Schedule C for law firms

[Guest Livia]

We are a law firm representing a plan sponsor. The engagement letter is with the plan sponsor. The firm sends a bill to the plan sponsor who reviews it and occassionally reimburses itself from the trust to the extent that a fiduciary determines some portion of the legal expenses are "reasonable adminstrative expenses". The plan sponsor wants to know why the law firm is not issuing a schedule C for indirect compensation. We don't want to issue a Schedule C because the firm is not a plan service provider. Is anyone one else dealing with this? thanks

[Peter Gulia]

Let's see whether we understand the facts:

The employer seems to be not only the plan's sponsor but also the plan's administrator.

Someone believes that at least a portion of the lawyer's services were for the plan's administration (rather than for the employer's interests other than as a plan fiduciary).

A plan fiduciary (perhaps someone of the plan's administrator{?}) allocated the lawyer's bill between employer and plan expenses, and gave an instruction to reimburse the employer for amounts that the employer had advanced to pay what the fiduciary decided were the plan's expenses.

If this is the situation, doesn't the plan's administrator already know the amounts to be reported as the lawyer's compensation paid by the plan?

Also, this isn't indirect compensation; it's direct compensation. Indirect compensation looks for a situation in which a third person pays the plan's expense.

In reading the definition of direct compensation [page 22 in the Form 5500 instructions], the negative implication of that paragraph's last sentence is that a payment made by the plan's sponsor and reimbursed by the plan results in direct compensation. And although it isn't authoritative, the FAQ states a similar view:

Q37: If a plan sponsor pays a third-party service provider on the plan's behalf and seeks reimbursement from the plan, should the Schedule C reflect a direct payment from the plan to the service provider and not a payment to the employer?

Yes. When a plan sponsor pays a plan third-party service provider and then seeks reimbursement from the plan, the Schedule C for the plan should reflect a direct payment from the plan to the service provider. In this regard, direct compensation is defined in the instructions for purposes of Schedule C as ”[p]ayments made directly by the plan for services rendered to the plan or because of a person's position with the plan” and excludes ”[p]ayments made by the plan sponsor, which are not reimbursed by the plan . . . .” The Department notes that if the plan sponsor pays a service provider directly, and does not seek reimbursement from the plan, such payment does not need to be reported on the Schedule C.

http://www.dol.gov/ebsa/faqs/faq_scheduleC.html

The law firm is a service provider. When a lawyer rendered advice about that plan's administration (rather than the employer's interests other than as a fiduciary), the law firm became a service provider.

[Peter Gulia]

Here's a related question for lawyers, consultants, and others who provide services in which some work is for the plan's administration and some work is for the employer's interest (other than as a plan fiduciary):

If a client asks you to categorize or allocate your bill to mark which services, in your opinion, may be paid from plan assets, do you provide that service?

If not, why not?

If you allocate your bill between plan and employer expenses, do you have reservations about the risks of rendering the implied opinion that underlies the allocation? How do you manage those risks?

Do you charge your client for the time it takes you to analyze which services may be paid from plan assets?