On June 10, 2026, the Financial Accounting Standards Board issued a Proposed Accounting Standards Update, Discount Rate Used to Measure the Benefit Obligation for Certain Market-Return Cash Balance Plans.
This update would amend Topic 715 of the FASB Accounting Standards Codification, which governs the measurement of pension liabilities for a plan sponsor’s financial statements. Under the current accounting standard, the liability measurement for a market-return cash balance plan can deviate significantly from the aggregate amount of participants’ account balances, a result that may not reflect the economic reality of these plans. The proposed update would result in liability measurements that more closely track the account balances, consistent with the plan sponsor’s true financial obligation.
Background
Cash balance plans are a type of defined benefit pension plan in which participant benefits are expressed in terms of notional account balances. The plans superficially resemble 401(k) plans, but they are treated like traditional defined benefit pension plans for funding and accounting purposes.
Some cash balance plans credit the notional account balances with a fixed rate of interest, such as 5% per year, while others use a crediting rate that varies based on one or more indicators of the broad financial markets, such as bond yields or stock market index returns. The Pension Protection Act of 2006 (“PPA”) clarified the ability of cash balance plans to credit interest on the notional accounts based on the actual rate of return earned by the underlying plan assets. Plans following this approach are known as market-return cash balance plans, and their popularity has steadily grown since the PPA’s passage.
Historically, the assets of cash balance plans were generally not invested in portfolios that would produce returns equal to the plan’s interest crediting rate on the notional accounts. For example, a cash balance plan that provides an interest crediting rate equal to the yield on 20-year Treasury bonds would likely not hold assets designed to produce this rate of return. The plan’s interest crediting rate is a plan provision that reflects the plan sponsor’s intended plan design that is entirely separate and distinct from the actual rate of return on plan assets. The plan sponsor’s financial obligation to the plan could be higher or lower than the sum total of the account balances, depending on whether the rate of return on the plan assets is above or below the plan’s interest crediting rate.
Market-return cash balance plans are different. In these plans, the interest crediting rate on the notional accounts is, by design, equal to the rate of return earned by the plan assets. If the plan’s asset portfolio earns 7% in a year, then all participant notional accounts receive 7% interest for that year. Putting aside ancillary factors such as benefits paid as annuities rather than lump sums, and the preservation of capital requirement, the plan sponsor’s financial obligation to the plan is equal to the aggregate total of the account balances. All investment experience is passed on to participants, so the sponsor is financially indifferent to the rate of return on plan assets.
Analysis
FASB Topic 715 currently requires that the discount rates applicable to future pension payments “reflect the rates at which the pension benefits could be effectively settled,” which is generally understood to be the yields available on investment-grade corporate bonds. It also requires that other actuarial assumptions “reflect the best estimate solely with respect to that individual assumption.” These requirements apply to all defined benefit pension plans, including cash balance plans.
Applied to a market-return cash balance plan, these rules could distort the plan’s true financial impact. This is because the future interest crediting rate assumption would reflect the anticipated return on plan assets, while the discount rate applied to future payments from the plan would reflect current bond yields. These two rates are unlikely to be the same, meaning that the notional accounts would be projected into the future at one interest rate, and then discounted back to the present date at a different rate. The resulting balance sheet liability is likely to be materially different from the aggregate total of the account balances – the sponsor’s true financial obligation.
In the proposed update, FASB acknowledges the drawbacks to the current accounting standard as applied to market-return plans, and proposes a revision. The proposal provides an exception to the discount rate requirement for market-return cash balance plans, whereby future benefit payments from these plans would be discounted using the assumed interest crediting rate. For example, if the expected crediting rate were 6.5% per year, under the proposed update, future plan payments would be discounted back to today at this same rate (i.e., 6.5%), resulting in a liability measurement that is substantially the same as the aggregate account balance.
Observations
Under the current accounting standard, it is common for plan sponsors to be required to record a balance sheet liability that overstates their true financial obligation to a market-rate cash balance plan. By eliminating this possibility, the proposed update removes a potential barrier to adopting this plan design.
We note, however, that a similar issue may exist with respect to the ERISA minimum funding requirements and PBGC premium calculations for these plans. FASB’s jurisdiction is limited to the accounting treatment of these plans, though it is possible that this action by FASB will encourage IRS and PBGC to consider similar regulatory changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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