FIS Relius
Schedule C: Part 8 – Bundled Service Arrangements 4/13/2010
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This is another in our continuing series of technical updates on the new Schedule C. This update builds on earlier updates, which will be linked throughout the article. This update deals with the special rules for bundled service arrangements (BSAs). The 5500 instructions provide special rules which can simplify Schedule C reporting of BSAs.

Q1 What is a bundled service arrangement (BSA)?

The Schedule C instructions describe two types of BSAs. In one, a plan hires a single company (the “main provider") to provide a range of services. The main provider may perform these services directly, or may use subcontractors or affiliates to provide some or all of the services. Payments to the main provider are direct compensation.

Example 1: Suppose Plan X hires MainCo to provide investment advice, trustee, and recordkeeping services. MainCo engages TrustCo and RecordCo to provide the trustee and recordkeeping services, respectively. MainCo will perform the investment advisory services itself. TrustCo is affiliated with MainCo. RecordCo is not. X plays a flat fee to MainCo, which in term pays TrustCo and RecordCo for their services. This is a BSA. X’s total payment to MainCo is direct compensation. MainCo’s payments to RecordCo and TrustCo are indirect compensation, but are not eligible indirect compensation (EIC).

A second type of BSA involves an investment provider which, in addition to providing a range of services to a plan, either directly or through subcontractors or affiliates, also provides investment products.

The instructions leave the definition of BSA somewhat vague. This is deliberate. The FAQs state that “there is flexibility in determining what services or providers are included as part of a bundled arrangement."

Q2 How does a plan report a BSA on Schedule C?

Unless an exception applies, the plan ignores the indirect compensation to the “second tier" providers (i.e., those service providers who receive compensation from the bundled service provider). In Example 1, the plan must report the direct compensation to MainCo (the total fee paid), but does not need to report the (other) indirect compensation to TrustCo and RecordCo.

Perhaps it is easiest to think of the BSA as a cheeseburger. When you order a burger (as opposed to buying separate ingredients and preparing the burger yourself) you pay a fixed price for the burger as a whole. You don’t pay 25 cents for each bun, and 50 cents for each patty. With a BSA, we simply report the price of the whole arrangement (the cheeseburger, ready to eat) without worrying about the costs of the individual items.

Q3 What exceptions apply to the BSA rule?

There are two exceptions to the special treatment of BSA. If a payment falls within either of the exceptions, then Schedule C must report the payment, either as eligible indirect compensation (EIC) (assuming the plan administrator receives the needed disclosures) or other indirect compensation (OIC).

The first exception applies to fees separately charged against a plan’s investment (e.g., investment management fees, float revenue, and other asset-based fees, such as shareholder servicing fees, 12b-1 fees, and wrap fees if charged in addition to the investment management fee). The plan must report these fees separately.

Example 2: Suppose a mutual fund engages a TPA to provide shareholder services, recordkeeping, and compliance services to a plan. The fund charges a shareholder services fee and pays that fee to the TPA. While this is a BSA, it falls within the first exception, and Schedule C must report the payment to the TPA. Fortunately, the payment is EIC and reportable under the alternative reporting system if the plan administrator receives the appropriate disclosures.

Example 3: Assume the same facts as Example 2, except the fund does not impose a separate shareholder service charge. Instead, the fund pays the charge out of its general “expense load." The payment is a BSA (because the fee is not separately charged) and does not fall within the first exception. Schedule C does not need to report the payment to the TPA.

The second exception is limited to key service providers. If a payment to a key service provider consists of commissions and other transaction based fees, finders’ fees, float revenue, soft dollars and other non-monetary compensation, the second exception applies and the plan must report the compensation. This is the exclusive list of indirect compensation the plan must report regarding a key service provider.

Example 4: A mutual fund pays commissions to a broker who handles transactions involving the plan. A person who provides brokerage services is a key service provider, and commissions are among the fees to which the exception applies. While this is a BSA, the second exception applies and the plan must report the indirect compensation to the broker. This would be EIC, reportable under the alternative reporting system if the plan administrator receives the appropriate disclosures.

Example 5: Continuing Example 1, the payments to TrustCo and RecordCo are payments to key service providers. However, the payments are not commissions, transaction-based fees, or other fees described in the second exception. Therefore, the second exception does not apply. The plan does not need to report the payments.

Q4 If Schedule C does not need to report indirect compensation under a BSA to a given service provider, and the provider receives additional direct or indirect compensation, does the BSA compensation nonetheless count in determining if the service provider has (1) at least $5,000 of total compensation reportable on Schedule C, or (2) at least $1,000 of OIC reportable on line 3?

No. If the BSA rule applies, it is as though the service provider did not receive the BSA indirect compensation.

Example 6: Continuing Example 1, assume RecordCo receives direct compensation of $3,000 from Plan X for loan processing fees, in addition to the payment RecordCo receives from MainCo. Because the MainCo payment comes under the BSA rule, the plan disregards the payment altogether. The plan takes into account only the $3,000 direct compensation to RecordCo. Because that payment is less than the $5,000 threshold, the plan does not report RecordCo on Schedule C.

Q5 Is there overlap between the alternative reporting system and the BSA rules?

Yes. Many payments which a plan would not need to report because they fall within the BSA rules are EIC which can be handled under the alternative reporting system if the plan administrator receives the appropriate disclosures. The plan has the choice in such a case of:
1. Not reporting the payment at all,
2. Using the simplified reporting of the alternative reporting system (for EIC), or
3. Reporting the payments anyway under the OIC rules.

Obviously, these choices are ranked in order of simplicity.

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.