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Some benefit plans contain features of both a defined contribution plan and a defined benefit plan. These plans should be accounted for based on the substance of the arrangement.

1.6.1 Target benefit plans

A target benefit plan has a benefit formula the employer uses to determine a target benefit. Contributions are made in an amount necessary to fund the benefit without an actual commitment to provide the benefit. Although the form of the plan is a defined contribution plan, the substance and employer's commitment may weigh more heavily on the side of a defined benefit plan. Analysis of the written plan provisions, communication to plan participants, and the history of and reasoning for updates to the contribution should be made to determine if, in substance, the plan provides a defined benefit, in which case it would be subject to the accounting and disclosure requirements of a defined benefit plan. The following are examples of when consideration should be given to accounting for a plan of this nature as a defined benefit plan:
  • The employer effectively controls the plan's investment policy, so that employees do not control how the balances in their individual accounts are to be invested (i.e., no choice exists among investment options, such as an equity fund, a fixed income fund, or a money market fund).
  • The employer periodically adjusts the level of contribution rates or takes other actions designed effectively to transfer the risk of investment losses to the employer rather than leaving it with the employees.
When a target benefit plan is established to replace a terminated defined benefit plan, the classification of the target benefit plan should begin with a presumption that it is a defined benefit plan. To overcome this presumption would require strong evidence to the contrary.

1.6.2 Cash balance plans

Arrangements referred to as "hybrid plans," "cash balance plans," "guaranteed individual account plans," or "lump-sum pension plans" typically have the following characteristics:
  • Benefits are intended to be paid primarily in lump-sum form, although annuity equivalents of the lump-sum account balance may be paid instead.
  • Employer contributions to "separate accounts" and account balances are communicated periodically to employees. However, separate investment accounts are not actually maintained; the "separate accounts" are maintained on paper only, and are "credited" periodically with investment earnings.
  • Actual plan earnings below the guaranteed rate of return are required to be made up by the employer; earnings in excess of the guaranteed rate, in effect, serve to reduce the employer's cost.
Legally, and in substance, these types of arrangements are defined benefit plans and should be accounted for as such. While the account-balance-reporting feature may be somewhat similar to a defined contribution plan, like any defined benefit plan, a cash balance plan must be funded on an actuarial basis in accordance with ERISA. The employer, not the employees, bears the investment risks and rewards. Similarly, and as with any other defined benefit plan, ASC 715 requires the accounting to be based on the attribution of benefits earned in each service period under the terms of the plan. With that in mind, the "guaranteed income credit" reported in the "separate accounts" may not be particularly relevant for accounting purposes.

ASC 715-20-25-1

A cash balance plan is a defined benefit plan.

ASC 715-20-25-2

A cash balance plan communicates to employees a pension benefit in the form of a current account balance that is based on principal credits and future interest credits based on those principal credits.

ASC 715-20-25-3

In a cash balance plan, individual account balances are determined by reference to a hypothetical account rather than specific assets, and the benefit is dependent on the employer's promised interest-crediting rate, not the actual return on plan assets. The employer's financial obligation to the plan is not satisfied by making prescribed principal and interest credit contributions—whether in cash or as a hypothetical contribution to participants' accounts—for the period; rather, the employer must fund, over time, amounts that can accumulate to the actuarial present value of the benefit due at the time of distribution to each participant pursuant to the plan's terms. The employer's contributions to a cash balance plan trust and the earnings on the invested plan assets may be unrelated to the principal and interest credits to participants' hypothetical accounts.

ASC 715-20-25-4

The determination of whether a plan is pay-related and the appropriate benefit attribution approach for a cash balance plan with other characteristics or for other types of defined benefit pension plans depend on an evaluation of the specific features of those benefit arrangements.

As noted in ASC 715-20-25-1, a cash balance plan is a defined benefit plan and, therefore, is subject to the guidance in ASC 715-30. The determination of the appropriate benefit attribution approach for a cash balance plan depends on an evaluation of the specific features of those benefit arrangements. 
ASC 715-30-55-127A includes an example of a cash balance plan that is not pay-related. In this example, the use of the projected unit credit method is not appropriate for purposes of measuring the benefit obligation and the annual cost of benefits earned. Instead, an entity that has that specific type of plan would apply a traditional unit credit method to determine costs and obligations for that plan. The principal difference between the projected unit credit method and the traditional unit credit method is that future salary increases are not assumed in the traditional unit credit method. See PEB 2.5.1 for discussion of the projected unit credit method.
Because this guidance applies only to the narrowly defined plan described in ASC 715-30-55-127A, entities should not necessarily apply that measurement and attribution guidance to other cash balance plans that have features that are different from the identified cash balance plan in the example. The accounting used should reflect the substantive plan based on its specific facts and circumstances.
Although many cash balance plans provide a minimum interest crediting rate, in many cases by reference to a US government obligation (e.g., treasuries), that interest crediting rate is part of the benefit promise and is not relevant for determining the present value (i.e., discounting) of the benefit obligation. Thus, the discount rate guidance in ASC 715-30-35-44 for “traditional” defined benefit plans equally applies to cash balance plans.

1.6.3 Floor-offset plans

Certain linked pension plan arrangements are known as "floor-offset" or "feeder-floor" plans. These arrangements (henceforth referred to as floor-offset plans) generally consist of two legally separate pension plans (a defined contribution plan and a defined benefit plan) that guarantee a minimum level of benefits. In a floor-offset plan, benefits are generally required to be paid from the defined benefit plan only if the balance in the employee's defined contribution account is insufficient to cover the minimum benefit under the defined benefit plan. Furthermore, the terms of the defined benefit plan may specify that the employer's obligation under that plan is reduced to the extent that a participant's account balance in the defined contribution plan is used to pay benefits covered by the defined benefit plan.
ASC 715-70-55-2 through ASC 715-70-55-3 indicates that these arrangements should be accounted for as two plans. It would be inappropriate to account for this arrangement as a single plan (either defined benefit or defined contribution) based, for example, on whether benefits will be satisfied primarily from one plan or the other. For example, it would be inappropriate to account for the two plans as a defined contribution plan even if the employer expects that a significant amount of the benefits payable under the arrangement will be satisfied by the defined contribution plan. The unit of accounting under ASC 715 is the individual plan. The dissimilar nature of an employer's obligation under each type of plan, including how those obligations are satisfied, and the fact that plan assets of a defined contribution plan would not be legally available to pay the benefits due under a defined benefit plan (and vice versa), makes it inappropriate to consider the two plans as a single plan for accounting purposes.
Floor-offset plans should be accounted for by determining the projected benefit obligation of the defined benefit plan as the net of (1) the actuarial present value of the defined benefit promised (ignoring the defined contribution offset) less (2) the current balance in the defined contribution plan at the measurement date. An approach in which the balance in the defined contribution plan is projected to retirement and then offset against the expected defined benefit at retirement is not appropriate. Once the projected benefit obligation for the defined benefit plan has been determined in this manner, the two plans should be accounted for separately. The assets of the defined contribution plan should not be combined with those of the defined benefit plan.

1.6.4 Variable annuity plans

A variable annuity plan is a defined benefit pension plan that provides a pension benefit that is adjusted for the actual return on plan assets as compared to an assumed investment (or “hurdle”) rate. A characteristic of this type of plan is that the lump sum value of the benefit will increase or decrease based on the actual return on plan assets. These plans are often communicated as account balance plans. However, the plan assets are commingled and there are no allocated individual account balances. Therefore, the plan does not qualify as a defined contribution plan and should be accounted for as a defined benefit plan.

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