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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.
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