Examining reporting standards criteria

City or county officials in charge of IRC Section 457 deferred compensation plans may have questions about their fiduciary responsibilities under the new Governmental Accounting Standards Board (GASB) Statement 32. The degree to which a local government administers its plan is a key point in determining its reporting requirements.

Often, a local government forwards payroll withholdings to a third-party administrator. If the government does not have responsibility for the plan and is not formally considered the plan’s trustee, then it would not have fiduciary accountability and is not required to report the plan in its financial statements.

Conversely, a government may self-administer its plan, performing all investment and accounting functions. In that case, the government clearly has fiduciary accountability for the plan and should report it in its financial statements as an expendable trust fund.

Statement 32 from the GASB states that “a deferred compensation plan that meets the criteria in [National Council on Governmental Accounting] Statement 1, … paragraph 26(3)(8), for inclusion in the fiduciary funds of a government should be reported as an expendable trust fund … .” Thus, governments must determine whether their 457 plans are “held by a governmental unit in a trustee capacity or as an agent for [others] … .”

Some plans may meet this criterion; others will not. The GASB has not defined what is meant by the terms “trustee capacity” or “agent,” and it has not provided guidance on what activities meet this fiduciary criterion. The challenge for municipalities, therefore, is to determine whether their level of involvement with plan activities is great enough to meet that criterion.

Statement 32 addresses the new Internal Revenue Code subsection 457 (g), which states that “all assets and income of the plan … are [to be] held in trust for the exclusive benefit of participants and their beneficiaries … .” Plans existing before Aug. 21, 1996, have until Jan. 1, 1999, to comply.

However, until a plan’s assets are held in trust, GASB Statement No. 2, which has been in effect for more than a decade, still applies. Statement 2 requires all plans to be reported in agency funds or as assets and liabilities of proprietary funds. Governments that use third-party administrators for their 457 plans should consult with the administrators to determine whether their plans comply with the trust provision.

Once the matter of a trust has been resolved, the next question is whether the plan covers a governmental-type fund. With the exception of public employee retirement systems, proprietary-type funds and entities (those managed like private sector businesses) traditionally do not report fiduciary activities such as 457 plans. At the moment a plan complies with the new trust provision, Statement 32 supersedes Statement 2 and its reporting requirements.

Thus, under Statement 32, enterprise and internal service funds need not report 457 plan assets or liabilities. Likewise, special purpose governments – utilities, for example – that use enterprise accounting, do not need to report 457 plans. On the other hand, if a 457 plan covers governmental-type funds or entities (e.g., a city general fund), that plan might have to be reported.

Finally, only one government at a time will meet the fiduciary criterion for any given 457 plan. Therefore, if one government administers and correctly reports the plans of other governments, those other governments would not have to report their individual plans.