GASB has issued Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans. Statement No. 97 address two matters: (1) an urgent issue that has come up during the implementation of Statement No. 84 regarding whether defined contribution plans and deferred compensation plans meet the definition of component units, and (2) the accounting treatment for Section 457 deferred compensation plans that operate as de facto pension plans.

Component Unit Status of Defined Contribution and Deferred Compensation Plans

Statement No. 84, Fiduciary Activities, is effective for governments with fiscal year-ends of December 31, 2019 or later, although Statement No. 95 subsequently extended the effective date to fiscal year ends of December 31, 2020 or later. Statement No. 97 clarifies when certain activities should be reported by governments within a fiduciary fund. Statement No. 84 outlines two paths that could result in a pension plan, OPEB plan, or deferred compensation plan where assets are held in trust being recorded within a fiduciary fund: (1) the plan meets the definition of a component unit (an external organization that should be included within the primary government’s reporting entity), as defined under Statement No. 14, and subsequently revised by other GASB statements; or (2) the government controls the assets within the trust, as further defined by Statement No. 84.

Statement No. 84 and the related Implementation Guide 2019-2 provide further guidance to assist in determining whether a plan meets the definition of a component unit. Implementation Guide 2019-2, question 4.5 states that, in situations where a plan does not have its own governing board, but the sponsoring government’s board functions as the plan’s board, this should be treated as the equivalent of the sponsoring government appointing the plan’s board for purposes of determining whether the plan is a component unit. Additionally, paragraph 7 of Statement No. 84 states that, when a government is legally obligated or has otherwise assumed the obligation to make contributions to a plan, the government is considered to have a financial burden to the plan.

The GASB intended these two provisions to result in defined benefit pension and OPEB plans being captured as component units within the financial statements. However, an unintended consequence has been that many defined contribution pensions, OPEB plans and deferred compensation plans also meet these requirements, which would require them to be reported as component units. Often, governments have not reported the assets and activity of defined contribution plans and deferred compensation plans within their financial statements in the past, which would cause difficulty for governments who must figure out how to obtain the necessary information to report these for the first time.

Accordingly, Statement No. 97 provides some relief in this area. Paragraph 4 clarifies that defined contribution plans and other employee benefit plans (which includes deferred compensation plans) are excluded from the requirement regarding the government’s board acting as the plan’s board. Similarly, paragraph 5 clarifies that the requirement to treat an obligation to make contributions to a plan as a financial burden applies only to defined benefit pension and OPEB plans.

The result is that Statement No. 97 should excuse most defined contribution plans and deferred compensation plans from being reported as component units. Due to the urgency of these changes as some governments are already implementing Statement No. 84, this portion of Statement No. 97 is effective immediately. It should be noted, however, that governments with defined contribution plans and deferred compensation plans will still need to evaluate whether they have control over the assets within the plan trusts, as discussed in the first paragraph of this section. If so, this will result in these plans being reported within fiduciary funds.

Accounting and Financial Reporting Treatment of Section 457 Plans

The second portion of Statement No.97 addresses the accounting and financial treatment for Section 457 deferred compensation plans. Statement No. 97 requires that Section 457 plans that meet the GASB’s definition of a pension plan be accounted for as pension plans. The definition of a pension plan is located in paragraph 51 of Statement No. 67 and paragraph 128 of Statement No. 73. Otherwise, the plan is considered an other employee benefit plan.

This represents a departure from the accounting treatment proscribed by Statement No. 32. At the time Statement No. 32 was issued in 1997, the GASB did not consider Section 457 plans to be pension plans, but considered them to be similar to tax-deferred employee savings plans. However, in the two decades since Statement No. 32 was issued, the Internal Revenue Code as well as the usage of Section 457 plans have changed such that the GASB now considers many of these plans to be similar in nature to pension plans, thus warranting the change in accounting treatment. This is particularly the case for Section 457 plans that receive employer contributions (instead of employee contributions only) and where a defined benefit is promised to plan participants.

Statement No. 97 requires that Statement No. 84, as amended, be used to determine whether an arrangement organized under IRC Section 457 should be reported as a fiduciary activity in a government’s fiduciary fund financial statements.

Additionally, Statement No. 97 requires that any plan meeting the definition of a pension plan that (a) is included in the financial statements of another government, or (b) issues stand-alone financial statements, should apply all of the financial reporting and disclosure requirements for pension plans found in Statement No. 67. Similarly, Statement No. 97 specifies that all accounting and financial reporting requirements relevant to pensions be applied to benefits provided through Section 457 plans that meet the definition of a pension plan. This includes the requirements of Statement No. 68.

The provisions of this portion of Statement No. 97 are effective for fiscal years beginning after June 15, 2021. Earlier application is permitted.

The full text of Statement No. 97 is available here.

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