Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities (GASB-84) attempts to standardize reporting of deferred compensation plans and similar plans under Internal Revenue Code (IRC) Sections 457 and 403. These plans are offered by tax-exempt organizations and allow employees to defer taxation of wages to a future year. They have become increasingly popular forms of retirement savings for employees of state and local governments due to their relatively flexible nature in comparison to traditional benefit plans.
GASB-84 repeals certain provisions of GASB Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, due to the updated definition of ‘fiduciary activities’ contained in GASB-84. As a result, the provisions of GASB-84 may adjust how state and local governments report IRC 457 and 403 plans (and similar if offered) due to the focus on whether the government has control over the funds.
When Does a Government Have Control in Accordance with GASB-84?
Component Unit or Not?
IRC 457 and 403 plans (and similar) may or may not be component units. If such entities are component units, they are fiduciary activities if they have one or more of the following characteristics:
This determination is made without regard if control is present. However, control needs to be evaluated when the relationship with such plans are not a component unit.
Control or No Control?
When a plan is not a component unit, then the government needs to ascertain whether control of assets are present. In accordance with GASB-84, par. 11, the government may control the assets of an activity such as a 457 or 403 plan, if the government:
GASB explains the word “use” in footnotes 4 and 5 to the Statement. “Use” is the ability to expend or consume the asset for the benefit of individuals, organizations or other governments outside of the government’s provision of services to them. They further explain that when a government appoints a designee to act on its behalf, the designee is performing the government’s fiduciary duties and not assuming them. Thus, appointing a designee to act on its behalf does not alter the government’s ability to direct the use, exchange, or employment of the assets. For many governments that utilize third-party administrators (TPAs) to manage or administer such plans, the government may still have control over the plan.
What May Be a Potential Reporting Solution?
If the government determines its 457 or 403 plan is a component unit or the government has control of the assets, reporting in accordance with GASB-84 of the plan will have minimal changes to what is reported today. Some of the other changes GASB-84 requires include:
If the government does not meet the requirements of GASB Statement 84 to include the 457 or 403 plan, the standard does not address the proper treatment of the withholdings and transfer of funds to the 457 or 403 plans. It is assumed the withholding and transfer of employee compensation to the plan may still need to be reported, resulting in an inflow and an outflow of resources. It is anticipated that GASB will address this when GASB issues its implementation guide for GASB 84.
For governments with such plans, this assessment of whether a fiduciary component unit exists and whether control exists are key steps in implementing GASB-84 beyond reclassification of agency funds and other aspects. GASB is in the midst of developing an Implementation Guide specifically for the provisions of GASB-84 which hopefully helps simplifying the implementation process. An exposure draft for the Guide is expected later this year. Implementation of GASB 84 is for reporting periods beginning after December 15, 2018.
If you have any questions on this issue, please contact an Eide Bailly professional.
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