FASB Proposes New Guidance for Market-Return Cash Balance Pension Plans

FASB Proposes New Guidance for Market-Return Cash Balance Pension Plans

On June 10, 2026, FASB issued a proposed Accounting Standards Update addressing accounting for market-return cash balance plans under ASC 715, Compensation — Retirement Benefits. The proposal targets a specific and growing category of defined benefit pension plan where practice has been inconsistent, creating comparability challenges for investors and complexity for plan sponsors.

What Is a Cash Balance Plan?

A cash balance plan is a type of defined benefit pension plan in which the benefit is expressed as a hypothetical account balance rather than as a traditional annuity formula (e.g., 1.5% × years of service × final salary). Each year, the participant's hypothetical account is credited with:

• A pay credit — typically a percentage of the participant's annual compensation, and
• An interest credit — an amount that grows the hypothetical balance over time

At retirement, the participant receives the accumulated hypothetical account balance, usually as a lump sum or converted to an annuity.

Despite having the appearance of a defined contribution plan to participants, cash balance plans are classified as defined benefit plans under US GAAP because the employer bears the investment risk — the actual plan assets must be sufficient to fund the promised hypothetical account balances.

What Makes Market-Return Plans Different?

In a market-return cash balance plan, the interest crediting rate is tied to actual market returns — typically a broad equity or bond index such as the S&P 500 or the return on the plan's own assets. This is in contrast to traditional cash balance plans that use a fixed rate or a rate linked to a government bond yield.

The market-return feature creates a distinctive accounting challenge: the projected benefit obligation (PBO) under ASC 715 is highly sensitive to assumptions about future market returns, which are volatile and difficult to estimate reliably. Additionally, because the interest crediting rate can move in tandem with the discount rate used to measure the PBO, the traditional actuarial assumptions applied under ASC 715 may not capture the economics of these plans appropriately.

What the Proposed ASU Addresses

1. Interest Crediting Rate Assumptions

Under current ASC 715, the PBO is measured by projecting future benefit payments and discounting them to present value using a high-quality corporate bond rate. For market-return plans, actuaries must also project what the interest crediting rate will be over the participant's career — a projection that involves significant estimation uncertainty when the rate is linked to equity market returns.

The proposed amendments are expected to provide specific guidance on the actuarial assumptions to be used when the interest crediting rate is linked to market returns, potentially requiring entities to reflect the expected return on the market index or the plan's own asset return as the projected crediting rate, rather than using a fixed or bond-based assumption.

2. Interaction with the Floor on Interest Credits

Many market-return cash balance plans include a minimum interest credit floor — for example, a guarantee that the interest credit will never be less than 0%, even if the index returns are negative. This floor creates an embedded option (analogous to an interest rate floor in a financial instrument) that affects the measurement of the PBO.

The proposed ASU is expected to clarify how the option value of the floor should be reflected in actuarial calculations, which has been an area of divergent practice.

3. Classification of Interest Credits in Net Periodic Benefit Cost

ASC 715-30 requires that the components of net periodic benefit cost be classified separately:

• Service cost — classified with other employee compensation costs (typically operating expenses)
• Other components (interest cost, expected return on assets, amortization of actuarial gains/losses) — classified outside of operating income under ASC 715-20

For market-return plans, the interest crediting component of the benefit obligation may have characteristics of both service cost (it is earned period by period based on the market return) and interest cost (it accretes the existing obligation). The proposed ASU is expected to clarify the appropriate classification, which affects whether the cost appears in operating income or below the operating line.

Why This Matters for Financial Statement Users

The inconsistency in current practice means that two companies sponsoring economically similar market-return cash balance plans may report materially different pension costs and obligation measurements depending on the actuarial assumptions chosen. This limits investors' ability to compare benefit cost burdens across companies in the same industry.

Additionally, for plan sponsors:

• The PBO volatility associated with market-linked crediting rates can create significant swings in other comprehensive income (OCI) through actuarial remeasurements, affecting book equity and leverage metrics
• Companies with large cash balance plan populations — common in banking, consulting, and technology sectors — may see material changes in reported pension obligations if the final ASU changes the projection assumptions

Comment Period

FASB is requesting public comments on the proposed ASU. Plan sponsors, actuaries, auditors, and benefit plan advisers are encouraged to submit input. The comment deadline will be specified in the official exposure draft.

Who Should Review the Proposed ASU

• Companies that sponsor cash balance plans where the interest crediting rate is linked to equity or bond market indices
• Banks, consulting firms, and technology companies — sectors where cash balance plans are most prevalent
• Actuaries and benefits consultants who advise on plan design and ASC 715 measurements
• Auditors whose clients have market-return plan features that have generated diversity in practice
• Investors and analysts evaluating pension obligations in capital-intensive industries where benefit costs are material