Employee Benefits & Executive Compensation Benefits Alert for Tax Exempt and Government Entities - Spring 2008

 June 30 Deadline for Phase 1 Virginia Localities to Adopt Trust for OPEB Liabilities

Statement No. 45 of the Governmental Accounting Standards Board (GASB) requires governmental entities to recognize expenses relating to post employment benefits other than pensions (OPEB). OPEB benefits include post-employment health benefits, health-related benefits such as medical, dental, vision, hearing, and other types of post-employment benefits such as life insurance, disability, and long-term care. Statement No. 45 permits assets to be set aside to offset the OPEB liability on the financial statements of the governing body.

Virginia localities and other political subdivisions may establish a trust for the purpose of accumulating and investing assets to fund OPEB liabilities. The trust may operate as an investment vehicle for only one locality or political subdivision or may in some instances be pooled with investments for other Virginia localities and political subdivisions.

The governing bodies empowered to establish an OPEB trust include:
  • The governing body of any county, city, town;
  • The governing body of any other political subdivision that is appointed in whole or in part by the governing body of such county, city, or town, if authorized to establish an OPEB trust by such county, city or town; and
  • Any appointed or elected school board.
Implementation of the new accounting standard will occur in three phases based on the governing body's total annual revenues in the first fiscal year ending after June 15, 1999:
  • Phase 1 Government bodies
    • Total annual revenues of $100 million or more
    • Periods beginning after December 15, 2006
  • Phase 2 Government bodies
    • Total annual revenues of $10 million or more but less than $100 million 
    • Periods beginning after December 15, 2007
  • Phase 3 Government bodies
    • Total annual revenues of less than $10 million
    • Periods beginning after December 15, 2008

Phase 1 government bodies are currently in the process of establishing OPEB trusts prior to the close of this fiscal year on June 30, 2008. Municipalities may participate in the VML/VACO Master Trust by Joinder Agreement, adopt their own individual trust, or remain unfunded (which may or may not affect a municipalities bond rating). If you would like any further information on establishing a trust to fund OPEB liabilities or an explanation of the requirements, please contact Jim Kolan of the Employee Benefits Practice Group at Kaufman & Canoles at (757) 624-3135.


Reminder to Update Ineligible Deferred Compensation Plans . . .

In Notice 2007-62, August 6, 2007, the IRS provided preliminary guidance on the definitions of substantial risk of forfeiture under Code 457(f)(1)(B) as applied to ineligible deferred compensation plans for tax exempt entities and state and local governments. Ineligible deferred compensation plans enable key executives of tax-exempt entities to accumulate deferred compensation in excess of the annual contribution limits ($15,500 in 2008) applicable to eligible plans.

The Code 409A regulations which form the basis of the new rules generally provide that a right to an amount of compensation is subject to a substantial risk of forfeiture if entitlement to the amount is (a) conditioned on the performance of substantial future services or (b) the occurrence of a condition that is related to a purpose of the compensation and the possibility of forfeiture is substantial. Neither a covenant not to compete nor a rolling risk of forfeiture will constitute a substantial risk of forfeiture under the new rules.

Pending the issuance of further guidance, state and local governments and tax-exempt employers may rely on the guidance described above. It is anticipated that further guidance will be applied prospectively.

With respect to existing nonqualified deferred compensation plans, tax exempt and state or local government employers should:
  • Review all agreements with employees regarding substantial risks of forfeiture to determine whether the agreements comply with the new guidelines; and
  • Make arrangements to amend all noncompliant agreements when the final guidelines are issued.

. . . and 403(b) Tax Sheltered Annuity Plans

The final regulations under Code section 403(b) will be effective on January 1, 2009. All tax-exempt employers, state colleges and universities and public schools that provide a 403(b) plan for their employees are required to have adopted written plan documents on or before December 31, 2008. In addition, a 403(b) plan that allows for contract exchanges between different annuity vendors under the plan must have entered into an information sharing agreement with the issuers of the annuity contracts under which the employer and the issuer will from time to time in the future provide each other with employment status information and information necessary for the resulting contract to satisfy other tax requirements.

Kaufman & Canoles offers a prototype 403(b) plan document that is easy to implement, flexible and cost effective. Plan sponsors with questions about implementing these requirements should contact Jim Kolan or Ann Bruce.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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