GASB Finalizes Reporting Rules for 457 Plans

The Government Accounting Standards Board (GASB) has finalized rules proposed in March by issuing Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.

The agency says the new guidance is designed to reduce costs and increase the consistency and comparability of reporting state and local governments’ fiduciary component units. Statement 97 requires that, for purposes of determining whether a primary government is financially accountable for a potential component unit—except for a potential component unit that is a defined contribution (DC) plan, a DC other post-employment benefits (OPEB) plan or other employee benefit plan—the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically performs.

Appointment of a voting majority is a criterion in existing standards used to determine whether a legally separate entity should be incorporated into the government’s financial statements.

Prior standards presumed that all Section 457 plans were not pension plans and, therefore, were not subject to pension plan reporting requirements; therefore, benefits provided through Section 457 plans were not reported as pension benefits. Under Statement 97, however, Section 457 plans should be classified as either a pension plan or other employee benefit plan, depending on whether the plan meets the definition of a pension plan.

After further considering the perceived costs associated with applying existing standards—specifically, paragraph 7 of Statement No. 84, Fiduciary Activities—the board, in Statement 97, decided to limit the application of the financial burden criterion regarding contributions to postemployment benefit plans to only defined benefit (DB) plans and DB OPEB plans that are administered through trusts. The new guidance clarifies that Statement 84, as amended, should be applied to all arrangements organized under Section 457 to determine whether those arrangements should be reported as fiduciary activities.

Statement 97 supersedes the remaining provisions of Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, as amended, regarding investment valuation requirements for Section 457 plans. As a result, investments of all Section 457 plans should be measured as of the end of the plan’s reporting period in all circumstances.

The requirements of Statement 97 that exempt primary governments that perform the duties that a governing board typically performs from treating the absence of a governing board the same as the appointment of a voting majority of a governing board in determining whether they are financially accountable for DC plans, DC OPEB plans, or other employee benefit plans and that limit the applicability of the financial burden criterion in paragraph 7 of Statement 84 to DB plans and DB OPEB plans that are administered through trusts are effective immediately. Other requirements are effective for fiscal years beginning after June 15, 2021. The GASB says earlier application of those requirements is encouraged and permitted.