With the issuance of GASB Statement 97, defined contribution plans can now enjoy some favorable treatment when it comes to applying GASB Statement 84 for other types of Fiduciary Funds.
In June 2020, GASB issued a pronouncement that amended the Fiduciary Funds accounting standard.
When GASB Statement 84 was first issued, the standard impacted how governments would treat 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. More specifically, the answer to two questions in that Implementation Guide would have caused most governmental entities 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.
GASB then completed a project to explore the impact the standards change was having on governmental financial statements.
The result of this project was 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.
The result of this standard was 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.
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 evaluation should include whether the government is the trustee of the plan, makes all investment decisions, determines all benefits, and other similar factors. GASB also stated 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 also addressed Section 457 plans. An entity with a 457 plan will need to first determine whether that plan meets the definition of a pension plan. If the Section 457 plan doesn’t meet the definition of a pension plan, they are treated like any other employee benefit plan for accounting and financial reporting purposes and would be reported using GASB 84 standards accordingly.
As you are examining your potential fiduciary activities with respect to defined contribution plans, GASB Statement 84, and / or GASB Statement 97, feel free to reach out to our governmental accounting and auditing experts if you have any questions.