Loading article...
On June 10, 2026, the Financial Accounting Standards Board (FASB) published an exposure draft/Proposed Accounting Standards Update “Discount Rate Used to Measure the Benefit Obligation for Certain Market-Return Cash Balance Plans.” If adopted, the proposal would allow most sponsors of market-return cash balance (MRCB) plans to report participant liabilities as equal to the participant account balances.
In this note we briefly review the proposal, beginning with some background.
Cash balance plans are defined benefit plans that provide a benefit based on principal credits (often referred to as pay credits) to the participant’s account (equivalent to contributions to a participant’s account in a DC plan) plus interest credits (equivalent to DC plan account earnings). While, classically, cash balance plan interest credits were at a stated interest rate (e.g., 4% per year or the prior year’s 30-year Treasury Yield), market-return cash balance plans provide interest credits based on the return on plan assets or the return on a regulated investment company.
Oversimplifying somewhat, and while there is some variability in approach, currently sponsor financial disclosure of cash balance plan liabilities (e.g., the projected benefit obligation) are determined by projecting the current benefit (the account balance) plus future interest credits, and then discounting that amount back to the valuation date using a discount rate derived from current market rates.
This approach – projecting at one rate (e.g., the plan’s interest crediting rate) and discounting at a different rate – can produce a benefit obligation that often is different from (and is almost always larger than) the plan’s hypothetical account balances.
The current accounting rule may make sense for a traditional cash balance plan, in which the interest crediting rate is generally unrelated to the plan’s discount rate, by allowing recognition of the economic effect that difference.
But MRCB plans function much more like defined contribution plans, where returns on plan accounts equal returns on plan assets. In that context, as FASB says, the current accounting rule “may not reflect the economics of those plans.”
FASB’s proposal: discount rate = assumed rate of return
Under FASB’s proposal, if an MRCB plan meets certain requirements, then “the plan’s assumed interest crediting rate shall be used as the assumed discount rate.” This will generally (and with a couple of nuances noted below) produce a plan obligation equal to the current value of participant accounts.
a. Pension benefits are communicated to employees in the form of an account balance that comprises principal credits and interest credits based on an investable market return in any of the following forms:
The return on plan assets
The return on a subset of plan assets that approximates the associated cash balance liabilities
The return on a regulated investment company.
b. Participants have the option to elect lump-sum payments.
Why not just say that the plan obligation is equal to the account balance (called the “walkaway amount”)? That alternative was considered, but FASB thought it was necessary to take the “project/discount at the same rate” approach “because measuring the obligation solely as the walkaway amount would omit plan features that would be reflected in measuring the present value of the benefit obligation for [covered] plans (such as the effect of the preservation of capital feature or the annuity option feature).” The latter two features are (of course) required by ERISA.
What the proposal does not discuss is how to account for a plan part of which follows the requirements noted above and part of which does not. Two situations that might not be covered by the proposal are (1) plans with participants in pay status that have elected an annuity and (2) plans a part of which have a design not covered by the proposal (e.g., a grandfathered benefit). In our view, logic would dictate that sponsors would follow the proposal for the part of the plan that is a market-return cash balance plan but use the existing Standard for the other part of the plan.
FASB “will determine the effective date after it considers stakeholder feedback on the amendments in [the proposal].” Sponsors will have to comply prospectively at the next pension measurement date after the effective date.
Comments are due by August 10, 2026.
We will continue to follow this issue.
* * *
This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com. The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.