If you’ve been following the twists and turns related to the treatment of defined contribution plans under GASB Statement 84, Fiduciary Activities — namely, are they in or are they out? — you likely breathed a sigh of relief in June 2020. That’s when GASB issued another pronouncement that amended the most problematic aspects of the fiduciary activities standard. Before we discuss the amendments in the new pronouncement, let’s take a step back for context.
When GASB Statement 84 was first issued, few likely envisioned that it might impact how we’ve been treating defined contribution plans. Many governments have set up various defined contribution plans — like 457, 401(a), 403(b), and health savings plans — for their employees, and it’s been rare to see them reported in the financial statements of those government sponsors. Then GASB issued a series of Implementation Guide questions and answers, Implementation Guide 2019-2, which caused a big stir. More specifically, the answer to two questions in that Implementation Guide would have caused most governmental defined contribution plans to be considered a component unit of the government, requiring inclusion in the governmental employer’s financial statements as a fiduciary activity. Unfortunately, given that many of these plans had never been audited before, thinking about the challenges inherent in including them in the employer’s financial statements could make your head spin.
Understanding and appreciating these challenges led the GASB to embark on a very quick but thorough project to explore the cost — versus the benefit — of including these plans in employer financial statements. GASB determined that the cost didn’t outweigh the benefits and issued amendments to the standards to address the problematic provisions.
With the issuance of GASB Statement 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code (IRC) Section 457 Deferred Compensation Plans, in June 2020, defined contribution plans can now enjoy some favorable treatment when it comes to applying GASB Statement 84.
In short, unless a defined contribution plan has a separate governing board, it’s likely those plans will not meet the definition of a component unit, eliminating one of two ways that these plans could come into a government’s financial statements as a fiduciary activity.
And, within this favorable new guidance lies an important point that shouldn’t be overlooked: Governmental entities with these defined contribution plans will still need to consider the notion of control within GASB Statement 84 before making a final conclusion as to the treatment of these types of plans.
In order to evaluate whether control exists, entities will need to determine whether the government holds these assets or “has the ability to direct the use, exchange, or employment” of the assets. The second criterion is more difficult to assess, and evaluation should include whether the government is the trustee of the plan, makes all investment decisions, determines all benefits, and other similar factors. Fair warning — GASB is very explicit that hiring a third party to act on its behalf doesn’t mitigate a government’s control, if it exists.
Within GASB Statement 97, GASB addressed Section 457 plans somewhat separately. An entity with a 457 plan will need to first determine whether that plan meets the definition of a pension plan. If it does, much of the above discussion related to defined contribution plans would apply, unless under the very rare circumstance that the 457 plan isn’t a defined contribution plan. If the Section 457 plan doesn’t meet the definition of a pension plan, you’d treat it like any other employee benefit plan for accounting and financial reporting purposes and analyze it under GASB 84 accordingly.
As you examine your potential fiduciary activities with respect to defined contribution plans, GASB Statement 84 or GASB Statement 97, feel free to reach out to our experts if you have questions.
