The revised schedule C requires plans to report both direct and indirect compensation paid to service providers. This Update will discuss the differences between the two.

Q-1 What is direct compensation?

Direct compensation is a payment the plan (including ERISA recapture account or forfeiture account) makes to a service provider for services rendered to the plan, or because of a person’s position with the plan. The term also includes an expense the employer pays but the plan reimburses.

Q-2 Does it make a difference in determining direct compensation how the plan allocates an expense among participant accounts?

No, it makes no difference. For example, direct compensation includes expenses allocated as a general plan expenses charged against all participants (e.g., proportionate to participants’ account balances); expenses charged against a forfeiture account; and expenses, such as distribution and loan fees, which are allocated to the accounts of specific participants.

Q-3 Is all direct compensation reported on Schedule C?

No. Schedule C lists only “reportable" direct compensation. For more information on what is reportable, see Part 2.

Q-4 Does the Form 5500 report direct compensation other than on Schedule C?

Yes. The very nature of direct compensation means that it will almost surely be reported on Schedule H, likely as part of line 2i.

Q-5 What is indirect compensation?

This is one of the most confusing elements of Schedule C. The instructions take over a column of text to define indirect compensation, and then refer the reader to the DOL’s FAQs for further discussion.

The short answer is that indirect compensation is any payment a service provider receives from sources other than direct compensation from the plan or from the plan sponsor, if the compensation was received in connection with services rendered to the plan or the person’s position with the plan. It does not include compensation that would have been received if the provider had not rendered services or the transactions had not taken place, or that cannot be reasonably allocated to transactions or services involving the plan.

The simplest example of indirect compensation would be a situation where Plan X pays Fred $10,000 for recordkeeping and consulting, and Fred pays Ilene $7,500 to do the recordkeeping. The $10,000 payment to Fred is direct compensation. The $7,500 payment to Ilene is indirect compensation. Unless an exception applies, Schedule C reports both payments ($17,500).

Frequently, however, indirect compensation takes a different route. Suppose Plan X invests $5,000,000 in Mutual Fund M. M charges an expense load of 0.40%, or $20,000. M engages Investment Manager I to perform investment advisory services for the fund. M determines that Plan X’s share of I’s compensation is $6,000. While X does not report the $20,000 expense load, it does report the $6,000 indirect compensation paid to I.

Q-6 What mutual fund or other investment fund expenses are indirect compensation?

A given fund may have many ways of paying its service providers, such as asset based fees, sub-transfer agency fees, shareholder servicing fees, account maintenance fees, and 12b-1 distribution fees. Any of these could give rise to indirect compensation. The services to the fund which would be reportable indirect compensation include:

• The fund’s investment adviser asset-based investment management fee,
• Brokerage commissions and fees charged in connection with purchases and sales of interests in the fund,
• Fees related to purchases and sales of interests in the fund (including 12b-1 fees),
• Fees for providing services to plan investors or plan participants such as communication and other shareholder services,
• Fees relating to the administration of the employee benefit plan such as recordkeeping services, Form 5500 return/report filing and other compliance services,
• Finder’s fees,
• Float revenue,
• Brokerage commissions,
• Research (soft dollars), and
• Other transaction based fees received in connection with transactions or services involving the plan.

However, ordinary operating expenses, such as attorneys’ fees, accountants’ fees, and printers’ fees, are not reportable indirect compensation.

Q-7 In the past, Schedule C has reported brokerage commissions only if the broker had investment discretion. Is that still true?

No. The instructions go out of their way to say that brokerage commissions Schedule C can report brokerage commissions whether or not the broker has discretion.

Q-8 How will a plan know what indirect compensation has been paid?

The situation is very much analogous to insurance information on Schedule A. For the most part, the plan does not know unless someone else informs the plan. For Schedule C, the plan must rely upon the investment funds and service providers to disclose this information.

Q-9 Does Schedule H report indirect compensation?

Generally, Schedule H does not directly reflect indirect compensation. Consider, the two examples in Q-5. Schedule H would report the $10,000 direct payment to Fred, but would not report the payment to Ilene. Schedule H would reflect the $20,000 expense load to Fund M as a decreased return on Plan X’s investment, but not as an administrative expense. Schedule H would not otherwise reflect the $6,000 payment to the investment manager.

Q-10 Does it make a difference in completing Schedule C whether an expense is direct or indirect compensation?

Yes, it does. Schedule C reports direct compensation separately from indirect. Additional or alternative reporting requirements may apply to indirect compensation.

Future Technical Updates will discuss direct and indirect compensation, and how they are reported on Schedule C, further.

Schedule C samples
By far, the most significant change in the Form 5500 is the change to the Schedule C. Preparers universally agree on its complexity and the difficulty in determining the proper reporting of fees and expenses. In our Form 5500/EFAST2 Workshop, we will thoroughly explain the new Schedule C. As an added bonus to attendees, we will provide several sample completed Schedules C.

5500 preparer letters
Those who attend our Form 5500/EFAST2 Workshop will receive a selection of sample letters. These are letters a preparer may use in communicating with the employer and others regarding preparation of the Form 5500, including:
1) A letter explaining electronic filing of the Form 5500 and a step-by-step explanation of how to obtain filing signer credentials
2) a letter to the plan’s auditor regarding the importance of a timely audit and how EFAST2 impacts the audit,
3) a letter to the employer informing the employer of the extended due date of the return
4) a letter advising the employer of the public disclosure of the return, and
5) a letter to an employer with a short plan year advising of the return due date.

Form 5500/EFAST2 – 35 cities, March – May
We will discuss these changes and more at our annual Form 5500 workshop. We will discuss all the new filing requirements for 403(b) and qualified plans and all the new information the form requires. This workshop can help you prepare for this transitional year.