EBSA, an arm of the U.S. Department of Labor, has published new interpretations of the reportable compensation calculation rules in a list of answers to 27 frequently asked Form 5500 questions.
Form 5500 is the form that benefit plans use to report on their activities to the Internal Revenue Service and the Labor Department.
Schedule C gives the IRS and the Labor Department information about a plan’s administrative costs.
Federal agencies are requiring more detailed descriptions of administrative costs. The agencies want to encourage sponsors to run plans as efficiently as possible, officials say.
One question deals with the costs and expenses incurred by an insurance company in connection with a general account investment contract that promises a guaranteed rate of return.
“The answer generally depends on whether plan services are included as part of the investment contract,” officials say.
If, for example a stablue value contracts includes recordkeeping services, trusteeship services and similar services, and the insurer reduces the crediting rate on the contract to cover the cost of providing those services, then that indirect charge would have to be reported as service provider compensation, officials say.
If the investment investment contract is not combined with any plan services, then the insurer is not receiving any reportable compensation, officials say.
"Payment of commissions and other compensation to agents, brokers and other persons in connection with the placement or retention of the insurance contract would, however, be reportable compensation to the recipients, regardless of how they are characterized,” officials say.
“For example, fees and commissions would still be reportable, even if they were characterized as being within a ‘mortality and expense’ charge used to establish the crediting rate,” officials say.
Another question in the guidance refers to contingent deferred sales charges, market value adjustments for annuity contracts, surrender charges and termination charges.
Officials consider whether the charges are reportable compensation and whether they must be reported as direct or indirect compensation.
“’Contingent deferred sales charges’ are typically understood to be back-end or deferred sales loads or commissions,” officials write.
“Although sales loads frequently are used to compensate outside brokers that distribute fund shares, some funds that do not use outside brokers still charge sales loads,” officials write. “To the extent paid by the plan or charged to a plan or participant’s account, such sales loads or commissions would be direct compensation to the person receiving the load or commission.”
If the deferred load or commission is reflected in the value of the plan’s investment, that could be treated as indirect compensation, if the right disclosures are provided, officials write.
“The department would apply similar treatments to exchange fees impose on shareholders if they exchange (transfer) to another fund within the same fund group, account fees imposed on investors in connection with the maintenance of their accounts, and purchase fees imposed to defray some of the fund’s costs associated with a purchase of fund shares,” officials write.
But market value adjustments or similar surrender or termination charges that are adjustments to the value of the investment would not normally be reportable Schedule C compensation, officials write.
Those adjustments and charges are not reportable if they reflect “only the contractual difference in the value of the plan’s investment because it was not held for the stated duration of the contract,” officials write.
A copy of the guidance is available here.
-National Underwriter Company