Law & Policy
FASB proposes accounting changes for some cash balance plans
July 1, 2026
For the first time in 20 years, the Financial Accounting Standards Board (FASB) has suggested substantive — though limited — changes to the accounting framework for defined benefit (DB) plans. FASB’s proposed Accounting Standards Update (ASU) is restricted to certain cash balance plans and would require them to use a discount rate equal to the plan’s assumed interest crediting rate, aligning the plan’s assets and liabilities. This would eliminate a significant source of friction for employers who sponsor (or are interested in sponsoring) these plans. Accounting for other DB plans would not change. Comments on the proposal are due August 10.
Cash balance plans define a participant’s benefits using a hypothetical account that grows with principal and interest credits. Interest credits may be determined using a fixed rate or a variable rate that depends on some kind of index (subject to regulatory requirements). Historically, many cash balance plans have used a rate tied to the yield on a US Treasury bond of specified duration. Market rate cash balance plans (MRCBPs) determine interest credits based on a plan-specified measure of investment return, which may be the return of the plans’ assets (or a portion of those assets) or the return of some other benchmark portfolio.
US accounting standards generally require employers to determine DB plan benefit obligations for their balance sheet using a discount rate reflective of the rate at which the benefits could effectively be settled. For this purpose, the current standards suggest that a plan could use rates implicit in annuity purchases or rates of return on high-quality fixed-income investments. The discount rate (the rate at which projected benefit payments — often equal to the projected account balances — are discounted back to the present) generally differs from the assumed cash balance interest crediting rate (the rate at which account balances are assumed to grow in the future, based on the plan’s specified interest crediting methodology). Therefore, under the current standards, a cash balance plan’s benefit obligation for accumulated balances generally doesn’t equal the sum of the balances, but may be a greater or lesser amount.
The accounting standards were not written with MRCBPs in mind, and stakeholders have observed inconsistent practices for setting MRCBP discount rates. For MRCBPs, unlike many other types of plans, the benefits paid out tie directly to the return on the plan’s assets (or a portion thereof, or another investable portfolio). Practitioners argue that using a discount rate that differs from the expected return on the assets used to determine the assumed interest crediting rate doesn’t properly reflect the MRCBP’s economic value, and that the benefit obligation should generally equal or otherwise closely reflect the accumulated hypothetical account balances for these plans.
To eliminate these concerns, the proposed ASU would require use of the assumed interest crediting rate as the discount rate, but only for “in-scope” MRCBPs meeting the following conditions:
- The plan expresses benefits in the form of a hypothetical account balance with principal credits and interest credits based on any of the following:
o The return on plan assets
o The return on a subset of plan assets approximating the associated cash balance liabilities
o The return on a regulated investment company
- Participants have the option to elect lump sum payments
The proposal would require employers with in-scope MRCBPs to apply the amendments prospectively — that is, to use the assumed interest crediting rate as the discount rate — as of the next measurement date. Early adoption would be permitted. Employers would not have the option to continue using a discount rate based on high-quality bonds. This is consistent with FASB’s goal of reducing diversity of practice in measuring these types of plans.
FASB limited the scope of the proposed ASU to plans meeting the conditions specified above, but the proposal doesn’t address the treatment of annuity benefits. MRCBPs often have substantial liabilities associated with annuity payments, for the following reasons:
- Traditional plans that have been amended to provide new accruals in the form of an MRCBP may have a significant population of retirees and terminated vested participants with annuity benefits.
- Plans with disparate participant groups (e.g., union vs. salaried groups, employees from merged plans or merged companies, participants with benefits under a legacy formula) may have multiple formulas, some of which are not cash balance.
- Some plans offer lump sums only up to a specified limit (e.g., $25,000), with the remainder payable as an annuity.
- Plans offering lump sums generally must also offer annuities, even to cash balance participants.
Annuity benefits are not tied to the plan’s assumed interest crediting rate, and so the same economic value argument supporting the alternative discount rate does not apply once payments begin in annuity form. Those benefits, and other out-of-scope benefits (such as non-MRCBP lump sums), may more appropriately be valued using traditional bond-based discount rates. The proposed ASU, however, appears to require in-scope MRCBPs to use the assumed interest crediting rate as the discount rate for all purposes.
The proposed ASU strictly limits the scope to MRCBPs meeting the specified conditions. But stakeholders note that the economic value argument applies equally to other types of plans that also tie benefits to the return on plan assets, for example:
- MRCBPs that would otherwise be in scope except that they don’t offer a lump sum, but instead provide annuities that are converted at market rates at the participant’s retirement
- MRCBPs that provide interest credits based on a formula tied to the plan’s investment return, rather than the actual return (e.g., 95% of the plan’s investment return or the plan’s investment return subject to a cap)
- Variable annuity plans that adjust benefits based on the plan’s investment return
Some stakeholders are concerned that by limiting the scope of the proposed ASU to only a subset of the plans that would benefit from the changes, FASB may drive plan design towards in-scope plans and away from alternative designs that might better suit sponsors’ needs or the interest of plan participants.
The proposed ASU invites comment on all aspects of the proposal. In addition to questions on the proposal’s clarity, usefulness, and operability, and other routine matters, FASB asks the following:
- Should the changes be mandatory in all circumstances for in-scope MRCBPs, or would using a different discount rate be appropriate in some situations?
- Should the changes be applied to other types of cash balance plans that are economically similar to in-scope MRCBPs? If so, how should those plans be defined, and how common are they?
Comments are due August 10.
- Proposed accounting standards update (FASB, June 10, 2026)
