Substantial changes to the Form 5500 return and the filing method become effective for the 2009 plan year. These changes will require plan sponsors to update data collection methods and implement new procedures for electronic filing. Calendar year plans have an August 2 deadline to submit their 2009 Form 5500, with its revised and expanded Schedule C (discussed below in detail), unless those plans have received a October 15 deadline extension.

Electronic Filing Is Now Required for all Form 5500s

All Form 5500s will have to be filed electronically under a new Department of Labor (DOL) electronic filing system called EFAST2. Even if your Form 5500s were previously filed electronically, you must switch to the new EFAST2 system. Form 5500 returns submitted through EFAST2 will appear on a new public disclosure website within approximately 24 hours of your submission.

In addition, all amended returns (including amended returns for years prior to 2009) will have to be filed electronically under the new system. There is a very limited exception for amended 2008 returns originally filed on paper. Unlike prior years, the entire Form 5500 must be resubmitted electronically with an amended return.

The EFAST2 process requires that electronic credentials be obtained for plan sponsor and plan administrator signers and, depending on the method you use to prepare and file the Form 5500, you may have to get preparer and transmitter credentials also. The DOL requires that each signer must have electronic credentials that may not be shared as they were under the prior EFAST system.

Even though all Form 5500s will be filed electronically now, plan sponsors are still required to maintain on file a fully executed paper copy.

Changes to Form 5500 and Schedules

Numerous changes have been made to the Form 5500 and related schedules. The most significant changes have been made to a greatly revised and expanded Schedule C.

Schedule C has undergone extensive changes to provide more detailed information about plan expenses-both direct and indirect-which is intended to result in greater transparency and disclosure. 2009 is the first plan year for expanded reporting of direct and indirect compensation. In the past, only the top 40 service providers receiving $5,000 or more in total compensation were reported on Schedule C. The 2009 Schedule C requires that all service providers receiving $5,000 or more be reported. Fiduciaries and “Enumerated Service Providers” receiving more than $1,000 in indirect fees (including gifts, awards, trips, etc.) must also be listed on the Schedule C. In order to capture all reportable compensation, the 2009 Schedule C has a new and larger list of service codes, disclosing the relationship of the service provider to the plan. Note: Small plans (less than 100 participants) are not required to file Schedule C.

The biggest challenge may be understanding how plan expenses are defined. The 2009 Schedule C defines fees and compensation as either “direct” or “indirect,” which are further broken down between “monetary” or “non-monetary” fees. Some fees may be difficult to identify, especially if they are lumped into a “bundling” arrangement and need to be broken out. See below for a discussion of direct and indirect compensation that must be reported.

What is Direct and Indirect Compensation That Must be Reported on Schedule C

All service provider compensation of at least $5,000 is reportable on Schedule C if it “includes money and any other thing of value (for example, gifts, awards, trips) received by a person, directly or indirectly, from the plan (including fees charged as a percentage of assets and deducted from investment returns) in connection with services rendered to the plan or the person’s position with the plan.” Form 5500 preparers will need to change data collection methods to capture the indirect service provider compensation.

Direct compensation is payment made by the plan (via the plan trust or participant accounts) for services rendered by the plan or because of a person’s position with the plan. Typically, direct payments of fees and expenses are found on the trust statements. Fees and expenses paid directly by the plan sponsor are not reported on Schedule C.

Indirect compensation is compensation received from sources other than directly from the plan or plan sponsor for services rendered to the plan or because of a person’s position. Examples of indirect compensation include:

• fees or expense reimbursements from mutual funds or an insurance company;
• 12b-1 distribution fees;
• sub-transfer agency fees;
• shareholder servicing fees;
• finder’s fees;
• float revenue;
• brokerage commissions; or
• non-monetary compensation such as trips, gifts or awards to persons for their role with a plan.

Indirect compensation is then divided into two categories for the Schedule C: eligible indirect compensation and ineligible indirect compensation.

Eligible indirect compensation is substantially easier to report on the Schedule C and includes most types of indirect compensation provided the plan sponsor is given written materials that disclose:

• the existence of indirect compensation;
• the services provided for the indirect compensation;
• an amount or estimate of the indirect compensation or a formula to compute it; and
• the identity of who is paying and who is receiving the indirect compensation.

Indirect compensation that does not meet the requirements for eligible indirect compensation is most likely to be non-monetary gifts, indirect compensation that is not related to the plan’s investments, and amounts for which the necessary written disclosures have not been made. The information reported on the Schedule C about ineligible indirect compensation is more extensive and similar to the information that must be disclosed to plan sponsors in order for indirect compensation to be considered eligible indirect compensation.

We are available to provide assistance to you in your efforts to comply with these new reporting requirements.

By Jeffrey C. Rambach, jrambach@dsda.com