Saturday, July 19, 2008

DOL Issues 40-FAQs About IRS Form 5500 – Schedule C

The DOL issued guidance on Schedule C reporting for 2009 Form 5500:

Washington – The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) today announced guidance to help plan administrators and service providers comply with the new requirements for reporting service provider fee and compensation information applicable to Form 5500 Annual Returns/Reports filed for plan years beginning on or after January 1, 2009.

EBSA released 40 frequently asked questions (FAQs) developed in response to questions from the employee benefit community on the new Schedule C requirements. The FAQs cover such issues as the alternative reporting option for eligible indirect compensation, electronic disclosure of fee information by service providers, fee reporting for brokerage window options in participant directed plans, and reporting on gifts, entertainment and other non-monetary compensation.

In response to concerns expressed by service providers trying to make changes to their recordkeeping and information management systems in order to provide their employee benefit plan clients with fee and compensation information required for 2009 reports, the department is not requiring plan administrators to report service providers on the Schedule C as failing to provide fee and compensation information if the service provider furnishes the plan administrator with a written statement that (i) the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion, and (ii) despite such efforts, the service provider was unable to complete the changes for the 2009 plan year.

The announcement included a link to 40-FAQs About The 2009 Form 5500 Schedule C:

  1. What is the purpose of this FAQ guidance?
  2. Is the Schedule C information on service provider indirect compensation required to be reported based on the plan's year or can the information reported be based on the service provider's fiscal year?
  3. Can the alternative reporting option for "eligible indirect compensation" be used to report compensation paid or received in separately managed investment accounts of a single plan?
  4. Are all the fees and expenses charged against an investment fund and reflected in the value of the plan's investment, such as an investment fund's payments for legal services provided to the fund, fees paid to the fund's accountant, and expenses associated with SEC filing requirements, reportable indirect compensation for Schedule C purposes?
  5. Are the requirements to report indirect compensation on Schedule C different for participant-selected investments through "open brokerage" windows?
  6. Are commissions paid to an agent in connection with the sale of an investment, product, or service to a plan reportable indirect compensation?
  7. Is compensation received in connection with the management and operation of venture capital operating companies (VCOCs), real estate operating companies (REOCs), and other operating companies reportable indirect compensation?
  8. A mutual fund pays eligible indirect compensation to a fund administrator, advisor, or distributor (a "fund agent"). In turn, the fund agent pays fees to the recordkeeper for "compliance services" provided to one or more participating plans, including discrimination testing, QDRO administration, and Form 5500 preparation. The recordkeeper is not an affiliate of the mutual fund or the fund agent. Is the mutual fund payment to the recordkeeper reportable indirect compensation? If it is reportable indirect compensation, is the fee received by the recordkeeper eligible indirect compensation?
  9. A recordkeeper may enter into an "alliance" arrangement with a broker-dealer to provide services offered together as a "package" sold by agents of the broker-dealer. The recordkeeper and broker-dealer are not affiliated to one another and each has a separate contract or arrangement with the plan. In connection with this alliance arrangement, the broker-dealer pays compensation to the recordkeeper. The compensation may be flat per-participant fees or asset-based fees based on the value of plans' investments in mutual funds or other investment vehicles offered to the plans by the broker-dealer. The broker-dealer pays the compensation for plan administration and recordkeeping services the recordkeeper provides to the broker-dealer's plan clients. Is the compensation paid by the broker-dealer to the recordkeeper "eligible indirect compensation?"
  10. A recordkeeper and an unaffiliated insurance company enter into an "alliance" arrangement similar to the alliance arrangement described in Q9. Under this version of an alliance arrangement, an insurance company agent offers the plan investments through a group variable annuity or other insurance products and also introduces the recordkeeper's service offering to prospective plan clients. The plan has a separate contract or arrangement with the insurance company and with the recordkeeper. The insurance company pays from its general assets compensation to the recordkeeper for plan administration and recordkeeping services the recordkeeper provides to plans with investments in insurance contracts issued by the insurance company, which may be flat per participant fees or asset-based fees based on the value of plans' investments in the insurance contracts. Do the amounts paid to the recordkeeper by the insurance company constitute eligible indirect compensation?
  11. Should float income on an account holding the assets of one plan be treated as direct or indirect compensation for Schedule C reporting purposes?
  12. Will disclosure of float income sufficient to satisfy the guidance in Field Assistance Bulletin 2002-03 meet the requirements of the alternative reporting option?
  13. What rules govern the determination of the services or providers included in the scope of a bundled arrangement for purposes of Schedule C reporting?
  14. What is an example of fees that are required to be broken out regardless of whether they are part of a "bundle?"
  15. Where the only compensation received by a service provider is "eligible indirect compensation" and all of the disclosures necessary to satisfy the alternative reporting option have been provided, is it necessary to complete any information on Schedule C regarding that service provider other than identifying the person providing the disclosures on Line 1?
  16. Does Part I, Line 3 of the Schedule C require reporting with respect to sources of indirect compensation if the compensation is "eligible indirect compensation?"
  17. If a service provider receives eligible indirect compensation (for which the disclosures have been made) and either direct compensation or indirect compensation that is not eligible, does Line 2(h) of Part I apply to the portion that is eligible indirect compensation?
  18. Must the service provider receiving "eligible indirect compensation" be the person who provides the disclosures needed to meet the alternative reporting option?
  19. If more than one person provides the same required disclosure for eligible indirect compensation, must all persons providing the disclosure be identified?
  20. When identifying the person who provided the required disclosures for the Schedule C alternative reporting option, must the name of an individual be provided?
  21. Are insurance contract "wrap fees" considered "eligible indirect compensation" for purposes of the alternative reporting option on Schedule C?
  22. Some insurance companies provide a "net rate" investment product where an investment contract is combined with plan recordkeeping, trusteeship, and similar services. Instead of charging fees for those services, the insurer credits the plan's investment in a stable value option with interest at a crediting rate that is "net" of the insurer's expenses and costs determined based on the overall experience of the insurer's general account. Is the portion of the insurance company's expenses and costs used to reduce the crediting rate reportable indirect compensation even though it is calculated based on the overall experience of the general account? If so, can these amounts be treated as eligible indirect compensation?
  23. Is the spread earned by a broker on principal transactions involving the plan "eligible indirect compensation?"
  24. May a plan administrator use a formula for reporting indirect compensation on the Schedule C that is required to be specifically reported on Line 2?
  25. If a service provider discloses a formula used to determine its indirect compensation, is the plan administrator required to calculate or estimate dollar amounts from the formula for purposes of Schedule C reporting (to the extent that compensation described by a formula is not eligible indirect compensation)?
  26. Plan administrators are not required to report on Schedule C information with respect to service providers receiving less than $5000 in total compensation (direct and indirect) from the plan. Schedule C, Part I, Line 2 states that service providers should be reported in descending order of compensation. Are plan administrators required to estimate a service provider's compensation for purposes of determining whether to include information about a service provider on Form 5500, or for purposes of reporting service providers in descending order of compensation on Part I, Line 2?
  27. What guidelines apply where service providers elect to provide an "estimate" of compensation?
  28. If a service provider provided the plan administrator with an estimate of its indirect compensation or a formula used to calculate its indirect compensation, but later determines a dollar amount for the compensation it received, does the plan administrator need to obtain an updated disclosure of the dollar amount in order to be able to rely on the Schedule C alternative reporting option?
  29. Can a recordkeeper satisfy the alternative reporting option for eligible indirect compensation by furnishing the plan administrator with prospectuses, brokerage fee schedules, the SEC Form ADV, or other already available documents prepared and provided to the administrator for separate purposes, or must it create its own written disclosure document?
  30. For purposes of satisfying the "written disclosure" requirement for the alternative reporting option, is electronic disclosure such as e-mail or other web-based technology satisfactory?
  31. Do the disclosures regarding "eligible indirect compensation" need to be provided at least annually in order for the alternative reporting option to be available?
  32. Will post-trade confirmation serve as adequate written disclosure of brokerage fees and commissions for purposes of the alternative reporting option?
  33. For Schedule C reporting purposes, where a service provider has received free attendance at a conference or seminar the constitutes reportable indirect compensation, is it adequate to report payments for meals, hotel, transportation costs, and other individual expenses? Must the plan administrator also report that portion of the expenses attributable to every conference attendee for costs such as guest speaker fees and other conference overhead?
  34. If a plan is required to report non-monetary compensation received by a service provider because the amount involved exceeds the Schedule C exclusion for occasional non-monetary compensation of insubstantial value, do gifts of less than $10 need to be included?
  35. If a person providing services to the plan is provided a meal or other entertainment based on a general business relationship that includes both ERISA and non-ERISA business, is it required to be reported on the Schedule C?
  36. If a person receives compensation that is reportable on Schedule A and compensation that is reportable on Schedule C, does the compensation that must be reported on Schedule A also be reported on Schedule C?
  37. If a plan sponsor pays a third-party service provider on the plan's behalf and seeks reimbursement from the plan, should the Schedule C reflect a direct payment from the plan to the service provider and not a payment to the employer?
  38. Where a plan service provider is providing non-plan related investment services to participants, and charging reduced fees for plan related services based on the anticipation of receiving fees from participants for non-plan related services, do the fees for non-plan related investment services need to be reported on the Schedule C?
  39. Do both proprietary soft-dollar compensation (e.g., research prepared by the entity providing brokerage services) and non-proprietary soft dollar compensation (e.g., research prepared by independent/third parties) fall within the definition of "eligible indirect compensation?"
  40. Under what circumstances is a service provider expected to be identified on Schedule C for failing to provide information necessary to complete the Schedule C?

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