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Section 115 integral advisory trusts

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Guest publicagencyfinance

Section 115 trusts are being touted as the solution for GASB 43 and 45 funding by several mutual fund and insurance providers. Will these trusts be usable for reduction of accrued liabilty for GASB purposes? I have issues with these trusts, primarily since little seems to be know about them except the claims made. Any help or sources?

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Guest mjb

In order to get any feedback you need to explain what a Section 115 trust is (is it an IRC section?) and what kind of benefits are provided and what GSAB 43 and 45 covers.

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Section 115 of the IRC excludes income accuing to a government for "any essential governmental function". A so-called "115 Trust" is simply a grantor trust established by the governmental unit to set aside funds for such things as paying off bonds issued, paying future employee benefits, etc. The accumulation within such trusts is excluded from Federal income taxes.

I don't believe that they are a "solution" for anything. In fact, no trust is necessary. The governmental unit can simply set funds aside in their budget, in a separate account, etc. for such purposes and still fall under IRC 115.

The basic problem with such arrangements is politics: whenever there is a pot of funds under control of the governmental unit, the governmental officials get tempted to gain political capital by cutting taxes, building infrastructure, providing services, etc. It's too easy to reallocate the funds and push the problem onto the next administration.

A better "solution" would be to use a VEBA [iRC section 501©(9)] trust that does not permit the employer to invade the funds that have been earmarked and set aside to provide benefits to employees.

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Guest publicagencyfinance
Section 115 of the IRC excludes income accuing to a government for "any essential governmental function". A so-called "115 Trust" is simply a grantor trust established by the governmental unit to set aside funds for such things as paying off bonds issued, paying future employee benefits, etc. The accumulation within such trusts is excluded from Federal income taxes.

I don't believe that they are a "solution" for anything. In fact, no trust is necessary. The governmental unit can simply set funds aside in their budget, in a separate account, etc. for such purposes and still fall under IRC 115.

The basic problem with such arrangements is politics: whenever there is a pot of funds under control of the governmental unit, the governmental officials get tempted to gain political capital by cutting taxes, building infrastructure, providing services, etc. It's too easy to reallocate the funds and push the problem onto the next administration.

A better "solution" would be to use a VEBA [iRC section 501©(9)] trust that does not permit the employer to invade the funds that have been earmarked and set aside to provide benefits to employees.

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Section 115 trusts are being touted as the solution for GASB 43 and 45 funding by several mutual fund and insurance providers. Will these trusts be usable for reduction of accrued liabilty for GASB purposes? I have issues with these trusts, primarily since little seems to be know about them except the claims made. Any help or sources?

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Try looking at Rev. Rul 77-261,1977-2 C.B. 45 , Rev. Rul 90-74, 1990-2 C.B. 34 and PLR 200606007. Additionally the GASB Implementation Guide and the Web site are very helpful www.gasb.com . There is an interactive Technical Inquiry procedure with the website that works very well. You get a contact back within 24-48 hours with your answer and additional help.

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Guest americasVEBA.com

A GASB qualified trust or equivalent arrangement must meet the criteria established in GASB Statement 43 Par 4 which states:

a) Employer contributions to the plan are irrevocable

b) Plan assets are dedicated to providing benefits to their retirees and their beneficiaries in accordance with the terms of the plan

c) Plan assets are legally protected from creditors of the employer(s) or the plan administrator

Considering that 115 trusts are an integral part of the government reported on the government wide financial statements we have some concerns over their use for GASB OPEB funding. In my opinion the use of a 115 trust is uncertain:

• Does a §115 trust meet the "separate and apart" requirements for a GASB OPEB qualified trust?

• Does a §115 trust subject (and limit) the employer to state specific investment of public funds rules and regulations?

I have contacted the GASB on numerous occasions to ask these questions. I have yet to receive a satisfactory answer that would give me any comfort in recommending 115 trusts to our advisors and distribution partners.

A safer alternative would be to use a 501©(9) VEBA trust which meets the definition by default. VEBAs are their own tax entity having their own FEIN making them separate and apart from the assets of the sponsoring employer. VEBA assets can never revert to the employer and must be used for the exclusive purpose of providing benefits to plan members. The trust must receive an IRS determination letter on its tax exempt status. Being that VEBAs are separate and apart from the governmental employer funding them, they satisfy the GASB 43 criteria as a qualified OPEB trust. VEBAs have been used by private sector employers for funding OPEBs; however, the earnings recieved on trust assets are taxable as unrelated business income (UBIT), making them less attractive. UBIT does not apply to non-profit or public sector employers as they are tax exempt entities. Additionally, VEBAs have existed since 1928 and there is plenty of case law and Revenue guidance to support their use for pre-funding OPEB obligations.

To answer the original question posted by publicagencyfinance, the governmental employer sponsors the trust and it is controlled by the employer. For these reasons I too agree with your concerns. The "win" for the governmental employer in establishing a qualified trust or equivalent arrangement is that a qualified trust allows actuaries to use a long-term discount rate when calculating the global OPEB liability. This can have a tremendous mitigation effect for the sponsoring employer. For more information see the America's VEBA website

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Guest Thomas2006

I am drafting a Section 115 Trust, does anyone have a form they would be willing to share?

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Guest mcw

Thomas2006 - I do not but am also drafting a 115 Trust. If you found a form that you would be willing to share, I would appreciate it.

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Guest Patriot190

mcw and Thomas2006... I, too, am looking for a 115 trust document. I am guessing documents would vary by state, so I am looking for one usable under Missouri statues.

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Guest Exec_Ben_N_Ret_Med_Guru

A GASB qualified trust or equivalent arrangement must meet the criteria established in GASB Statement 43 Par 4 which states:

a) Employer contributions to the plan are irrevocable

b) Plan assets are dedicated to providing benefits to their retirees and their beneficiaries in accordance with the terms of the plan

c) Plan assets are legally protected from creditors of the employer(s) or the plan administrator

Considering that 115 trusts are an integral part of the government reported on the government wide financial statements we have some concerns over their use for GASB OPEB funding. In my opinion the use of a 115 trust is uncertain:

• Does a §115 trust meet the "separate and apart" requirements for a GASB OPEB qualified trust?

• Does a §115 trust subject (and limit) the employer to state specific investment of public funds rules and regulations?

I have contacted the GASB on numerous occasions to ask these questions. I have yet to receive a satisfactory answer that would give me any comfort in recommending 115 trusts to our advisors and distribution partners.

A safer alternative would be to use a 501©(9) VEBA trust which meets the definition by default. VEBAs are their own tax entity having their own FEIN making them separate and apart from the assets of the sponsoring employer. VEBA assets can never revert to the employer and must be used for the exclusive purpose of providing benefits to plan members. The trust must receive an IRS determination letter on its tax exempt status. Being that VEBAs are separate and apart from the governmental employer funding them, they satisfy the GASB 43 criteria as a qualified OPEB trust. VEBAs have been used by private sector employers for funding OPEBs; however, the earnings recieved on trust assets are taxable as unrelated business income (UBIT), making them less attractive. UBIT does not apply to non-profit or public sector employers as they are tax exempt entities. Additionally, VEBAs have existed since 1928 and there is plenty of case law and Revenue guidance to support their use for pre-funding OPEB obligations.

To answer the original question posted by publicagencyfinance, the governmental employer sponsors the trust and it is controlled by the employer. For these reasons I too agree with your concerns. The "win" for the governmental employer in establishing a qualified trust or equivalent arrangement is that a qualified trust allows actuaries to use a long-term discount rate when calculating the global OPEB liability. This can have a tremendous mitigation effect for the sponsoring employer. For more information see the America's VEBA website

Above you say "however, the earnings received on trust assets are taxable as unrelated business income (UBIT), making them less attractive. UBIT does not apply to non-profit or public sector employers as they are tax exempt entities." Do we know if this is actually the case?

Under Treas. Reg. §1.511-2(a)(1)(i); §1.511-2(b) the income of a governmental plan trust appears to be subject to UBIT. But an argument can be made that governmental plans should be exempt under section 115(2), which provides that gross income does not include income derived from the exercise of any essential governmental function that accrues to a state or political subdivision. See Rev. Rul. 90-74, 1990-2 C.B. 34, which held that income of an organization formed by a political subdivision to pool risks arising from workers’ compensation and employees’ health is excluded from gross income under section 115.

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