Department of Labor Issues Q&As on Form 5500 Schedule C Reporting for 2009

The Schedule C accompanying the Form 5500 for the 2009 plan year for large plans will be markedly different from the Schedule C previously required. On November 16, 2007, the Department of Labor (“DOL”) published a new Schedule C, effective for the 2009 plan year, which requires significantly more disclosure of service provider fees and compensation. On July 14, 2008, the DOL published additional guidance on the Schedule C requirements in the form of 40 Frequently Asked Questions (“FAQs”).

While the new Schedule C for the 2009 plan year is not generally due until 2010, plan sponsors and service providers should familiarize themselves with the new reporting requirements in order to be well prepared to comply by the required date.

The New Schedule C

The new Schedule C disclosure requirements are intended to increase transparency regarding fees and expenses paid by employee benefit plans, and to ensure that plan officials obtain the information they need to assess the reasonableness of compensation paid for services rendered to the plan.

Schedule C must be attached to the Form 5500 filed for a large pension or welfare benefit plan, or a direct filing entity (e.g., common and collective trust), to report persons who rendered services to the plan and received, directly or indirectly, $5,000 or more in reportable compensation in connection with the services provided to the plan, or in connection with their position with the plan. Direct compensation includes payments made directly by the plan for services rendered to the plan or because of a person’s position with the plan. Examples of direct compensation include direct payments by the plan out of a plan account, charges to plan forfeiture accounts, and direct charges to plan participant individual accounts. Payments made by a plan sponsor that are not reimbursed by the plan are not subject to Schedule C reporting requirements. Compensation received by a service provider in connection with services provided to the plan or in connection with its position with the plan that is not received directly from the plan or plan sponsor is reportable as indirect compensation. Examples of reportable indirect compensation include sub-transfer agency fees, shareholder servicing fees, account maintenance fees, 12b-1 distribution fees, finder’s fees, float revenue, brokerage commissions, and soft dollars. The level of disclosure required for a particular service provider depends on whether the service provider received only “eligible indirect compensation” or received compensation other than “eligible indirect compensation.”

Eligible Indirect Compensation

Eligible indirect compensation includes fees or expense reimbursements charged to investment funds and reflected in the value of the investment or in the return on investment (e.g., finders’ fees, “soft dollar” revenue, float revenue, and/or brokerage commissions). For such indirect compensation to be eligible indirect compensation, the plan sponsor must have received written disclosure of the following information:

  • the existence of the indirect compensation
  • the services provided for the indirect compensation or the purpose of the payment of the indirect compensation
  • the amount (or estimate) of the compensation or a description of the formula used to calculate or determine the compensation
  • the identity of the party or parties paying and receiving the compensation

If a service provider received only eligible indirect compensation, the plan sponsor must only identify the person who provided the necessary disclosure regarding the indirect compensation.

Indirect Compensation and Direct Compensation

For those persons who received direct compensation or indirect compensation that does not qualify as eligible indirect compensation, more detailed disclosure must be made. Such service providers must disclose the name, address and EIN of the service provider, the service code describing the services provided to the plan, the service provider’s relationship to the plan, the amount of direct compensation paid by the plan and the amount of indirect compensation received (or alternatively, the formula used to determine the amount of indirect compensation).

FAQs Additional Guidance

The DOL received numerous questions regarding the new reporting requirements for Schedule C, and the FAQs were published to address many of those questions. Topics covered by the FAQs include the following:

  • requirements for the limited reporting of eligible indirect compensation
  • reporting compensation provided through a bundled arrangement or an “alliance” arrangement
  • reporting of float income
  • reporting requirements for a service provider who received both eligible indirect compensation and indirect compensation that does not constitute eligible indirect compensation
  • use of a formula or an estimate to report indirect compensation
  • methods for satisfying the disclosure requirement for eligible indirect compensation (e.g., electronic disclosure)
  • reporting of non-monetary compensation (e.g., gifts, entertainment) received by service providers

Service Provider Failure or Refusal to Provide Information

Part II of Schedule C requires a plan sponsor to disclose identifying information for each service provider who failed or refused to provide the information necessary to complete the Schedule C. In recognition of the difficulties many service providers face in order to supply their employee benefit plan clients with the information necessary to comply with the new reporting requirements of Schedule C, the DOL provides some transition relief. For the 2009 plan year, plan administrators will not be required to list a service provider on Part II if the plan administrator receives from the service provider a statement that the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion, and despite such efforts the service provider was unable to complete the changes in time to provide the information for the 2009 plan year.

The full text of the FAQs can be found here.

Please contact us for more information on meeting these new requirements.