FIS Relius
Schedule C – Part 5; Eligible Indirect Compensation 3/18/2010
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This is another in our continuing series of technical updates dealing with the revised Schedule C to Form 5500. A previous update addressed the difference between direct and indirect compensation. This update will take a closer look at one type of indirect compensation, eligible indirect compensation.

Q-1 What is eligible indirect compensation (EIC)?

EIC is indirect compensation (compensation paid for services to the plan by someone other than the plan or the employer) which falls in one of these categories:

  • Fees or expense reimbursements charged to an investment fund and reflected in fund’s value or return on investment
  • Finder’s fees
  • “Soft dollar" revenue
  • Brokerage commissions
  • Other transaction based fees for transactions involving the plan that weren’t paid directly by the plan or sponsor

Q-2 What is the difference between EIC and indirect compensation in general?

EIC is a subset of indirect compensation. Indirect compensation not described in Q-1 is not EIC. For example, suppose a recordkeeper collects 10 basis points of 12b-1 and sub-transfer agency fees from a mutual fund in which the plan invests. Assuming the proper disclosures are made, the basis points collected by the recordkeeper are EIC because the fees are reflected in the fund’s value. However, assume further, the recordkeeper, from the fees collected pays a TPA $10,000 for 5500 preparation and compliance testing. The fee paid to the TPA does not fit into any of the categories shown. Thus, it would be indirect compensation but would not be EIC.

Q-3 Why does it matter if a payment is EIC?

An alternative reporting system is available for EIC. The alternative reporting system is much easier to use. The alternative reporting system is not available for indirect compensation which is not EIC.

Q-4 Does all EIC qualify for the alternative reporting system?

No. To qualify, the Plan Administrator (as opposed to the TPA) must have received written materials which disclose:

  • The existence of the EIC
  • The services or purpose for which the EIC was paid
  • The amount of EIC, an estimate of the amount, or the formula used to compute the amount (e.g., 5 basis points)
  • Who paid and received the EIC

Q-5 Who must give the Plan Administrator these written materials?

Anyone. It does not matter. Likely, the Plan Administrator will receive the information from the EIC recipient or payor or some other service provider, such as a broker.

Q-6 How does a plan report a service provider who receives only EIC if the appropriate disclosures are made?

On line 1 of the return, the plan lists the party which made the disclosures. If more than one party made the disclosures, the plan needs to list only one of them. If the service provider does not receive any compensation (direct or indirect) other than the EIC, the plan completes only line 1 for the service provider.

For example, suppose a recordkeeper will receive a 12b-1 fee of 8 basis points, and a broker will receive specified commissions. The mutual fund involved discloses both types of payments to the plan administrator. The plan can simply list the mutual fund as the person providing the information. The plan must also state the EIN or address of the fund.

Q-7 How does a plan report a service provider who receives both EIC and other direct or indirect compensation?

The plan must report the service provider on line 2 of Schedule C for the direct and/or other indirect compensation. Element (f) of line 2 is a yes/no question: “Did indirect compensation include eligible indirect compensation, for which the plan received the required disclosures?" The plan would answer yes to this question (on the line for the service provider) to report that there was EIC. No further reporting of the EIC is necessary. Specifically, the plan does not report the amount of the EIC. If the service provider is a key service provider, the plan does not report the EIC on line 3.

Q-8 If a plan wishes to avoid determining if compensation is EIC, can it simply report the EIC as it does all other indirect compensation?

Yes. The alternative reporting system (described in Q-6 and Q-7) is an optional system. If the plan wishes to report the EIC fully, as the plan does other indirect compensation, that is an acceptable option. The plan can use the alternative system for some EIC payments and not for others.

Q-9 Can the written disclosures be provided electronically, via email or the web?

Yes. However, there must be a record of receipt of the materials and the plan must retain these records for 6 years after filing the 5500.

Q-10 Can disclosures the plan already receives satisfy the written disclosure requirement?

Yes. For example, the DOL FAQs indicate that a post-trade confirmation may have the information needed to constitute disclosure of a brokerage fee. Moreover, a prospectus or brokerage fee schedule could provide the disclosures as long as the party giving the disclosures informs the plan administrator that these documents are intended to satisfy the alternative reporting system (in addition to serving other functions), and references the sections of the document that contain the required information.

Schedule C samples and FAQs
Confused about how to complete a Schedule C? 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. In addition, we will provide attendees with the written responses to the 40 FAQs generated from our Schedule C webcasts.

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.

401(k) Plan Workshop – 22 cities, March - May
Prototype and volume submitter restatements for 401(k) plans, as well as emerging opportunities for growing Roth accounts should make 2010 a challenging year. Many employers are looking to address this year’s challenges by revisiting their plan designs and options. This workshop can help prepare you and your organization for these changes and more.

In many locations, the programs are offered back-to-back. Early registration and multi-program discounts are available. Visit our Web site now for links to additional details, dates/locations, online brochure, and to register online.