By Jeff Chang
Substantial confusion exists about whether the assets of an Internal Revenue Code section 115 trust created to fund pension or OPEB (retiree health) obligations may be used to offset the overall pension or OPEB liabilities that public employers are required to report under Government Accounting Standards Board Statements (Statement 68 for pension liabilities; Statement 75 for OPEB liabilities).
Statement 75 was issued in June 2015 as a replacement of GASB Statement 45 (issued in June 2004). GASB 45 became effective in phases between 2006 and 2008. GASB 45, and the guidance surrounding it, led many public agencies to believe that monies set aside in a 115 trust could be counted as an offset against OPEB liabilities on their financial statements. As a result, a number of these agencies established either a 115 trust or a section 501(c)(9) trust (a VEBA) for this purpose.
Since about 2007, a considerable number of retirement plan and employee benefit plan service providers in the public arena, including CalPERS, have begun to offer a variety of pension and OPEB “funding solutions,” including template 115 trust document, recordkeeping and investment services. A number of these newer trust offerings are promoted as “rate stabilization” or “side funding” arrangements that give agencies the flexibility to set aside monies on some basis to fund future OPEB or pension obligations, without actually contributing the monies directly to the trust fund or plan (e.g., CalPERS) that pays the OPEB or pension benefits. We’ll call this category of funding “side-fund arrangements.” The use of pension side-funding has gained momentum because many public agencies have become concerned about predictions of ever-increasing employer contribution requirements for the state-wide pension systems in which they participate (e.g., CalPERS).
With the advent of side-fund arrangements, we now have two types of 115 trusts: those designed to fund and pay pension and OPEB benefits directly and those designed to set aside monies from the general assets of the employer for future use toward pension or OPEB obligations. Much of the current confusion regarding whether 115 trust assets can be used to offset pension or OPEB liabilities for GASB purposes stems from proposed guidance issued by the GASB board in early 2017. In proposed Q&As regarding the implementation of Statement 75, GASB indicated that side-fund arrangements, even though irrevocably dedicated for pension or OPEB purposes, could not be counted as pension or OPEB plan assets, which offset respective plan liabilities. Due to the prevalence of such side-fund arrangements, a number of public agency employer groups, including GFOA, complained to GASB about this guidance. A year has passed since this issue was raised, and it appears that the GASB interpretation will likely stay in place. Furthermore, due to the controversy over the treatment of side-fund arrangements, many government accounting firms and their clients remain confused about whether all section 115 trusts will be treated this way – or only those that operate as side-fund arrangements.
We have examined the “trust equivalent” requirements (for amounts to offset GASB liabilities) under both the old (GASB 27 and 28 for pensions; 43 and 45 for OPEB) and the new (GASB 67 and 68 for pensions; 74 and 75 for OPEB) guidance. These rules and definitions really have not changed much. Basically, amounts held in trust (whether in a 115 trust or VEBA) may be used to offset pension and OPEB liabilities for GASB purposes, if:
- The contributions and earnings to the trust are irrevocable;
- The assets of the trust are dedicated to providing plan benefits to plan participants and the funding arrangement is actually used to pay benefits;
- The assets of the trust are legally protected from the creditors of sponsoring employer(s).
If you expect to have the monies your organization sets aside to pay for future pension or OPEB obligations count now as an offset against your pension and/or OPEB liabilities, it is critically important to understand the exact purpose and legal details of the trust you are using or plan to use.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.