedures is a com-plicated process. Not only must the IRA Custodian/Trustee, or the IRA Administrator for the IRA Custodian/Trustee, comply timely and correctly, they must be able to prove they complied timely and correctly.
This is where good documentation enters into the picture.
Second, in the event of an IRS audit, the IRA custodian/trustee/administrator must be able to demonstrate that it has processes and procedures in place to assure that required IRA reporting and administration occurs. This sys-tem should be accessible and easy to understand, whether it is based strictly on paper files, electronic files, or a combination of both.
Many financial organizations maintain a master file, or history file that contains copies of the establishing IRA documents that were used and how they were completed. This master file can also be used to document special mailings like amendments or required notices. It too could be scanned/archived.
Other financial organizations are more comfortable keeping a complete copy of all documents and reports in the IRA Holder’s individual IRA files. While this can be cumbersome, it is absolutely the best method to prove com-pliance.
Either way, correctly executed documentation is essential. So the scanning of them needs to be carefully processed. It needs to be reviewed for overlaps of scanned documents or unreadable documents. A good rule to follow is that if a document is bad in hard copy, it needs extra care in scanning, and usually the hard copy should be saved.
The acceptability of scanned IRA documents has really never been directly addressed by the IRS. The IRS is way behind in dealing with the electronic age. Because of that our usual recommendation is that ALL IRA documents should be saved forever. As you can imagine, this is not always acceptable or practical, so you must rely on your own legal counsel for this issue. You will need to remember that there are banking regulations, legal issues and state laws to also consider.
So when asked to come up with an alternative procedure to saving everything…forever, our next best recommen-dation is this:
Save all IRA documents, hard copy, for at least a minimum of five years. This includes IRA applications; plan agreements, disclosure statements, financial disclosures and amendments. This also applies to Federal (and state) withholding documentation and beneficiary designation documentation. This will generally cover the three years after filing and amending that is the usual audit procedure for the IRS. Then your usual scanning and shredding procedures can be followed. Many financial institutions, however, use at least ten years as a cutoff before any archiving and shredding is done, which is preferable.
to save all IRA documentation until the IRA is closed. This presumably would include through the final distribu-tion to beneficiaries.
NOTE: Recently, the IRS has removed this publication from their web site, so the operative words in this area should be BE CAREFUL before shredding anything!
A written policy and procedure should be adopted so that there is some type of audit trail/review following the scanning and destruction procedures. Final destruction should be approved only after the scanned documents are reviewed.
While we recommend a very conservative time frame before shredding, an IRA Custodian/Trustee should always follow its own legal counsel. In so doing however, remain cognizant that it appears the IRS can require an IRA Custodian/Trustee, and therefore the IRA Administrator to prove any and all IRA transactions, as far back as they care to go. While three years after filing/amending is the norm, it would be unusual, but it is not impossible for the IRS to request farther back.
Then, too, there can be state legal issues. Many states have a period of time after an account is closed that remains open for litigation purposes.
Please see additional comments on this topic in Chapter 1 of this manual, Record Retention for IRA Administrators.
Overall Archiving Recommendation: Keep all IRA documents and records for a minimum of 5 years. Ten years is better. Then after ten years, retain all original IRA Plan Agreements, Disclosures, Financial Disclosures, Amendments, Beneficiary Documents, and Federal (and state) Withholding Documents. Of course, in matters like this it is always good to follow your own legal counsel’s recommendation.
We recommend that you have a detailed procedure written for this process. It should include timing of the scan-ning/archiving and what, if any, the destruction period is, and how it is approved. Before any documents are destroyed, a detailed written procedure should become part of your Policies and Procedures. A control sheet should be maintained with all IRAs listed. It should also include any older files that are scanned/shredded. The date scanned should be noted as well as who scanned it. And, maybe most important, someone should maintain the schedule for shredding; making sure the file is scanned before it is shredded.
Master File Recommendation: If you decide you are going to only scan the IRA application, as many financial institutions do, we recommend copies of the IRA plan agreement, disclosure statement, financial disclosure, financial projections and amendments be kept in a master file, where a copy of the current forms used/sent is scanned. They should be completed in the manner that is currently being used and the timeframe used. The file must be maintained currently so every time a form is changed, it is updated in the file. Think of it as historical sample file or historical procedure file.
JM Consultants Creating a Compliance Friendly Filing System
While the IRS could still ask for proof of what version of the document was used for a particular IRA Holder/Beneficiary, the better the master file, the less likely that is. Remember, the application usually only states that the IRA Holder received certain documents, it does not state what the documents said.
Specialized Logs/Compliance Notes
There are several compliance areas where a notation in the file makes it easier to verify whether compliance requirements have been satisfied. For example:
CIP requirements - If an existing customer wants to establish an IRA, it is not necessary to request identifying information for the IRA file. However, from an auditing standpoint, it is not possible to tell if an IRA client was an existing customer or whether the person establishing the account failed to follow the CIP procedures. (sample CIP Log follows)
Amendments – When an amendment master file is used, it is helpful to maintain a log in the master file and in each individual file that notes when amendments have been sent out and to whom. The same log format may be used for the master and individual file, the main difference being that the master file should log every amend-ment sent by the financial organization, while the individual file should only contain a log of amendamend-ments sent to that individual customer (sample Amendment Log follows)
Notices/Elections - Although it is not necessary to keep a copy of required notices in individual files (withhold-ing and RMD notices), it is helpful to keep a log in each IRA file that is subject to a notice requirement to record when the notice went out and the fact that the documentation is stored in the master file. This log could also be used to note withholding elections and RMD distribution elections. (sample Notice/Election Log follows) Beneficiary Designation Log - Since IRA Holders may change beneficiaries at any time, it makes it easier to track the current beneficiary if a log is kept in each IRA file that documents any beneficiary changes and when they occurred. This is particularly true when a customer is in RMD status and a beneficiary change involves using a different life expectancy calculation than what was used previously (spouse beneficiaries who are more than 10 years younger than the IRA Holder). However, if used consistently it is also useful in verifying the most recent beneficiary designation (which should be kept in the physical file, or stored electronically, in a paperless envi-ronment) when an IRA Holder dies. (sample Beneficiary Designation follows)
✔ Distribution Year
✔ Name, birthdate, and relationship to the IRA Holder of the designated beneficiary (i.e., the benefici-ary that is used to determine the life expectancy factor used for calculating RMDs)
✔ Date the beneficiary was named
✔ Life expectancy factor used to calculate the RMD
✔ Prior-year end balance
✔ RMD amount calculated
✔ Date the required RMD notice was sent to the IRA Holder
✔ Date RMD was taken, or an indication that the IRA Holder is aggregating his RMD at another insti-tution.
Although much of the beneficiary information requested for each distribution year may be the same from year to year, listing the information used to calculate each year’s RMD requires the IRA specialist to verify that no ben-eficiary changes have been made since the last RMD calculation that may affect the current year RMD calcula-tion. (sample Inherited IRA Log follows)
Inherited IRA RMD Information – To determine whether beneficiaries are satisfying the RMD requirements, it’s important to know the relationship between the deceased IRA Holder and the beneficiary, whether the bene-ficiary was the sole benebene-ficiary, whether the IRA Holder died before or on or after his or her required beginning date. This log serves as a cross-reference to the information that would normally be found in the deceased IRA Holder’s customer file, as well as serving as a place for logging beneficiaries named by the beneficiary. (sample Inherited IRA follows)
Transaction Logs – Keeping transaction logs for reportable and nonreportable transactions can be valuable for cross-checking reporting forms and making sure that nonreportable transactions (i.e., transfers) are not reported by accident as long as they are used consistently. It is recommended that financial organizations log any transac-tion applicable to a reporting year (potentially from January 1-April 15) on these logs. Using a transactransac-tion log allows a financial organization to quickly scan the log and look for less common transactions, like recharacteri-zations, conversions, etc., to verify whether they have been properly reported on Forms 5498 and 1099-R. Some suggested transaction logs include a contribution log, an incoming transfer log, a distribution log, and an outgo-ing transfer log.
Transaction Logs – Reporting logs allow a financial organization to track and document when and how a mandatory reporting requirement was satisfied for a reporting year.
Many of these logs could be done electronically with in your computer system. In fact, the financial institution should demand these logs/reports to help in their internal compliance review.
Sample Logs Follow:
CIP Log
(To be Stored in Master File, CIP Documentation Stored in Applicable Customer File ) Caution: Always Follow Your Organization’s Written Procedures,
as Penalties for Failing to Do So Are Severe.
JM Consultants Creating a Compliance Friendly Filing System
Customer Name
Type of IRA and Date Opened
New Customer?
If Not, List Acct. # of Existing Account, If Yes, see next column
Documentation Requested and Copied
to Satisfy CIP
Date Amendment
Sent
Type of IRA Amended
Form Number/
Revision Date
(Attach Copy with list of Customers who Received)
Purpose (e.g., “GUST” (law change) or “Merger”
(internal change))
JM Consultants Creating a Compliance Friendly Filing System