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Possible Improvements Coming to the Way 457 Plans Are Administered by Municipalities

 Thproposed Statement is intended to improve the relevance, consistency, and comparability of the accounting and financial reporting for Section 457 plans that meet the definition of a pension plan.

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 Thproposed Statement is intended to improve the relevance, consistency, and comparability of the accounting and financial reporting for Section 457 plans that meet the definition of a pension plan.

Back in 1999, Internal Revenue Code Section 457 plans were removed from financial reporting requirements through the Governmental Accounting Standards Board Statement No. 32 (GASB 32). Now, 20 years later, the GASB released an exposure draft on the Proposed Statement – “Internal Revenue Code Section 457 Deferred Compensation Plans That Meet the Definition of a Pension Plan and Supersession of GASB Statement 32.”

This proposed Statement is intended to improve the relevance, consistency, and comparability of the accounting and financial reporting for Section 457 plans that meet the definition of a pension plan. This involves arrangements through which pensions are determined, assets dedicated for pensions (if any) are accumulated and managed, and benefits are paid as they come due. Simply put, in order for a deferred compensation plan to be considered a pension plan, the employer needs to provide a benefit to the employee.

In most situations, the benefit will likely be an employer contribution. For example, if a municipality provides employees with a Defined Contribution 457 Plan, in which only employees contribute, the employer would not be providing a benefit, and this would not be considered a pension plan. However, if the employer also contributes to the plan, they would be providing a benefit, and the plan would be considered a pension plan, and fall under the standard.

While employer contributions are the most common way for an employer to provide employees with a benefit, it is not the only way. For example, a municipality may not make a contribution to its Defined Benefit 457 Plan, but provide a guaranteed rate of return. This guarantee is considered a benefit and thus this plan would be considered a pension and fall under the provisions of new standard.

If a municipality has determined that its 457 plan indeed provides a benefit to employees and is considered a pension plan, then all accounting and financial reporting requirements that are relevant to pension plans should be applied, effectively following the standards of GASB 67/68 or GASB 73, depending on if the plan is administered through a trust or not.

This proposed Statement would be effective for fiscal years beginning after December 15, 2020, which would most commonly be fiscal years beginning January 1, 2021 or July 1, 2021. Municipalities and benefit plan managers within them need to be aware of the possible changes coming through GASB and prepare accordingly.

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