# Revision of Annual Information Return/Reports

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URL: https://www.frixlaw.com/law-library/documents/fr%3A07-5521

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** November 16, 2007
- **Citation:** 72 FR 64731

## Text

DEPARTMENT OF LABOR
Employee Benefits Security Administration
DEPARTMENT OF THE TREASURY
Internal Revenue Service
PENSION BENEFIT GUARANTY CORPORATION
RIN 1210-AB06
Revision of Annual Information Return/Reports

AGENCIES:

Employee Benefits Security Administration, Labor, Internal Revenue Service, Treasury, Pension Benefit Guaranty Corporation.

ACTION:

Notice of adoption of revisions to annual return/report forms.

SUMMARY:

This document contains revisions to the Form 5500 Annual Return/Report forms, including the Form 5500 Annual Return/Report of Employee Benefit Plan and a new Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan (Short Form 5500 or Form 5500-SF), filed for employee pension and welfare benefit plans under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986, as amended (Code). The Form 5500 Annual Return/Report forms, including the schedules and attachments, are an important source of financial, funding, and other information about employee benefit plans for the Department of Labor, the Pension Benefit Guaranty Corporation, and the Internal Revenue Service (the Agencies), as well as for plan sponsors, participants and beneficiaries, and the general public. The revisions to the Form 5500 Annual Return/Report forms contained in this document, including the new Short Form 5500, are intended to streamline the annual reporting process, reduce annual reporting burdens, especially for small businesses, update the annual reporting forms to reflect current issues and agency priorities, incorporate new reporting requirements contained in the Pension Protection Act of 2006, and facilitate electronic filing. Some of the forms revisions will apply on a transitional basis for the 2008 reporting year before all of the forms revisions are fully implemented for the 2009 reporting year as part of the switch under the ERISA Filing Acceptance System (EFAST) to a wholly electronic filing system (EFAST2). The forms revisions affect employee pension and welfare benefit plans, plan sponsors, administrators, and service providers to plans subject to annual reporting requirements under ERISA and the Code.

DATES:

Effective January 15, 2008.

FOR FURTHER INFORMATION CONTACT:

Elizabeth A. Goodman or Michael I. Baird, Employee Benefits Security Administration (EBSA), U.S. Department of Labor, (202) 693-8523, for questions relating to the Form 5500, and its Schedules A, C, D, G, H, and I, and lines 1 through 11 of the Form 5500-SF (Short Form 5500), as well as the general reporting requirements under Title I of ERISA; Lisa Mojiri-Azad, Internal Revenue Service (IRS), Office of Chief Counsel, (202) 622-6060, or Ann Junkins, IRS, (202) 283-0722, for questions relating to Schedules SB, MB, and R of the Form 5500, lines 12 and 13 of the Short Form 5500, and the filing of Short Form 5500 instead of the Form 5500-EZ for plans that are not subject to Title I of ERISA, as well as questions relating to the general reporting requirements under the Internal Revenue Code; and Michael Packard, Pension Benefit Guaranty Corporation (PBGC), (202) 326-4080, ext. 3429, for questions relating to Schedules SB and MB of the Form 5500, and lines 13 through 19 of Schedule R, as well as questions relating to the general reporting requirements under Title IV of ERISA. For further information on an item not mentioned above, contact Mr. Baird. The telephone numbers referenced above are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

A. Background

Sections 101 and 104 of Title I and section 4065 of Title IV of the Employee Retirement Income Security Act of 1974, as amended (ERISA), sections 6058(a) and 6059(a) of the Internal Revenue Code of 1986, as amended (Code), and the regulations issued under those sections, impose certain annual reporting and filing obligations on pension and welfare benefit plans, as well as on certain other entities.
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Plan administrators, employers, and others generally satisfy these annual reporting obligations by the filing of the Form 5500 Annual Return/Report of Employee Benefit Plan, including its schedules and attachments (Form 5500 Annual Return/Report), in accordance with the instructions and related regulations.

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Other filing requirements may apply to certain employee benefit plans and to multiple-employer welfare arrangements under ERISA or to other benefit arrangements under the Code, and such other filing requirements are not within the scope of this Notice. For example, Code sec. 6033(a) imposes an additional reporting and filing obligation on organizations exempt from tax under Code sec. 501(a), which may be related to retirement trusts that are qualified under sec. 401(a) of the Code.

The Form 5500 Annual Return/Report is the principal source of information and data available to the Department of Labor (Department or Labor), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) (collectively, Agencies) concerning the operations, funding, and investments of about 800,000 pension and welfare benefit plans. These plans cover an estimated 150 million participants and hold an estimated $4.3 trillion in assets. Accordingly, the Form 5500 Annual Return/Report constitutes an integral part of each Agency's enforcement, research, and policy formulation programs, and is a source of information and data for use by other federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies. The Form 5500 Annual Return/Report also serves as a primary means by which plan operations can be monitored by participants and beneficiaries and by the general public.

On July 21, 2006, the Department published a final rule requiring electronic filing of the Form 5500 Annual Return/Report for reporting years beginning on or after January 1, 2008 (Electronic Filing Rule). 71 FR 41359. Simultaneously with the publication of the Electronic Filing Rule, the Agencies published a notice of proposed forms revisions (July 2006 Proposal) proposing changes to the Form 5500 Annual Return/Report for the 2008 reporting year. 71 FR 41615. On December 11, 2006, the Agencies published a Notice of Supplemental Proposed Forms Revisions (Supplemental Notice). 71 FR 71562. The Supplemental Notice was necessary to make changes to the Form 5500 Annual Return/Report required by the Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780 (2006), enacted on August 17, 2006 (PPA).

The Agencies received 38 comment letters on the July 2006 Proposal,
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and seven comments on the Supplemental Notice. Comments were submitted by various members of the regulated community, including representatives of employers, plans, and plan service providers. Copies of the comments are

posted on the Department's Web site at
http://www.dol.gov/ebsa/regs.

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The Agencies also received a comment letter from the United States Department of Commerce, Economic and Statistics Administration, Bureau of Economic Analysis (BEA), that indicated that the BEA relies on the information collected in the Form 5500 to prepare certain statistics.

After careful consideration of the issues raised by the written public comments, the Agencies decided to adopt the forms largely as proposed, but, in an attempt to strike a balance between ensuring adequate reporting and disclosure to participants, beneficiaries, and the Agencies, on the one hand, and the costs and administrative burdens attendant to the administration and maintenance of employee benefit plans on the other, the Agencies revised some of the annual reporting requirements in response to public comments. The Agencies now are publishing in this Notice the final forms revisions for the Form 5500 Annual Return/Report (including the Short Form 5500), generally effective for the 2009 reporting year (with certain transition changes effective for the 2008 reporting year). Set forth below is a general summary of the public comments received in response to the proposals, changes made in response to those comments, and an overview of the final forms revisions being adopted in this Notice.

The Agencies are printing in this Notice information copies of the 2009 Form 5500, 2009 Form 5500-SF, and 2009 Schedules A, SB, MB, C, D, G, H, I, and R. This Notice also includes information copies of the related instructions, except for the instructions to the Schedule SB and MB and certain new questions on the Schedule R, which the Agencies will publish after the Treasury/IRS develop the underlying substantive guidance under the PPA, and certain instructions relating to electronic filing procedures under the EFAST2 system. Information copies of the forms and the instruction package will also be posted on the Department's Web page at
http://www.dol.gov/ebsa.
Because of the switch to EFAST2 and a wholly electronic filing requirement, the information copies of the 2009 annual return/report forms printed in this Notice are not acceptable for and cannot be used for filing an annual return/report under the EFAST2 system. Once the EFAST2 contract is awarded to a firm to develop the new wholly electronic filing system for the 2009 Form 5500 Annual Return/Report forms, including the Form 5500-SF, the contractor may as part of its development of the new system need to make technical reformatting changes to the forms that may affect the appearance of the forms. Details on any changes to the appearance of the forms and on the wholly electronic filing and processing system, including details on electronic signature requirements, will be available as the contract is awarded and the system development is finalized. Although the paper forms will not be used for filing under the EFAST2 system, the final format of the forms and schedules will be the required format for satisfying disclosure obligations under ERISA, including the plan administrator's obligation to furnish copies of the annual report to participants and beneficiaries on request pursuant to section 104(b) of ERISA.

B. Discussion of the Public Comments

1. Deferral of Forms Revisions and Electronic Filing Mandate to the 2009 Plan Year

A significant number of the commenters, including several large industry groups representing plan sponsors and service providers, asked for a delay in the effective date of the forms changes. A number of the commenters asked for additional time to comment due to work being done to implement new statutory requirements enacted as part of the PPA. Some commenters also suggested that the comment period should be extended to allow more time to address the Schedule C (Service Provider Information) changes due to the significance of the changes in plan fee and expense reporting, the attendant compliance costs, and a desire to evaluate the Schedule C changes in conjunction with proposed regulations the Department has announced it will be publishing under ERISA section 408(b)(2).
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Three different commenters suggested that the effective date for the new reporting requirements for Code section 403(b) plans be delayed until after the IRS publishes its final regulation on Code section 403(b) plans. Some commenters urged that the effective date be extended for the Form 5500 Annual Return/Report changes until 2009 or 2010 at the earliest to allow sufficient time to make necessary changes to comply with the new requirements. One commenter, who requested a delayed implementation date generally for the new forms and electronic filing requirement, suggested an earlier implementation date for the Short Form 5500 as a way of satisfying the PPA requirement of a simplified report for plans with fewer than 25 participants.

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As set forth in the Department's semi-annual regulatory agenda, 72 FR 22845, the rulemaking would amend the regulation at 29 CFR section 2550.408b-2 setting forth the standards applicable to the exemption under ERISA section 408(b)(2) for contracting or making reasonable arrangements with a party in interest for office spaces or services. The proposed amendment is intended to ensure that plan fiduciaries are provided or have access to the information necessary to determine whether an arrangement for services is “reasonable” within the meaning of the statutory exemption, as well as within the meaning of the prudence requirements of ERISA section 404(a)(1)(B).

The proposed revisions to the Form 5500 Annual Return/Report, which include both those set forth in the Agencies' July 2006 Proposal and those in the Supplemental Notice to address changes required by the PPA, are part of the switch under the ERISA Filing Acceptance System (EFAST) to a wholly electronic filing and processing system (EFAST2) that would replace the existing largely paper-based filing system. As part of that e-filing initiative, and as noted above, the Department published the Electronic Filing Rule, establishing an electronic filing requirement for annual reports filed for plan years beginning on or after January 1, 2008. In adopting the final Electronic Filing Rule, the Department responded to public comments seeking a delay in the wholly electronic filing system by agreeing to a one year deferral of the electronic filing mandate from the 2007 plan year to the 2008 plan year. The Department agreed to the deferral in order to facilitate an orderly and cost-effective migration to an electronic filing system by both the Department and the regulated community. Under the final Electronic Filing Rule published in July 2006, the vast majority of filers would have had until at least July 2009 to make any necessary adjustments to accommodate the electronic filing of their annual report because annual reports generally are not required to be filed until the end of the 7th month following the end of the plan year. The timing also provided service providers, software developers, and the Department additional time to work through electronic filing and processing issues.

In evaluating the public comments seeking a further deferral of the implementation of the revised forms and, as a consequence, the electronic filing requirement, the Agencies evaluated the benefits of giving the regulated community more time to transition to the new EFAST2 electronic filing system, keeping in mind the effective dates mandated by the PPA for certain of the annual reporting changes. The Agencies continue to believe it is important for plans, service providers, and the Agencies to have an orderly and cost-effective migration to the EFAST2 electronic filing system. In light of the substantial number of comments expressing concern about needing more time to adjust recordkeeping and other annual reporting systems, the Agencies have decided to defer for an additional

year the implementation of annual reporting forms changes not mandated by the PPA,
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except for a few Schedule R items that the PBGC had determined that it needs to enable it to properly monitor the plans it insures. Thus, the current EFAST filing system will be continued for the 2007 and 2008 plan year filings. This includes the requirements to file the Schedule E, the Schedule SSA, and the IRS Form 5500-EZ, “Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan” (Form 5500-EZ), under the current EFAST system with the Department for the 2007 and 2008 reporting years. Also, as provided in the Electronic Filing Rule, delinquent or amended filings for prior plan years for which paper filing options were available also will be subject to the electronic filing requirement. The deferral of the electronic filing requirement applies to delinquent and amended filings. The Department will provide instructions prior to the inauguration of the system on how those filings are to be made under the electronic filing system.

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It is significant to note that the implementation of the annual reporting form changes not mandated by the PPA has been deferred until after the publication of the IRS final regulations on Code section 403(b) plans.

Under the final regulations, the electronic filing requirement and all of the forms changes, except for those mandated by the PPA and the PBGC's new Schedule R items discussed below, will become effective for all annual report filings made under Part 1 of Subtitle B of Title I of ERISA for plan years (or reporting years for non-plan filings) beginning on or after January 1, 2009.
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The Supplemental Notice explained that the Department believed that the EFAST2 system would satisfy the PPA requirement that the Department make available electronically on its Web site certain actuarial information filed as part of the Form 5500 Annual Return/Report. See PPA § 504, 29 U.S.C. § 104(b). The Department believes that the related provision in the PPA calling for actuarial information to be filed electronically was intended to facilitate the Department's ability to meet its obligation to post the actuarial information on its Web site within 90 days after the information is filed as part of the plan's annual report. The Department believes it can still satisfy the web posting requirement under the current EFAST system without imposing a special electronic filing requirement on defined benefit pension plans for the transition 2008 plan year.

To effectuate the postponement of the electronic filing requirement, the Department, in the final rule being published contemporaneously with this Notice amending its annual reporting regulations, is including an amendment to the Electronic Filing Rule. Specifically, that final rule amends the Department's regulation at 29 CFR 2520.104a-2 to provide that the electronic filing requirement is applicable for plan years beginning on or after January 1, 2009. The vast majority of filers will now have until at least July 2010 to make any necessary adjustments to accommodate the non-PPA required changes (other than the PBGC Schedule R changes) to the form and those required for electronic filing of their annual report because, as noted above, annual reports generally are not required to be filed until the end of the 7th month following the end of the plan year.

Short plan year filings for 2009 plan years and filings for DFEs for 2009 reporting years will be subject to a special transition rule. The instructions to the Form 5500 Annual Return/Report advise filers that the due date for their Form 5500 for a plan year of less than 12 months (short plan year) is the last day of the 7th month after the short plan year ends. For purposes of determining the filing deadline, the instructions state that a short plan year ends on the date of the change in accounting period or upon the complete distribution of assets of the plan in the case of terminated or merged plans. For DFE filings, the instructions provide that DFEs (other than GIAs) must file 2009 return/reports no later than nine and one half months after the end of the DFE year that ended in 2009, and the 2009 Form 5500 must report information for the DFE year (not to exceed 12 months in length). The Agencies historically have permitted short plan year filers and DFEs to use the prior year's forms if the current year forms are not available by the plan's or DFE's filing due date. The Agencies expect that, in some cases, filings for 2009 short plan years and DFE filings for 2009 reporting years (e.g., if the DFE year differs from the 2009 calendar year) may be due during 2009 and before the January 1, 2010, date on which the new EFAST2 wholly electronic filing system is expected to become operational for return/report filing purposes. Plans filing for 2009 short plan years and DFEs filing for 2009 reporting years will have the option of using the 2008 Form 5500 Annual Return/Report forms and filing for 2009 under the current EFAST filing system if they file before the date the new EFAST2 electronic filing system becomes operational. Alternatively, plans whose due date for their 2009 short plan year filing and DFEs whose due date for their 2009 reporting year filing falls before the new EFAST2 system becomes operational but who want to file electronically under the new EFAST2 system will be granted an automatic extension until after the EFAST2 system becomes operational in which to file. The Agencies intend to describe the terms and conditions for the automatic extension in the instructions for the 2008 Form 5500 Return/Report.

a. PPA-Required Actuarial Schedules, Multiemployer Plan Reporting, and Asset Allocation Information

The PPA-required changes in the Form 5500 Annual Return/Report (other than the simplified reporting requirement) are the new actuarial information schedules (Schedules SB and MB), lines 13a and 13b of the Schedule R (identifying information on significant contributors to multiemployer defined benefit plans), lines 14-17 of the Schedule R (additional information related to multiemployer defined benefit pension plans), line 18 of the Schedule R (certain liabilities to participants and beneficiaries under two or more pension plans), and, for multiemployer defined benefit plans only, the new line 7 of the Form 5500 (number of employers with an obligation to contribute to the multiemployer plan).
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To comply with the PPA, these reporting changes are being implemented under the current EFAST system for 2008 plan year annual reports.

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The text of the question on the new line 7 has been revised from that in the July 2006 proposal to exactly match the language in the annual reporting requirement in the PPA.

The Agencies concluded that it would not be cost-effective or practical to create computer scannable versions of the Form 5500 and these schedules to be compatible with the outdated EFAST computer scannable form technology because these forms would have a limited one year useful life under the EFAST system during the transition period before implementation of the EFAST2 electronic filing system. Effective for the 2008 transition year, plans required to file actuarial information must check the box on the Form 5500 to indicate that they are filing a Schedule B, but instead of filing the current Schedule B, they will file Schedule SB or MB (whichever is applicable). The Schedule B will no longer be a valid schedule for 2008 plan year filings. Plan year 2008 Form 5500 Annual Return/Reports filed by pension plans subject to the minimum funding rules must include a Schedule SB or MB and not a Schedule B for 2008 plan years. Filings that include a Schedule B instead of a Schedule SB or MB will be rejected. As to the other PPA-required items (lines 13a, 13b, and 14-18 of Schedule R and line 7 of Form 5500), for

the transition year, filers will be directed in the instructions to include answers to those questions as an attachment to the current Schedule R. Similarly, lines 13c-e (for multiemployer defined benefit plans) and line 19 (asset allocation questions for large defined benefit plans) of the Schedule R also are being implemented on a transition basis for 2008 plan year annual reports. Filers will also be directed in the instructions to include answers to these lines as an attachment to the Schedule R.

The Agencies also changed the 2007 Form 5500 Annual Return/Report instructions for short plan year filings (filings for years of less than 12 months) to accommodate these PPA changes. Specifically, the instructions to the Form 5500 Annual Return/Report historically have advised filers that the due date for their Form 5500 for a plan year of less than 12 months (short plan year) is the last day of the 7th month after the short plan year ends. For purposes of determining the filing deadline, the instructions state that a short plan year ends on the date of the change in accounting period or upon the complete distribution of assets of the plan in the case of terminated or merged plans. The Agencies have permitted short plan year filers to use the prior year's forms if the current year forms for the short plan year are not available by the plan's filing due date. The Agencies expect that, in some cases, filings for 2008 short plan years may be due during 2008 and before the final regulations and instructions for the Schedule SB or MB are available. Since the Schedule B will not be a valid schedule for plan year 2008 filings, filers will not have the option of using the 2007 Schedule B with a 2008 short plan year filing, but will be required to wait until the 2008 Forms are available for filing. The Agencies have indicated in the instructions for the 2007 Form 5500 Annual Return/Report that an automatic extension that will be available for 2008 short plan year filings required to include a Schedule SB or Schedule MB and/or a supplemental attachment to Schedule R.

b. PPA-Required Simplified Reporting for Plans With Fewer Than 25 Participants

As noted in the Supplemental Notice, section 1103(b) of the PPA requires a simplified report for plans with fewer than 25 participants at the beginning of the plan year to be available for 2007 plan year filings, i.e., filings for plan years beginning after December 31, 2006. The Supplemental Notice proposed to satisfy the simplified report requirement for 2008 plan years, i.e., those beginning after December 31, 2007, by implementing the Short Form for 2008 plan year reports under the new EFAST2 system. The Supplemental Notice explained the Agencies' intention for the interim 2007 reporting year to give plans covering fewer than 25 participants that met the conditions for being eligible to file the Short Form 5500 the option of filing an abbreviated version of the current Form 5500 Annual Return/Report for small plan filers. The Supplemental Notice explained that the abbreviated version would largely replicate, within the context of the existing Form 5500 Annual Return/Report structure, the information that would be required to be reported on the proposed Short Form 5500 by allowing certain schedules to be excluded from the filing and requiring only certain line items to be completed on some of the required schedules. With the additional deferral of the electronic filing requirement, this simplified reporting option for plans with fewer than 25 participants will be available for both the 2007 and 2008 plan year filings.

For the 2007 and 2008 plan years, plans with fewer than 25 participants at the beginning of the plan year that meet the eligibility requirements for the Short Form 5500, treating those conditions as if they applied for 2007 and 2008 plan year filings, may file the following as their annual return/report: (1) The entire Form 5500; (2) a Schedule A for any insurance contract for which a Schedule A is required under current rules, completing lines A, B, C, D and the insurance fee and commission information in Part I; (3) if the reporting of actuarial information is required, the entire Schedule B for the 2007 plan year, and the entire Schedule SB or MB (whichever is applicable) for the 2008 plan year; (4) the entire Schedule I; (5) Schedule R identifying information and Part II; and (6) the entire Schedule SSA. The instructions to the 2007 Form 5500 Annual Return/Report explain and 2008 Form 5500 Annual Return/Report will explain, respectively, this simplified reporting option.

Some eligible small plan filers may want to wait until the implementation of the Short Form 5500 for the 2009 plan year in order to avoid having to make changes to their annual reporting systems and procedures for 2007 and 2008 plan year filings and then having to adjust them again to start filing the Short Form 5500 electronically for the 2009 plan year. The above simplified reporting alternative, accordingly, is available for plans that voluntarily choose to take advantage of the option. Plans with fewer than 25 participants may continue to file in accordance with the otherwise applicable small plan filing rules for the 2007 and 2008 plan years. Small plans with 25 or more participants that meet the eligibility requirements must wait until the 2009 plan year to take advantage of the Short Form's simplified reporting.

2. Short Form 5500

The Short Form 5500 was proposed as a new two-page form for small plans (generally, plans with fewer than 100 participants) with secure and easy to value investment portfolios. As set forth in greater detail in the July 2006 Proposal, a plan would be eligible to file the Short Form if the plan: (1) Covers fewer than 100 participants or would be eligible to file as a small plan under the rule in 29 CFR 2520.103-1(d); (2) is eligible for the small plan audit waiver under 29 CFR 2520.104-46 (but not by virtue of enhanced bonding); (3) holds no employer securities; (4) has 100% of its assets in investments that have a readily determinable fair market value; and (5) is not a multiemployer plan.

Commenters on the July 2006 Proposal generally supported the proposed Short Form 5500 as a way to simplify the annual reporting requirements and reduce annual reporting burdens for small plans. The Agencies, accordingly, have decided to adopt the Short Form 5500 largely as proposed with only minor technical revisions to the form and the accompanying instructions.

Two commenters suggested that the Agencies relax the conditions for plans to be eligible to file the Short Form 5500. The commenters noted the requirement in the PPA (enacted after the July 2006 Proposal was published) that Labor and the Department of the Treasury (Treasury) jointly develop a simplified report for plans that cover fewer than 25 employees. One of the commenters suggested that Labor and Treasury use the Short Form 5500 to meet this requirement by eliminating any other eligibility conditions for plans covering fewer than 25 participants. That commenter also suggested that the Short Form 5500 eligibility requirement—that the plan hold 100% of its assets in secure, easy to value investments—be modified so that it tracked the 95% “qualifying plan asset” threshold that currently applies under the Department's regulation at 29 CFR 2520.104-46 for small pension plans to be eligible for the waiver of the general Title I requirement for employee benefit plans to be audited annually by an independent qualified public accountant (IQPA). Two other

commenters objected to the Short Form 5500 and reduced annual reporting for small plans, asserting that small plans, especially those with fewer than 25 participants, are more likely than plans of larger companies to suffer from mismanagement of funds and improper administration. Notwithstanding the PPA mandate to develop a simplified annual report, the commenters urged requiring more detailed reporting for small plans as a way of protecting against such abuses.

The Department of Labor and the Department of Treasury continue to believe, as set forth in the Supplemental Notice, that the requirement in the PPA to provide “simplified” reporting for plans with fewer than 25 participants is satisfied by the simplified reporting scheme in the July 2006 Proposal. In addition, the Department of Labor does not view the PPA provision as a direction from Congress that was intended to preclude the Department from determining that plans with fewer than 25 participants should meet conditions consistent with the purposes of Title I and the PPA to be eligible to file the new simplified report. To the contrary, the Department believes the PPA provision should be read consistently with the authority granted the Department in ERISA section 104(a)(2) and 104(a)(3) to create simplified reports for pension and welfare plans, both of which provisions acknowledge that the Department has such discretion. The Short Form 5500, as proposed, was targeted to provide a simplified report for plans with fewer than 25 participants. Approximately 75% of all plans eligible to file the Short Form 5500 cover fewer than 25 participants and approximately 95% of plans with fewer than 25 participants are estimated to be eligible to file the Short Form 5500. The decision to prohibit multiemployer plans and plans that invest in employer securities from being eligible to use the Short Form 5500 is consistent with the PPA's emphasis on expanding the annual reporting requirements for multiemployer plans and increasing transparency and participant control over employer securities in individual account plans. As under the July 2006 Proposal, even those small plans not eligible to use the Short Form 5500 still would be able to avail themselves of the other simplified reporting options available to small plans under the Form 5500 Annual Return/Report. The commenter's suggestion to eliminate all of the Short Form 5500 eligibility conditions for plans covering fewer than 25 employees therefore has not been adopted.

The suggestion to modify the condition that 100% of the plan's assets are held in investments that have a readily determinable fair market value also is not being adopted. As noted above, the Short Form 5500 conditions already require plans to satisfy the audit waiver conditions in 29 CFR 2520.104-46 to be eligible to file the Short Form. The condition in the audit waiver regulation that 95% of the plans assets be “qualifying plan assets,” focuses on whether the assets are held by a regulated financial institution, The Short Form 5500 condition regarding types of plan investments, in contrast, is based on a premise that certain small plans, by virtue of all of their assets being held by regulated financial institutions and having a readily determinable fair market value, present reduced risks for their participants and beneficiaries. Using any percentage measure for assets with a readily determinable fair market value would create a risk that hard to value assets would be materially undervalued in order to meet the percentage threshold and result in plans with substantial holdings in hard to value assets being eligible to file the Short Form 5500. The Agencies continue to believe that the separate financial information regarding hard to value investments on the Schedule I is important for regulatory, enforcement, and disclosure purposes. The Agencies are not changing this provision because of their concerns that allowing plans with any hard to value assets to use abbreviated annual report filing (i.e., the Short Form 5500) could compromise enforcement and research needs of the Agencies and disclosure needs of participants and beneficiaries in such plans.

3. Code Section 403(b) Plan Reporting

Under the July 2006 Proposal, the limited annual reporting options currently available to Code section 403(b) plans would have been eliminated so that Code section 403(b) plans would be subject to the same annual reporting rules that apply to other ERISA-covered pension plans. Two commenters representing employee benefit plan auditors and administrative service providers were supportive of the Department's proposal and agreed that requiring Code section 403(b) plans to comply with the same annual reporting rules that applied to other ERISA covered pension plans would improve transparency and accountability. Other commenters representing 403(b) plan sponsors and insurance and investment companies opposed the proposal. Those opposing the expanded reporting requirement argued that compliance with the reporting requirement would be both burdensome and costly given the fact that most 403(b) plans are a composite of individual contracts issued to employees by different 403(b) vendors without a central point for administration and recordkeeping. The commenters claimed that there is no record of abuse in the 403(b) plan area that supported the proposed changes. Certain commenters also suggested that different annual reporting rules for Code section 403(b) plans are justified by the fact that the tax exempt employers that sponsor Code section 403(b) plans do not have a tax incentive for sponsoring pension plans for their employees and might be more likely to terminate plans or refuse to sponsor plans based on concerns about administrative costs and burdens.

After evaluating the comments, the Department continues to believe that subjecting Code section 403(b) plans to the same annual reporting rules that apply to other ERISA covered pension plans is consistent with the purposes of Title I of ERISA and the interests of covered participants and beneficiaries. The approach to annual reporting by tax sheltered annuity programs was premised historically on the conclusion that they differed from ordinary pension or deferred compensation plans. Code section 403(b) plans, which date back to 1958, were originally less in the nature of a plan than of an arrangement under which an employer purchased from an insurance company on behalf of an employee an individual annuity contract that could be tailored to the desires and financial means of the individual employee. Because contributions were required to be invested only in annuity contracts or in certain mutual fund custodial accounts, the Department had believed that the regulatory supervision of insured annuity contracts and of regulated investment companies provided much of the disclosure, fiduciary and funding protection afforded by Title I of the Act. The Department also had concluded that because section 403(b) programs may be individually tailored, the reporting and disclosure provisions of Title I could present substantial administrative difficulties for the employer and for the Department. Finally, the Department viewed section 403(b) programs as similar to individual retirement account (IRA) based plans that were granted an exemption from the annual reporting requirements under Title I provided they met certain conditions.

As the IRS indicated in the preamble to the recently published final regulations on Code section 403(b) plans (72 FR 41128, Jul. 26, 2007), various amendments to section 403(b) over the past 40 years have diminished the extent to which the rules governing Code section 403(b) plans differ from the rules governing other employer-based plans, such as arrangements that include salary reduction contributions, i.e., Code section 401(k) plans. The IRS's final Code section 403(b) regulations would impose requirements involving the establishment of a more centralized system of recordkeeping for all Code section 403(b) plans. The establishment and growth since 1978 of 401(k) plans has made the “individually tailored” character of Code section 403(b) plans less distinctive. Section 401(k) plans are often structured as participant directed with multiple investment options offered by separate investment providers, and many plans include brokerage accounts as a way of allowing employees to further tailor the plan to their individual investment objectives and financial means. Developments in the Code section 403(b) plan market have also raised questions about whether regulatory supervision of Code section 403(b) plan vendors under insurance and securities laws provides much of the disclosure, fiduciary, and funding protections afforded by Title I of the Act. In the fiscal years 2002 through 2006, the Department found violations in 78 percent of its investigations of Code section 403(b) plans. Although the predominant issue in these investigations was delinquent employee salary contributions, investigations of Code section 403(b) plans also revealed delinquent employer contributions, imprudence, prohibited uses of assets, and reporting and disclosure violations. The high incidence of improper handling of employee contributions suggests a potentially broader laxity in fiduciary oversight. There are also reports that governmental entities that sponsor Code section 403(b) plans (which generally would be excluded from ERISA as governmental plans) are concerned about undisclosed fees, penalties, and restrictions in their Code section 403(b) plans and are making demands for additional disclosures.
See, e.g.,
California Assembly Bill 2506, signed Sept. 29, 2002 (codified at Cal. Education Code secs. 25100-25115).

The Department believes that the annual report requirements, including an audit by an IQPA, provide important oversight of the Code section 403(b) plan's internal control structure and overall operations. The Department believes that preparing the financial statements and schedules as part of the annual report in compliance with the Department's requirements for reporting and disclosure under ERISA provides participants with greater assurance that the plan administrator or other authorized parties have properly monitored the financial condition and operation of the plan. The impact of having to meet the same annual reporting requirements applicable to other ERISA-covered plans would be substantially less burdensome for small tax-exempt employers, which generally should be eligible for the small plan audit waiver and for filing the Short Form 5500.

While the new annual report requirements may result in additional costs to a Code section 403(b) plan, these reporting requirements would only apply to Code section 403(b) plans that are subject to Title I of ERISA and would subject those plans only to the same annual reporting requirements that apply to other ERISA-covered pension plans. In such cases, the administration and management of the Code section 403(b) plan have already been subject to ERISA's general fiduciary obligations. Such plans should, therefore, already have an administrative structure in place to ensure compliance with various Title I requirements, such as having a written plan document, furnishing summary plan descriptions and other ERISA required disclosures to participants and beneficiaries, and maintaining an adequate recordkeeping system so that the plan fiduciaries can prudently manage the plan and monitor plan service providers. In the Department's view, the process of preparing an annual report reinforces a recordkeeping and monitoring discipline on plan officials that facilitates better fiduciary compliance. In that regard, the Department does not believe that it would be helpful to adopt the suggestion by one commenter to have Code section 403(b) plans answer only a single or limited number of questions focused just on timely transmission of employee salary reduction contributions to the plan. The Department does not believe that continuing a general exemption from the audit requirement for Code section 403(b) plans subject to Title I annual reporting requirements is appropriate.

As noted in the preamble to the July 2006 Proposal, small Code section 403(b) plans (generally covering fewer than 100 participants) should be able to meet the conditions for being exempt from the audit requirement and be eligible to file the proposed Short Form 5500.
7

Thus, relative to the current requirements, the final rule provides significant annual reporting and audit relief for small tax exempt employers. In that regard, in the Department's view, Code section 403(b) plans that were eligible to file as a small plan under 29 CFR 2520.103-1(d) in the previous year and that have participant counts of less than 121 at the beginning of the 2009 plan year can file as small plans under the new filing rules.

7
One commenter expressed concern that some Code section 403(b) investments might not meet the Short Form 5500 eligibility requirement that 100% of the plan's assets be held in investments that have a readily determinable fair market value. The instructions published with the July 2006 Proposal specifically provided that investments in mutual fund shares and insurance contracts for which valuation information is provided by the insurer at least annually were assets that had a “readily determinable fair market value” for purposes of the Short Form 5500 eligibility conditions. Those instructions are carried over into the instructions to the final Short Form 5500.

One commenter that supported the proposal to apply generally applicable annual reporting rules to Code section 403(b) plans suggested that interim relief may be needed because auditors may refuse to take on initial engagements because records from prior years may not be adequate for current year audit purposes. Although Code section 403(b) plans have not yet been subject to an audit requirement as part of the annual reporting process, as noted above, fiduciaries of such plans must keep records under ERISA section 107 to verify that they are in fact eligible to file as Code section 403(b) plans and have a general fiduciary obligation to keep adequate records to monitor the plan and ensure compliance with the fiduciary and other substantive requirements of Title I of ERISA.
8

Further, Code section 403(b) plans are required to maintain various records in order to comply with Code requirements including, for example, discrimination testing, required distributions and compliance with maximum contribution limitations. Despite the existing recordkeeping requirements, the Department recognizes that auditors may face difficulties in providing an unqualified opinion in their initial audits of Code section 403(b) plans. In that regard, the final forms changes defer the reporting year to which this requirement applies for an additional year from that in the proposal. This Notice is thus being published over a year before the first plan year for which plan audits would be required, and over two years before the plan audits themselves would likely be commenced. In light of the extended lead time the publication date gives plans to make changes to their recordkeeping practices and make certain they have access to the necessary records in anticipation of the audit for the 2009 plan year, in the Department's view, it would be premature at this point to announce general transitional relief from the audit requirement. The Department will, however, remain open to reconsidering the issue to the extent developments suggest that a transitional enforcement policy or other transitional relief would be appropriate to address problems caused by lack of familiarity with the audit process or is needed to facilitate a smoother transition to the new annual reporting regime by Code section 403(b) plans.

8
One commenter argued that Code section 403(b) plans covered by ERISA have no ERISA section 107 recordkeeping obligations under Title I because they file under an alternative method of compliance under section 110 of ERISA, not under a simplified report or exemption under section 104 of ERISA, and ERISA section 107 only requires administrators to keep records necessary to verify the information actually filed on the Form 5500 when it is filed as an alternative method of compliance. ERISA section 107 provides that “[e]very person subject to a simplified requirement to file any report or to certify any information therefor under this title or who would be subject to such a requirement but for an exemption or simplified reporting requirement under section 104(a)(2) or (3) of this title, shall maintain records on the matters of which disclosure is required which will provide in sufficient detail the necessary basic information and data from which the documents thus required may be verified, explained, or clarified, and checked for accuracy and completeness. . . .” Accepting the commenter's argument would lead to the anomalous result that large Code section 403(b) plans would have very limited recordkeeping obligations under ERISA section 107, but plans exempt from any Form 5500 filing requirement would be required to keep records necessary to verify the information that would be required to be

filed under section 103 of ERISA. In any event, all Code section 403(b) plans filing a Form 5500 under the limited reporting provisions available to Code section 403(b) plans would have to keep records under ERISA section 107 to verify that they are in fact a pension plan or arrangement using a tax deferred annuity arrangement under Code section 403(b)(1) and/or a custodial account for regulated investment company stock under Code section 403(b)(7) as the sole funding vehicle for providing pension benefits and would have a general fiduciary obligation to keep records adequate to ensure compliance with the fiduciary and other substantive requirements in Title I of ERISA.

A few commenters contended that the “universal availability” requirement applicable to Code section 403(b) plans under the Internal Revenue Code and Treasury Department regulations will unfairly result in Code section 403(b) plans with only a small number of active participants being subject to the large plan audit requirement because all eligible employees are counted as covered participants. The Department notes that Code section 401(k) plans are currently subject to a similar rule where all employees who are eligible to make salary reduction contributions are required to be counted as participants regardless of whether they in fact make any contributions. The Department also expects that, like Code section 401(k) plans, a substantial percentage of large Code section 403(b) plans should be eligible for limited relief from the full audit requirement by taking advantage of the limited scope audit option available under the Department's regulation at 29 CFR 2520.103-8.

Some additional technical changes were made to the final forms to make it clear that certain annual reporting options available to Code section 401(k) plans are also available to Code section 403(b) plans. Specifically, the Schedule H instructions have been modified to provide for aggregate reporting on Lines 4i (Schedule of Assets Held for Investment Purposes) and Line 4j (Schedule of Reportable Transactions) for individual annuity contracts and custodial accounts in Code section 403(b) plans as is currently permitted for participant-directed accounts in Code section 401(k) plans. In addition, the Schedule A instructions have been expanded to make clear that the current rule allowing filers to report a group of individual policies issued by the same insurer on a single Schedule A would apply for Code section 403(b) individual annuity contracts. At the request of one commenter, Line 9 of the Form 5500 has been changed to make clear that Code section 403(b) plans that are funded with and pay benefits through Code section 403(b)(7) “custodial accounts” should check “trust” for both funding and benefit arrangement.

Finally, in light of the additional annual reporting obligations associated with maintaining a Code section 403(b) plan that is covered by Title I, several commenters stated that more guidance was necessary on the Department's safe harbor regulation at 29 CFR 2510.3-2(f) to assist plans in determining whether they were covered by Title I of ERISA. The commenters stated that this guidance was especially important in light of Treasury's then anticipated issuance of final regulations at 72 FR 41128, TD 9340 reflecting legislative changes made to Code section 403(b) since the existing regulations were adopted in 1964 and incorporating interpretive positions that Treasury has taken in other guidance on Code section 403(b). The Department's safe harbor at 29 CFR 2510.3-2(f) states that a program for the purchase of an annuity contract or the establishment of a custodial account in accordance with provisions set forth in Code section 403(b) and funded solely through salary reduction agreements or agreements to forego an increase in salary, are not “established or maintained” by an employer under section 3(2) of ERISA, and, therefore, are not employee pension benefit plans subject to Title I, provided that certain factors are present. The Department agrees that it is important for Code section 403(b) plans to be able to determine whether they are covered by Title I for annual reporting and other ERISA compliance purposes. Thus, the Department issued guidance contemporaneously with Treasury's issuance of its revised regulations under Code section 403(b) on the continued availability of the safe harbor at 29 CFR 2510.3-2(f) and the interaction of the Department's safe harbor and the provisions of the Treasury regulations addressing employer tax compliance obligations in the ongoing operation of a Code section 403(b) arrangement.
See
FAB 2007-02 (July 24, 2007) (available on the Internet at
http://www.dol.gov/ebsa/regs/fabmain.html
).

4. Schedules SB and MB (Pension Plan Actuarial Information)

Draft Schedules SB and MB were posted on the Department's Web site in conjunction with the Supplemental Notice. Instructions for these draft Schedules were not posted nor are they included in this Notice because their development hinges on guidance to be issued by the IRS and/or the PBGC implementing the PPA requirements underlying the Form 5500 Annual Return/Report data elements. Specific guidance regarding the details required in Schedule SB and Schedule MB will be provided in future guidance and will be included in the instructions.

The Agencies received no comments related to the new Schedule MB and multiple comments from one commenter on Schedule SB. That commenter suggested that Line 4a be eliminated because it is identical to the entry in the second column of Line 3d. The Agencies note that the amount reported on Line 4a will not be the same as the amount reported in Line 3d and that this will be made clear in the instructions.

This commenter also suggested that item 6 be expanded to have one line for reporting regular target normal cost and another line for reporting at-risk target normal cost. The Agencies acknowledge that some plans will need to calculate both amounts in order to determine target normal cost, but conclude that it is not necessary to require that these interim calculations be reported. Guidance regarding the details of this calculation will be included in the instructions.

This commenter suggested that the words “not less than zero” be added to

the end of the parenthetical definition for Line 30 on the Schedule SB. The Agencies concluded that this change is not necessary. Guidance regarding Line 30 will be included in the instructions.

This commenter noted that the definitions for Lines 7 and 8 refer to Lines 13 and 35 from the prior year, but that these definitions will not be valid for 2008 unless the 2007 Schedule B is changed to include Lines 13 and 35 as defined in the 2008 Schedule SB. The Agencies note that Lines 13 and 35 will not be included on the 2007 Schedule B. The Schedule SB was designed to reflect various PPA reporting and disclosure provisions (generally effective for 2008 and subsequent years). Information on “look back” rules applicable for completing the questions on the Schedule SB will be included in the instructions.

5. Schedule C (Service Provider Information)

The Department believes that an annual review of plan fees and expenses as part of the annual reporting process is part of a plan fiduciary's on-going obligation to monitor service provider arrangements with the plan. Commenters generally supported the goals of the proposed changes to the Schedule C, as stated in the proposal, of increasing transparency regarding fees and expenses paid by employee benefit plans and ensuring that plan officials obtain the information they need to assess the compensation paid for services rendered to the plan, taking into account revenue-sharing arrangements among plan service providers and potential conflicts of interests.

Commenters representing insurance companies, banks, and other financial institutions, however, while generally supporting fee transparency and applauding the Department's initiatives in this area, raised concerns that the proposed Schedule C reporting scheme for indirect compensation was more extensive than necessary. They asserted that the proposed changes could result in duplicative, misleading, and confusing reporting. The commenters also argued that the proposed changes, if not narrowed, would impose significant administrative costs on service providers to track and disclose information on indirect compensation, which costs they likely would pass on to their employee benefit plan clients. These commenters suggested that reporting of indirect compensation, as proposed, should be narrowed in various ways: (1) Eliminate or narrow reporting of “float” income; (2) postpone any requirement to report “soft dollars” until after the Securities and Exchange Commission (SEC), as the primary regulator of soft dollar compensation, addresses the subject as it applies to investors generally; (3) except from reporting revenue sharing payments among affiliates and by other bundled service providers to entities that the bundled provider engages to provide services; (4) retain the current rules under which brokerage commissions are not required to be reported unless the broker is granted some discretion; (5) define “service providers” required to be listed in the Schedule C as limited to persons with direct service relationships with the plan and exclude from Schedule C reporting payments to “subcontractors” based on the premise that subcontractors are merely assisting the direct service provider in fulfilling its contractual obligations and are not providing services to the plan; (6) confirm that insurers and investment providers are not required to be listed as service providers on Schedule C solely as a result of the plan's purchase of the insurance contract or investment with the investment provider; and (7) integrate the annual reporting requirement into other regulatory disclosure requirements regarding fee and expense disclosure to avoid duplicative and confusing disclosure requirements.

Two individual commenters suggested that the Schedule C should be completed by small plans as well as large plans and that the $5,000 reporting threshold for listing a service provider on the Schedule C should be lowered or eliminated. Another commenter suggested that, if full Schedule C reporting was not expanded to small plans, investment-related fees and expenses should be reported separately in a similar manner as administrative service provider expenses under the July 2006 Proposal which called for administrative service provider expenses paid by the plan to be reported as an aggregate line item on Schedule I and the Short Form.

As noted in the July 2006 Proposal, issues relating to the appropriate manner and scope of the reporting of service provider compensation on the Schedule C have been raised by the ERISA Advisory Council and the Government Accountability Office, as well as by Form 5500 Annual Return/Report filers and plan service providers. The Department is working on a separate regulation setting forth the standards applicable to the exemption under ERISA section 408(b)(2) for contracting or making reasonable arrangements with a party in interest for services.
See
72 FR 22845. That regulation is intended to eliminate the current uncertainty as to the information relating to services and fees that plan fiduciaries must obtain and service providers must furnish for purposes of determining whether a contract for services to be rendered to a plan is reasonable. Another rulemaking initiative on the Department's regulatory agenda involves review of participant-level disclosure, including the regulation governing ERISA section 404(c) plans (29 CFR 2550.404c-1), to ensure that participants and beneficiaries in individual account plans are provided the information they need, including information about fees and expenses, to make informed investment decisions.
Id.
Other federal agencies, for example the SEC, are also focusing on efforts to give investors, including employee benefit plans, better information about the actual amount they have paid investment fund managers during a given period.

Against this backdrop, and inasmuch as plan administrative costs are being passed on to plan participants with increasing frequency, it is critical to ensure that the benefits of any new annual reporting requirement outweigh the attendant compliance costs—costs that may ultimately reduce retirement savings. The Schedule C requirements historically have been limited to large plans that are required to file the Form 5500 Annual Return/Report and have not covered the broader class of plans covered by the Department's other fee transparency initiatives. Considered in context with other fee disclosure initiatives at the Department and elsewhere that are more tailored to the concerns expressed by GAO and the ERISA Advisory Council on changes needed to provide 401(k) plan participants better information on fees, particularly investment fees indirectly incurred by participants directing the investment of assets in their individual 401(k) plan accounts, the Department does not believe expanding the Schedule C annual reporting requirements to small pension plans would be consistent with the direction from Congress in the PPA for the Department to simplify the annual report for plans sponsored by small businesses.

The Department continues to believe that it is appropriate to modify the Schedule C reporting requirements for large plans in an effort both to clarify the reporting requirements and to ensure that the Form 5500 Annual Return/Report serves a role in helping plan officials obtain the information they need to assess the reasonableness

of the compensation paid for services rendered to the plan, taking into account revenue sharing and other financial relationships or arrangements and potential conflicts of interest that might affect the quality of those services. After having carefully reviewed the public comments on the Schedule C proposal, the Schedule C is being adopted largely as proposed, but some revisions are being made to the proposed requirements. The changes are intended to reduce the administrative burdens on plans and plan service providers and clarify the reporting requirements without compromising the proposal's overall objectives.

a. Indirect Compensation Reporting on Schedule C

Reportable compensation under the final Schedule C revisions continues to be defined to include money and any other thing of value (for example, gifts, awards, trips) received directly or indirectly from the plan (including fees charged as a percentage of assets and deducted from investment returns) for services rendered to the plan. The Department does not agree with the commenters who argued that only those persons with “direct service relationships” with the plan should be treated as providing services to the plan for Schedule C reporting purposes. The Department believes that such a conclusion would be inconsistent even with the current reporting requirements in the Schedule C. Under current reporting rules, reportable indirect compensation expressly includes “among other things, payment of ‘finder's fees’ or other fees and commissions by a service provider to an independent agent or employee for a transaction or service involving the plan.” Nothing in the proposal was intended to restrict or diminish the existing requirement to report such finders' fees or commissions. Rather, the proposal was designed to expand indirect compensation reporting requirements. The Department also believes that adopting the commenters' suggestion would undermine the objective of improving disclosure of fee and compensation information because it is not consistent with the reality of the employee benefit plan marketplace where the nature and complexity of the business and investment environment in which plans operate has changed the ways in which plans obtain and pay for administrative, investment, and other services. Although the Department agrees that an investment of plan assets or the purchase of insurance is not, in and of itself, reportable service provider compensation for purposes of the Schedule C, in the Department's view, persons that provide investment management, recordkeeping, participant communication, and other services to the plan as part of a transaction with the plan should be treated as providing services to the plan or its participants for purposes of Schedule C reporting. Thus, under the final Schedule C revisions, and subject to the alternative reporting option described below, such persons would be required to be identified in Part I if they received, directly or indirectly, $5000 or more in reportable compensation for a transaction or service involving the plan.

Several commenters suggested that a payment be reportable on Schedule C only if either the service provider's eligibility for the payment or the amount of the payment is based on a transaction directly involving assets of the plan. The commenters argued that such a test would be consistent with conflict of interest rule in ERISA section 406(b)(3), which prohibits receipts by plan fiduciaries of consideration for their own personal account from any party dealing with a plan “in connection with” transactions involving plan assets. The Department does not agree that the standard for Schedule C reporting should be narrowed to parallel the prohibited transaction standard in ERISA section 406(b)(3). Unlike the prohibited transaction provision in 406(b)(3), the Schedule C revisions were not intended to be limited to receipts by plan fiduciaries or to identifying impermissible conflicts of interest. The Schedule C reporting of indirect compensation also is not limited to only those circumstances where a plan fiduciary affirmatively chooses the indirect service providers. Rather, one of the goals of the Schedule C changes is to improve fee disclosure to plan fiduciaries, especially where they do not have a role in determining the compensation paid to parties that are receiving fees for a transaction or service involving the plan. Schedule C reporting arises in part from ERISA section 103(c)(3), which requires information in the annual report regarding “each person” (not limited to just fiduciaries) who rendered services to the plan or who had transactions with the plan who received, directly or indirectly, compensation from the plan during the year for services rendered to the plan or its participants. Further, ERISA section 103(c)(5) expressly provides that the administrator shall furnish as part of the annual report “[s]uch financial and actuarial information” as the “Secretary may find necessary or appropriate.” In the Department's view, the prohibited transaction standard in ERISA section 406(a)(1)(C)—transactions that constitute a “direct or indirect” furnishing of goods, services, or facilities to the plan—is generally a more suitable analog for Schedule C reporting. Thus, in the Department's view, the Schedule C reporting requirement should generally capture both persons who receive direct or indirect compensation and persons who provide services directly or indirectly to the plan.

The Department nonetheless agrees that additional guidance on certain areas of concern raised by commenters would establish useful compliance guides for plan administrators and plan service providers.

As was noted in the July 2006 Proposal, Schedule C was intended to capture information on compensation received by persons providing services, and not information on benefit payments to participants and beneficiaries. Where fully insured group health benefits, or similarly fully insured benefits under a plan, are purchased from and guaranteed by a licensed insurance company, insurance service, or other similar organization, and where information regarding that contract is reported on the Schedule A, compensation paid by the insurance company from its general assets to affiliates or third parties for administrative activities necessary for the insurer to satisfy its contractual obligation to provide benefits is not required to be treated as reportable service provider compensation for purposes of the Schedule C. Insurance investment contracts are not eligible for this exception. As described below in the discussion of the Schedule A (Insurance Information), a similar exclusion is being adopted in defining the scope of insurance fees and commissions that must be separately reported on the Schedule A. In determining whether such compensation is excludable from the Schedule C, the Department would look to whether the administrative services are necessary for the insurer to satisfy its contractual obligation to provide benefits under the plan and are not services incidental to the sale or renewal of a policy, whether payments by the insurer are out of its general assets to third parties without any other direct or indirect charge to the plan other than the policy premium, are made pursuant to a contract or written understanding to provide the services, and whether the amount of the compensation paid by the insurer is

reasonable in light of the value of the services provided.

Under the proposal, Schedule C reportable compensation included brokerage commissions and fees directly or indirectly charged to the plan on purchase, sale, and exchange transactions regardless of whether the broker is granted discretion. Commenters urged retaining the current limitation under which such compensation is reported on the Schedule C only for brokers granted discretion. The Department continues to believe that brokerage fees and commissions may constitute a significant part of a plan's annual expenses and that continuing the current exemption from the Schedule C reporting for such expenses is not appropriate. A review of expenses as part of the annual reporting process is part of a plan fiduciary's on-going obligation to monitor service provider arrangements with the plan. Requiring the reporting of such brokerage commissions and fees should emphasize and reinforce that monitoring obligation. The Department understands that information on brokerage fees and commissions may be provided to the plan by parties other than the broker receiving the fee or commission. For example, a number of commenters indicated that in many cases the broker will not know the party on whose behalf a brokerage transaction is being executed because the instructions to execute trades are often provided by investment managers who control investment portfolios for multiple ERISA plans, non-ERISA plans, and non-plan clients. The commenters asserted that it may be very difficult for the broker to identify fees and commissions it receives from ERISA plan transactions, much less identify fees and commissions it receives on transactions involving a particular ERISA plan. The Department notes that the plan administrator is the party with the obligation to complete the Schedule C. Further, the Schedule C does not require that information on reportable fees and commissions necessarily be furnished to the administrator by the party receiving the fee or commission. Rather, in the situation described by the commenters, the investment manager should have information on which transactions are being executed for which clients and should have information on the fees and commissions it is being charged for those transactions. In such a case, the investment manager, rather than the broker, may be the appropriate party to provide the plan administrator with information on those service provider fees and commissions.

Many of the comments raising concerns about the difficulties and burdens of reporting indirect compensation focused on “float” revenue;
9

securities brokerage commissions (including soft dollar commissions
10

); and service fees charged against plan investments and reflected in the net value of the plan's investment in mutual funds, bank investment funds, and insurance company investment contracts. According to the GAO,
see, e.g.
, “Private Pensions: Changes Needed To Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees” (GAO 07-21, Nov. 2006), these investment-related fees indirectly paid by plans and plan participants account for the largest portion of total plan fees regardless of plan size. Services provided for these fees can include investment management (e.g., selecting and managing the securities included in a mutual fund); consulting and providing financial advice (recommending vendors for investment options or other services); custodial or trustee services for plan assets; and shareholder services (such as telephone or web-based customer services for participants). Record-keeping fees were identified as generally constituting the second-largest portion of these indirect fees. Record-keeping fees are usually paid to a service provider to set up and maintain the plan. These fees cover activities such as enrolling plan participants, processing participant investment selections, preparing and mailing account statements, and other related administrative activities.

9
Financial service providers (e.g., banks and trust companies) sometimes place ERISA plan assets in a general account for short periods of time in order to facilitate certain transactions, such as while waiting for investment instructions from the plan's fiduciaries or in order to make a distribution or other disbursement. The period that begins when the plan money is deposited in the general account, and ends when the investment instructions are executed or the disbursement check clears, is known as the “float.” During this float period, the money often is invested in conservative, short-term investments. In some cases, the ERISA plan is credited with the earnings on these investments. In others, the financial service provider keeps the earnings as part of its compensation.

10
Soft dollars include research or other products or services, other than execution, received from a broker-dealer or other third party in connection with securities transactions.

The commenters indicated that the burden and complexity of reporting investment-related fees is due in large part to the fact that a substantial majority of retirement plan service providers maintain plan records and investment information at an omnibus account level. Certain commenters described omnibus accounting as “best practice” in the industry. They suggested that efficiencies in data exchanges and settlement transactions between funds and retirement plan record keepers generated by omnibus accounting are used to reduce plan service costs. These savings were described as based in part upon the service provider maintaining omnibus trading accounts with investment-related service compensation based upon a percentage of the total assets in an investment fund. A commenter representing the mutual fund industry asserted that it would be extremely difficult to parse out by plan (in dollars) specific components of a fund's expenses for purposes of Form 5500 reporting. The commenter suggested that the data systems overhaul that would be needed to track this information would be prohibitively expensive. Other commenters suggested that, although it may be possible with current data systems to generate an estimate of the amount of investment-related fees reflected in the periodic net asset valuation of a plan's investment on a case-by-case basis, systematically performing such a task each year for each investing plan would be difficult given the variation in omnibus account investment fees and the pervasiveness of their use as a means of compensating service providers for an array of investment-related services.

In a similar vein, several commenters expressed concern about the Schedule C reporting requirements in the case of revenue sharing among members of a bundled service arrangement (including, in particular, revenue sharing among affiliates from investment-related fees charged at the omnibus account level). The commenters explained that bundled service arrangements include arrangements where the plan hires one company to provide, either directly or through affiliated entities or unaffiliated subcontractors, an array of services rather than purchasing the services on an individual basis. In some typical arrangements, a bundle of services is included as part of an investment transaction and the service providers are paid out of investment management and other charges levied on an investment fund comprised of many ERISA plans, other plans, and, in some cases, non-plan investors. Several commenters asked that the final Schedule C revisions confirm that payments received in such a bundled arrangement by a service provider from an affiliate not be separately reportable on Schedule C. The commenters argued

that separate reporting was not necessary to identify possible conflicts of interest because the self-interest such a service provider has in its affiliate should be readily apparent to the plan fiduciary evaluating an investment in the bundled arrangement or any advice or recommendation by that service provider relating to its affiliate. The commenters also argued that separate disclosures on revenue sharing among affiliates are not necessary where the total compensation received by the affiliated group is to be reported. The commenters argued that allocation of revenues among affiliates may not be based on the value of services provided by the respective affiliates to investing plans, but instead may be driven by tax accounting, cash flow or other internal business purposes of the affiliate group. They also argued that, although they could attempt to allocate a cost to each service in the bundled, the annual report does not in other cases require service providers to report their cost, as opposed to the charges paid by the plan. The commenters also argued that reporting revenue sharing among affiliates would create a confusing distinction between entities that provide services using employees in multiple divisions of one company and entities that use several separate subsidiaries to provide the services. One of the commenters suggested that if multiple affiliates within an organizational group provided services to a plan, it should be sufficient to identify in Part I of Schedule C the organization together with its participating affiliates and report compensation on an aggregate basis.

Other commenters representing “unbundled” or “open architecture” investment providers asserted that allowing aggregate reporting for bundled/affiliated providers, without having a parallel rule for unbundled providers would generate misleading information for plan administrators. The commenters represented that unbundled investment service arrangements use the same basic omnibus accounting and omnibus account fee arrangements as bundled providers. In the unbundled context, revenue sharing is used to compensate unaffiliated entities providing the same recordkeeping and shareholder services provided by affiliates in a bundled provider arrangement. They pointed out that technological improvements in information management systems and data exchange between investment funds and retirement plan record keepers have given unbundled providers the ability to offer cost and fee structures competitive to those of bundled providers. They also argue that unbundled arrangements give plans access to a wider range of unaffiliated investment vehicles than is typically offered by bundled providers.

Representatives of the “unbundled” service providers claim that, just like the bundled providers, the parties providing sales, recordkeeping, participant communication, and other services are often paid indirectly from charges levied against the investment funds in which the plan accounts are invested. They read the Schedule C proposal as requiring, in the case of bundled providers, reporting of a single sum equal to the total compensation, including investment management and other asset-based fees, paid by the plan without reporting the allocation of those charges to affiliated service providers in the bundle. In comparison, they read the proposal to require that the plan report, in the “unbundled” structure, both the total investment management and other asset-based fees as well as report allocations from those fees to the unaffiliated service providers. The commenters suggested, therefore, that, although an unbundled arrangement may provide the same services as a bundled arrangement and the various service providers may be paid out of the same investment management and omnibus asset-based charges as in a bundled arrangement, the Schedule C reporting could make it appear as if the unbundled arrangement included more fees.

The Department has decided to revise the Schedule C reporting requirement in an effort to address both the concerns regarding the burden and expense of reporting plan specific components of omnibus asset-based charges and concerns over disparate reporting treatment of affiliated service provider groups and unaffiliated providers using essentially the same indirect compensation arrangements. In that regard, the Department notes that even commenters generally supporting the Schedule C proposal urged the Department to provide flexibility, consistent with the spirit of the proposed Schedule C changes, in defining acceptable methods of reporting fee and expense information and allocating the fees and expenses for specific service provider compensation to individual plans.

Thus, the final Schedule C revisions include a new definition of what would constitute a bundled arrangement for Schedule C reporting purposes. In the case of such bundled arrangements, although revenue sharing within the bundled group generally does not need to be separately reported, the person or persons in the bundle receiving separate fees charged against the 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) must, subject to the alternative reporting option described below, be treated as receiving separate reportable compensation for Schedule C purposes. Also, and subject to the alternative reporting option described below, any person in the bundle who is a fiduciary to the plan or provides one or more of the following services to the plan contract administrator, consulting, investment advisory (plan or participants), investment management, securities brokerage, or recordkeeping—receiving amounts as commissions (including finders' fees), soft dollars or other nonmonetary compensation, float revenue, or transaction-based charges (e.g., brokerage commissions) must be separately reported on the Schedule C if their total reportable compensation equals or exceeds $5,000. The Department believes that having to disclose the receipt of separate fees actually charged against the plan's investment would not require service providers to disclose information legitimately classified as proprietary or confidential. Further, in the case of commissions, soft dollars, finders' fees, float revenue, and transaction-based charges paid to affiliates, the Department believes such charges are just as likely for both affiliate groups and unaffiliated providers to be relevant to the plan fiduciary in evaluating possible conflicts of interest.

Except as described above, the Department continues to believe that it is generally sufficient for Schedule C reporting purposes to treat an affiliate group as a single person and identify that affiliate group in Part I of the Schedule C as the party receiving compensation from the plan for rendering services to the plan. The Department emphasizes, however, that if one or more of the affiliates or a member of a bundled arrangement received compensation from sources outside the affiliate group or bundled arrangement in connection with the investment transaction with the plan or services provided to the plan, that compensation also would have to be included as part of the reportable compensation received in determining Schedule C reporting requirements.

For purposes of this Schedule C reporting rule, an “affiliate” of a person includes any person, directly or

indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the person. The instructions for the Schedule C have been revised to provide that “control,” with respect to a person other than an individual, means the ability to exercise a controlling influence over the management or policies of such person.

In attempting to strike a balance between the costs and benefits of improved disclosure of investment-related fees and expenses, the Department believes some of the concerns regarding the burden and complexity of allocating fees charged in an omnibus account structure can be addressed by further modifying the Schedule C requirements so they rely on disclosures regarding those fees resulting from other regulations or business practices to the extent those disclosures meet the objectives underlying the Department's Schedule C proposal. The final Schedule C revisions thus include an alternative reporting option for “eligible indirect compensation.” To constitute eligible indirect compensation for this purpose, the compensation has to be of a certain type and the plan must have received certain disclosures. The eligible compensation types are compensation not paid directly by the plan or plan sponsor but received by plan service providers from omnibus level fees charged to investment funds in which the plan invests where the charges are reflected in the value of the investment or return on investment of the participating plan or its participants and for: distribution, investment management, recordkeeping or shareholder services; commissions and finder's fees paid to persons providing direct or indirect services to the participating plans; float revenue; securities brokerage commissions and other transaction-based fees (whether or not they are capitalized as investment costs); and “soft dollar” revenue. For the alternative reporting option to be available, in addition to being within that class of investment fees, the plan administrator must also be furnished written materials, including in electronic form, that disclose the existence of the indirect compensation; the services provided for the indirect compensation or the purpose or purposes for the payment of the indirect compensation; the amount (or estimate) of the compensation or a description of the formula used to calculate or determine the compensation; and the identity of the party or parties paying and receiving the compensation. The Department believes that any written disclosure, whether regulatory, contractual, or voluntary, could be relied upon so long as all of the elements of the disclosure were provided to the plan administrator. Further, the necessary information could be provided to the plan administrator in separate disclosures from multiple parties.

In the case of service providers who received only eligible indirect compensation, the plan administrator would be able to check a box on the Schedule C to indicate that there were such service providers and that the plan had received the appropriate disclosures, and then identify on the Schedule C each person from whom the plan administrator received the necessary disclosures regarding the eligible indirect compensation. For example, 12b-1 fees received by a party providing recordkeeping services to a plan would not have to be separately reported on the Schedule C if the disclosures in the mutual fund prospectus together with disclosures in the service contract advised the plan administrator of the fact that the 12b-1 fees were being received, what the fees were paid for, the amount or estimate of the fees received or the formula used to calculate the amount of the fees received, and the party from whom the recordkeeper was receiving the fees. Similarly, “soft dollars” received by an investment manager in the form of research or other permissible services in connection with securities trades on behalf of plan clients need not be separately reported on the Schedule C if disclosures in the SEC Form ADV, together with disclosures in the investment management contract, advised the plan administrator that the manager is receiving “soft dollars,” the reason the person was receiving the “soft dollar” payment, the amount of “soft dollars” or the formula used to determine the amount of “soft dollars” that the manager receives in connection with each securities transaction, and the party or parties from whom the investment manager is receiving the “soft dollars.” The Department recognizes that it may not be practicable to provide a formula or estimate to calculate the value of certain types of “soft dollar” non-monetary compensation at the plan level, particularly so-called “proprietary” soft dollar arrangements, such as access to information from certain research specialists. In such circumstances, a description of the eligibility conditions sufficient to allow a plan fiduciary to evaluate them for reasonableness and potential conflicts of interests would satisfy the “amount of compensation” prong of the disclosure alternative for Schedule C reporting. When reporting service providers who received eligible indirect compensation and other compensation, the service provider would be required to be separately listed on the Schedule C if the total compensation equaled or exceeded the $5,000 threshold. The plan administrator would check a box to indicate that some of the compensation was eligible indirect compensation and complete the other elements of the Schedule C to report information on the balance of the direct and indirect compensation received by the service provider. Since the identity of the service provider would be included on the Schedule C in such cases, separately listing the person from whom the plan received the required disclosures regarding the eligible indirect compensation would not be necessary.

The Department has previously expressed its opinion that in hiring and retaining service providers plan fiduciaries must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In addition, the process should be designed to avoid self-dealing, conflicts of interest, or other improper influence. The alternative reporting option being adopted as part of the Schedule C revisions for eligible indirect compensation is intended to emphasize and reinforce the obligation to review of plan expenses as part of a plan fiduciary's on-going obligation to monitor service provider arrangements. It also provides the Department with adequate reporting to engage in effective oversight activities while addressing concerns about annual reporting burdens and costs, which are increasingly being passed on to plan participants and beneficiaries. A party seeking to avail itself of the alternative reporting option would also bear the burden of maintaining records sufficient to demonstrate compliance with the conditions of the alternative reporting option.

Several commenters asked that the Department modify the proposed Schedule C requirement applicable to plan fiduciaries and certain enumerated service providers who received, directly or indirectly, $5,000 or more in total compensation, and also received more than $1,000 in reportable compensation from a person other than the plan or plan sponsor. Under the proposal, the Schedule C would have had to provide

information identifying the payor of such indirect compensation, the payor's relationship with the plan or services provided to the plan by the payor, the amount paid, and the nature of the compensation. The enumerated service providers were contract administrator, securities brokerage (stock, bonds, commodities), insurance brokerage or agent, custodial, consulting, investment advisory (plan or participants), investment or money management, recordkeeping, trustee, appraisal, or investment evaluation. The commenters expressed concern that the list of enumerated service providers was overbroad because it included most types of plan service providers, including those where compensation arrangements did not present any real conflict of interest concerns. The commenters also objected because the reporting requirement substantially reduced the costs savings and burden reductions of the aggregate reporting of compensation by affiliates and bundled service providers. In light of the other revisions being made to the reporting requirements for bundled service arrangements described above, the Department is revising the Schedule C instructions to limit the enumerated service provider list to types of providers where compensation arrangements presenting conflict of interest concerns are most likely to exist.

Modifications were also suggested to the aspect of the Schedule C proposal that required reporting business meals, gifts, promotional items, and other similar non-monetary forms of compensation. Commenters complained that the proposal would require costly tracking and reporting by plan service providers of typical business expenses only remotely connected to the plans. One commenter cited, as an example, the need to track and report when an employee of a plan service provider is treated to a business lunch by another service vendor to discuss the services the vendor provides to the service provider's plan clients. The commenter questioned whether the cost of such tracking and potential reporting, which ultimately could be passed on to the plan or the plan sponsor, is justified based on value to plan fiduciaries evaluating the reasonableness of service provider fees. The Department recognizes that providing meals, entertainment, free travel, or other gratuities may serve an ordinary business purpose, such as cultivating goodwill or securing or maintaining a commercial relationship, but continues to believe that non-monetary compensation should be subject to Schedule C reporting rules. Access to this information should help plan fiduciaries gauge whether the service provider's business decisions with regard to the plan may be influenced by any such personal benefits. At the same time, excepting from reporting occasional and insubstantial free meals, gifts, and promotional items will help to ensure that service providers are not burdened with reporting routine business gratuities that should be of little interest to plan fiduciaries.

The Department thus has modified the Schedule C reporting requirements to exclude ordinary business gifts that are both occasional and of insubstantial value, for example, widely distributed items such as pens with a company name permanently imprinted or ordinary business lunches, where the cost of the gift or meal would be tax deductible for federal income tax purposes for the person providing the gift or meal and the gift or meal would not be taxable income to the recipient. For this exemption to apply, the gift must be valued at less than $50, and the aggregate value of gifts from one source in a calendar year must be less than $100, but gifts with a value of less than $10 do not need to be counted toward the $100 annual limit. If the $100 aggregate value limit is exceeded, the aggregate value of all the gifts will be reportable. Gifts from multiple employees of one service provider should be treated as originating from a single source when calculating whether the $100 threshold applies. On the other hand, in applying the threshold to an occasional gift received from one source by multiple employees of a single service provider, the amount received by each employee should be separately determined in applying the $50 and $100 thresholds. For example, if six employees of a company providing administrative services to employee benefit plans attend a business conference put on by a broker designed to educate and explain the broker's employee benefit business services, where refreshments valued at $20 per individual are provided at no cost to the employees, the gratuities would not be reportable on the Schedule C even though the total cost of the refreshments would be $120. The Schedule C instructions have also been revised to emphasize that these thresholds are for purposes of Schedule C reporting only and to caution filers that the payment or receipt of gifts and gratuities of any amount by plan fiduciaries may violate ERISA and give rise to civil liabilities and criminal penalties.

Commenters also expressed concern that the Schedule C reporting rule allowing any reasonable method of allocating indirect compensation among multiple plans as long as the method is disclosed to the plan administrator would result in confusion for plan officials because service providers will not necessarily be using consistent methods in allocating indirect compensation. The diversity in the form and manner of payment of indirect compensation described in the comments, however, defied applying a single allocation method for such compensation among multiple plans. Thus, in circumstances where the amount of indirect compensation received by a person is attributable to more than one plan, allowing any reasonable allocation method but also requiring the method of allocation to be disclosed to the plan administrator provides the parties with appropriate flexibility in meeting the annual reporting requirement while ensuring the plan administrator is properly informed.

Several commenters raised concerns about the proposed indirect compensation reporting requirements as possibly leading to confusion among plan officials over “double reporting” of service provider compensation. They cited as an example of such “double reporting” situations where an investment advisor is paid an investment management fee from a mutual fund, and the investment advisor uses some of that revenue to pay fees to brokers, pension consultants, and others for marketing and distribution expenses. The commenters were concerned that if the investment management fee received by the investment manager and the fee received by a broker, for example, are both required to be reported as indirect compensation on the Schedule C, plan officials could incorrectly conclude that the plan paid the broker's fee in addition to the investment management fee. The Department believes that the modifications to the form and instructions described above, including the alternative reporting option for eligible indirect compensation, should address this concern by giving service providers flexibility that will allow them to provide plans with disclosures that can be used to satisfy the Schedule C reporting requirements while also clearly explaining the indirect compensation in a way that will enable the service providers to avoid creating confusion about the indirect fees and compensation they receive.

The Schedule C is also being modified so that service providers required to be

listed would separately report direct compensation paid by the plan and indirect compensation received from sources other than the plan or the plan sponsor, for example, compensation charged against investment assets. In addition, in light of the fact that particular service providers may receive direct and indirect compensation of various types from various sources, in order to provide more informative disclosures about the types of fees being paid to or received by plan service providers, the final forms revisions expand the service codes currently required on the Schedule C, which identify the types of services provided, to include fee codes designed to better identify the types of direct and indirect compensation received. For example, codes were added for direct payments by the plan out of a plan account, including charges to plan forfeiture accounts and fee recapture accounts, charges to a plan's trust account before allocations are made to individual participant accounts, and direct charges to plan participant individual accounts (e.g., loan charges, brokerage account service fee, distribution service charge). Codes for types of indirect compensation include common investment fees indirectly paid by plans and participants, such as sales loads (including charges on purchases and deferred sales charge); redemption fees; purchase fees paid to the fund (not to a broker); exchange fees charged to an investor when they exchange (transfer) to another fund within the same fund group; account maintenance fees; investment management fees paid out of fund assets to the fund's investment adviser for investment portfolio management; distribution and service (12b-1) fees; shareholder service fees; custodial fees; legal expenses; accounting fees; and transfer agent expenses. The fee codes should provide plan sponsors, participants and beneficiaries, and the Department with better information on the types of compensation being paid directly or indirectly by the plan.

The Department believes that this revised framework for the Schedule C continues to accomplish the objectives of improving Schedule C reporting of fee and compensation information, while addressing many of the concerns of the commenters relating to annual reporting burdens, costs, and potentially duplicative and confusing disclosures to plan officials. It also provides sufficient flexibility so that plans and service providers can use other current or future regulatory disclosure regimes, such as soft dollar disclosure requirements developed by the SEC, as part of satisfying ERISA's annual reporting requirements.

b. Miscellaneous Schedule C Issues

One commenter asked the Department to confirm that revenue sharing payments, such as sales loads and 12b-1 fees received from the mutual funds and other revenue sharing payments from distributors and/or advisors of the mutual fund for sub-transfer agency services and shareholder services, are not necessarily “plan assets” for purposes of the fiduciary responsibility provisions of Title I of ERISA solely by virtue of being required to be listed on the Schedule C. The commenter pointed out that some revenue sharing payments to plan service providers are calculated based on the amount of assets a plan or a group of plans have invested in a particular investment vehicle or family of vehicles at a given time. Other revenue sharing payments are not asset-based, but may involve a flat fee. In the Department's view, the Schedule C reporting requirements are not restricted to plan asset payments. In general, in evaluating plan investments, identification of plan assets is governed either by the “plan asset” regulation (29 CFR 2510.3-101), or, in situations beyond the regulations, the assets of an employee benefit plan are identified on the basis of ordinary notions of property rights.
See, e.g.,
Advisory Opinion 2005-22A. In the context of a plan's investment in a mutual fund or other investment vehicle, the plan's beneficial interest generally is its ownership of shares, units, or an undivided interest in the underlying assets of the vehicle. The fact that revenue sharing payments charged against the assets in an investment vehicle are required to be reported on Schedule C or disclosed under the alternative reporting option would not, by virtue of the reporting requirement alone, make those revenue sharing payments plan assets under the plan asset regulation or under ordinary notions of property rights.

One commenter suggested that revising the instructions to Schedule C to clarify that health and welfare plans exempt from the financial reporting and audit requirements by reason of meeting the conditions in the Department's limited exemption in 29 CFR 2520.104-44, including plans that rely on the enforcement policy guidance in the Department's Technical Release 92-01, are not required to file a Schedule C. The Department has modified the instructions for the Schedule C to make it clear that, although neither the limited exemption at 2520.104-44 nor Technical Release 92-01 expressly address Schedule C reporting requirements, plans that meet the conditions of the exemption or the enforcement policy guidance are not required to complete and file a Schedule C to report information on service provider compensation. Another commenter requested confirmation that where the plan sponsor pays expenses of the plan, the amounts paid by the plan sponsor, and not reimbursed by the plan, would not have to be reported on Schedule C. The Schedule C and its instructions continue to provide that reporting is only required for amounts directly or indirectly paid by or received from the plan.

Several commenters expressed concern with the statement in the July 2006 Proposal that if reportable compensation is due to a person's position with or services rendered to more than one plan, the total amount of compensation received should be reported on the Schedule C of each plan if the compensation could not reasonably be allocated among the various separate plans. The commenters' concern focused on an example in the preamble to the July 2006 Proposal involving a $1,000 gift from a securities broker to an investment adviser given because of the investment adviser's relationship with ERISA plans as potential clients for the securities broker. The preamble assumed the $1,000 gift could not be reasonably allocated among the ERISA plans and indicated that in such a case the $1,000 should be reported on the Schedule C of all plans for which the investment advisor performed services. The commenters urged clarifying in the instructions that, as long as a reasonable allocation can be made in such circumstances, the total value of the gift or other consideration is not required to be reported on the Schedule C of each plan. The Department agrees that in the case of gifts or other consideration attributable to multiple plans, only an allocable share of value of the gift or other consideration needs to be included on each plan's Schedule C as long as the value of the gift or other consideration can be reasonably allocated among the multiple plans.

Commenters also expressed concerns, similar to those submitted by insurers on the Schedule A described below, regarding the requirement to identify service providers that fail or refuse to provide the administrator with the information needed to complete the Schedule C. The Department continues to believe that identifying service providers that fail to provide information needed to complete the

Schedule C is important information that will allow the Department to better carry out its responsibilities to administer and enforce the provisions of Title I of ERISA. As noted below in connection with the similar question being added to the Schedule A, the instructions for the Schedule C have been changed to remind plan administrators that they have an obligation to take reasonable and prudent steps to secure the necessary Schedule C information and that administrators generally should contact the service providers and make a request for Schedule C information before identifying a service provider on the Schedule C as having failed or refused to provide necessary information.

One commenter requested confirmation that the proposed changes regarding reporting of indirect compensation did not require service provider compensation reported on a Schedule C filed for a master trust investment account (MTIA) or 29 CFR 2520.103-12 investment entity (103-12IE) also to be reported on the participating plans' Schedule Cs. The indirect compensation reporting requirements were not intended to change the rule in the current instructions to the Schedule C, which emphasizes that compensation to a service provider should not be reported both on the Schedule C for the plan and on the Schedule C for the MTIA or 103-12IE in which the plan participates. Rather, plan filers must include the plan's share of compensation paid during the year to an MTIA trustee or other person providing services to the MTIA or 103-12IE only if such compensation is not subtracted from the total income of the MTIA or 103-12IE in determining the net income (loss) reported on the MTIA or 103-12IE's Schedule H, Line 2k, or is not reported on the MTIA's or 103-12IE's Schedule C.

Two commenters urged the Department not to eliminate the provision in the current Schedule C under which only the “top 40” highest compensated service providers are required to be listed on the Schedule C reporting, as proposed. The commenters suggested that the “top 40” limit be retained or replaced with some other limit based on a larger number of service providers or requiring service providers to be listed when their compensation exceeded a specified percentage of total plan expenses. The commenters suggested that, for a very large plan, requiring all service providers that received $5,000 or more in direct or indirect compensation could require the plan to list hundreds of service providers and substantially complicate their Form 5500 Annual Return/Reports. A review of Form 5500 Annual Return/Report data for reports filed before the “top 40” limit was adopted in the 1999 Form 5500 Annual Return/Report indicates that only a few very large plans reported 40 or more service providers on the Schedule C. A review of more recent Schedule C data also reflects that the 40th highest paid service provider generally was paid as much or nearly as much as the 15th or 20th highest paid service provider even though the Schedule C requires service providers to be reported in descending order of amount of compensation. Based on these data, the Department does not believe continuing the “top 40” limit is appropriate.

One commenter suggested that clarifying the reporting year in which termination of an accountant or an enrolled actuary must be reported on Schedule C. Although not expressing a preference for either result, the commenter indicated that it was not clear whether the termination should be reported on the form filed for the year in which the accountant was terminated or on the form filed for the year in which a new accountant performed the plan audit. The instructions have been revised in response to the comment to state more explicitly the existing rule that the termination of an accountant or an enrolled actuary must be reported in the Form 5500 Annual Return/Report for the plan year in which the accountant or enrolled actuary was terminated.

6. Schedule A (Insurance Information)

The Agencies received a number of comments in response to the proposed addition of a new section to the Schedule A to identify insurance providers that fail to give plan administrators the information necessary to complete the Schedule A. A commenter representing plan auditors, which supported the change based on the auditors' experience of having difficulty getting information needed to complete plan audits, also requested an expansion of the requirement to cover insurance carriers that did not provide the requisite information in a timely fashion. In contrast, insurance industry commenters expressed concern that the reporting requirement may create unnecessary administrative burdens when plan administrators wrongly identify insurers as having failed to provide required information. One insurance industry commenter, describing testimony before the ERISA Advisory Council on this issue as “unsubstantiated anecdotal reports,” objected to the Department's reliance on a report of the ERISA Advisory Council (
see
71 FR at 41620), as support for adding the new section. Two insurance industry commenters suggested that, if the reporting requirement was retained, plan administrators should be required to advise insurers before identifying the insurer on the Schedule A as having failed to provide required information.

Section 103(a)(2) of ERISA provides that, if some or all of the information necessary to enable the administrator to comply with the requirements of Title I of ERISA is maintained by an insurance carrier or other organization that provides some or all of the benefits under a plan or holds assets of the plan in a separate account, such carrier or other organization is required to transmit and certify the accuracy of such information to the administrator within 120 days after the end of the plan year. Given the importance of plan administrators receiving timely information necessary to complete Schedule A, especially fee and commission information, the recurring reports of difficulties in this area, and the recommendation by the ERISA Advisory Council that such a question be included on the Schedule A to assist plan administrators and the Department in enforcing the insurance carriers' obligations in this regard, the Department continues to believe that insurance providers that fail to provide the necessary information should be identified on Schedule A.

The Department nonetheless agrees that, in addition to the insurer's obligation to provide information, plan administrators have an obligation to take reasonable and prudent steps to secure the necessary Schedule A information. The Department also accepts that there may be instances where plan administrators and insurers disagree over what information is required and other instances where administrators may identify an insurer on the Schedule A based the administrator's erroneous conclusion that the insurer failed to provide required information. The current instructions for the Schedule A that remind filers of the insurer's obligation to provide information needed to complete the Schedule A, accordingly, are being expanded to remind plan administrators that they have an obligation to take reasonable and prudent steps to secure the necessary Schedule A information and that they generally should contact the insurer and make a request for any missing

information before identifying an insurance provider on the Schedule A.

Another commenter requested confirmation that electronic transmission of the required Schedule A information would satisfy the insurer's obligation under ERISA section 103(a)(2). The commenter noted that some plan administrators may believe that insurers are required under ERISA to provide plan administrators with a completed copy of the Schedule A that the administrator could file as part of the plan's annual report. The commenter noted that some insurers had developed such a practice as part of the services they provided to policyholders, but indicated that such practices could be difficult to continue in a wholly electronic filing environment. In the Department's view, nothing in ERISA precludes insurers and plan administrators from agreeing to the insurer's electronic transmission of Schedule A information to the administrator. The Department also anticipates that some software providers will have EFAST2 compatible systems that will enable multiple parties, including insurers, to include information as part of the development of the plan's annual report. The Department also agrees that while insurers are required to provide the information necessary for the plan administrator to complete the Schedule A, insurers are not required by ERISA to provide the information on a completed Schedule A itself.

One commenter suggested that the requirement to report fees, commissions, and other compensation paid to agents, brokers, and other persons in connection with an insurance contract placed with or retained by the plan should be reported on Schedule C instead of on Schedule A. The commenter suggested that such a change would facilitate a “level playing field” in the annual reporting area between insurers and banks, investment companies, and other investment product providers. Another commenter suggested that there should be a de minimis reporting exception on the Schedule A under which persons receiving monetary or non-monetary commissions and fees totaling less than $500 would not be required to be listed on the Schedule A. One insurance company commenter complained that the Schedule A approach to the reporting of fees and commissions was unduly burdensome on insurers and service providers and lacked a clearly articulated purpose. The commenter asked that the Agencies limit or clarify Schedule A reporting in several ways: Limit Schedule A fee and commission reporting to “sales-related” compensation; exempt from Schedule A reporting payments to a “general agent or manager” even if the amounts are paid in connection with a policy placed with or retained by an employee benefit plan; address whether compensation can be reported on a Schedule A for the year in which the compensation was paid rather than for the year in which the right to the payment accrued; confirm that payments are not required to be reported if they are made after the year in which an insurance contract or policy is terminated; and establish safe harbor methods for allocation of compensation attributable to multiple policies.

The July 2006 Proposal did not include any proposed changes to the fee and commission reporting requirements on the Schedule A.
11

The Department issued Advisory Opinion 2005-02A in February 2005 to address a reported pattern and practice among some in the insurance industry of underreporting commission and fee payments to brokers, agents, and other persons. This pattern and practice was reported to be based on incorrect interpretations of the Schedule A, the Schedule A instructions, and other guidance issued by the Department regarding the Schedule A reporting requirements. The Advisory Opinion was intended to explain clearly the Department's views regarding the current Schedule A reporting requirements. After carefully considering the public comments on the Schedule A, the Department does not believe that the comments provide a basis for making major substantive changes to the Schedule A reporting requirements at this time. The Department, however, agrees that two changes adopted as part of the final Schedule C reporting requirements should also be adopted as part of the Schedule A reporting requirements on insurance fees and commissions.

11
Although the proposal eliminated the Schedule A filing requirement for plans eligible to file the Short Form 5500, the Short Form 5500, consistent with the overall objective of improving fee transparency, the Short Form 5500 adopted from the Schedule A requirement to report aggregate insurance fees and commissions, in the form of a compliance question.

Specifically, the Department previously clarified, as part of an update of the instructions following the publication of Advisory Opinion 2005-02A, that compensation paid by the insurer to third parties for recordkeeping and claims processing services provided to the insurer as part of the insurer's administration of the insurance policy is not required to be reported as fees and commissions on Line 2 of the Schedule A.
12

One commenter complained that the instructions should have been expanded to include other similar types of administrative functions. One insurance organization gave as an example its national accounts programs under which its regional group health insurance programs are able to offer ERISA plans access to medical providers in all fifty states pursuant to agreements with its other regional programs that operate in those states. The Department agrees that where benefits have been purchased from and guaranteed by a licensed insurance company, insurance service, or other similar organization, payments by the insurer from its general assets to affiliates or third parties for performing administrative activities as part of the insurer satisfying its contractual obligation to provide the fully insured benefits under the plan (such as recordkeeping and claims processing services) and where there is no direct or indirect charge to the plan for the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A07-5521. Public record. Not legal advice.