This is another in our continuing series of Technical Updates dealing with the revised Schedule C to Form 5500. Update 3 differentiated between direct and indirect compensation. Update 5 analyzed reporting of one type of indirect compensation, eligible indirect compensation (EIC). Update 6 discussed the line 2 reporting of other indirect compensation (OIC). This update will continue that discussion with a look at line 3 of Schedule C.
Q-1 What does a plan administrator report on line 3?
Line 3 reports OIC received by key service providers. It does not report EIC or direct compensation.
Q-2 Who is a key service provider?
Key service providers are fiduciaries and service providers who provide contract administrator, consulting, custodial, investment advisory, investment management, broker, or recordkeeping services. Notice that this is a functional definition. What matters are the services you perform, not the title you give yourself. Investment advisory services include advice to participants and advice to the plan.
Q-3 Is a TPA a key service provider?
This is difficult to answer because different TPAs provide different services. An additional difficulty is that neither the instructions nor the DOL FAQs define the various functions which would make someone a key service provider. So the TPA must ask himself or herself, “Do I perform consulting services as part of the services I provide to this plan?" “What about recordkeeping services?" “Would I characterize myself as a contract administrator?
While the preparation of Form 5500 or performance of routine annual testing probably does not give rise to “consulting" services, there are many TPAs who go well beyond these functions into discussing design alternatives or advising a client on making plan corrections, which would almost surely be consulting functions.
Q-4 Which key service providers does Line 3 report?
Line 3 reports key service providers who received at least $1,000 of OIC from a single source. If a key service provider received at least $1,000 from each of two or more sources, there would be a separate entry on line 3 for each source. By contrast, if a key service provider did not receive at least $1,000 of OIC from a single source, then line 3 would omit the service provider. For example, if all of a key service provider’s indirect compensation was eligible indirect compensation (EIC) reported under the alternative reporting system, the service provider would not appear on line 3.
Q-5 Suppose the plan administrator does not know the amount of OIC a key service provider receives from a given source, but instead knows only a formula (such as 1 basis point). Does line 3 list the service provider?
Yes. In other words, if the plan administrator only has a formula for the key service provider’s OIC, the administrator must assume the key service provider received at least $1,000.
Q-6 Would line 3 list a key service provider whose total reportable compensation is less than $5,000?
No. If the total direct and indirect compensation for a service provider is less than $5,000, Schedule C does not list the service provider at all. Therefore, any service provider shown on line 3 will also appear on line 2, listing providers (key and non-key) who received at least $5,000 of total compensation?
Q-7 What information does line 3 disclose?
There are 5 elements to line 3:
(a) The service provider’s name as it appears on line 2.
(b) The service codes attributable to the compensation reported on line 3. For a discussion of service codes, see Update 4.
(c) The amount of OIC
(d) The name and EIN of the person or firm paying the OIC
(e) A description of the OIC, including any formula used to compute it.
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.
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