DOL's New Thinking on Schedule C

Written by: Nick Curabba

Kudos to fellow blogger (and lawyer) Andrew Oringer who, writing for BNA's Pension and Benefits Blog on the new Department of Labor FAQs on Schedule C of the 5500, we think correctly highlighted one of the more important clarifications contained in the DOL's guidance.  Q&A7 of the FAQs, which the DOL issued on June 14 after nearly six months of plan provider and sponsor questions, creates a huge exception to the new reporting rules for operating companies and puts to rest the concern of many that venture company operating companies and real estate operating companies would need to be included in the list of service providers on  Form 5500 of benefit plan investors. 

In Q&A7, the DOL clarified (helpfully, no doubt, to some) that the Schedule C reporting rules will not require reporting of indirect compensation received indirectly by a VCOC or a REOC for managing the operating company into which plans have invested.  And while one may agree with the result (especially if you are, or represent, VCOCs or REOCs), it is difficult to discern an underlying policy driving the DOL's position.  Indeed, Mr. Orlinger points out, correctly we think, that Q&A7 requires a kind of "intuitive analysis" under which "all that matters here is whether there is an operating company present effectively to block" the application of reporting rules.  This would not only be the case in situations in which the operating company is not a VCOC or REOC (both of which are deemed to hold no "plan assets" under the DOL regulations), but even where the operating company was 100 percent owned by a plan (and therefore deemed to have "plan assets" for its underlying assets).

Likewise, with Q&A5, which creates a special rule for open brokerage windows. Again, there is much to like about a rule that does not require Schedule C reporting of compensation and plan relationships with the issuers of the individual stocks purchased through the brokerage window, but the Department offers no explanation or rationale for creating this exception.  While we may agree that the administrative burden to apply the full measure of the rules to open brokerage windows might have caused sponsors to take away that investment option, the same could have been (and usually is) argued on behalf of every sector of the financial services/investment provider industry that must now engage in more extensive reporting. 

In Q&A4, the Department grants another exception to reporting "ordinary operating expenses" charged against the plan's investment in an investment fund.  Although "ordinary operating expenses" is not defined, the DOL notes, by way of example, that they include "attorney's fees, accountants' fees, (and) printers' fees" as among those expenses not reportable as indirect compensation on Schedule C.  Again, it is not at all clear to us the boundaries of this "operating expenses" exception.  If, as the DOL earlier notes in Q&A4, "fees related to the administration of the employee benefit plan such as recordkeeping services, Form 5500 filing and other compliance services" are reportable as indirect compensation, why are "ordinary operating expenses" excluded?.  Is there a meaningful distinction between "fees related to the administration" of a plan and the "ordinary operating expenses" of the investment fund providing services to a plan? Moreover, to the extent many plans use attorneys and accountants to file Form 5500s and  other compliance services, how can attorneys fees and accountants fees be excluded from reporting? Also, if printers' fees need not be reported, why would the Department create a special reporting code (as we blogged about already) for plans to track and report "copying and duplicating" fees?

We suspect there are many other questions raised by the FAQs, and other questions about the Form 5500 yet to be asked to the DOL.  The 2009 reporting year is shaping up to be an interesting and active year.