In addition to a normal retirement income benefit, defined benefit pension plans can provide funding for a portion of an employer’s post-retirement health care and welfare benefit obligation. This can be done pursuant to Section 401(h) of the Internal Revenue Code (IRC), whereby a "401(h) account" is established in the pension plan to fund the payment of current retiree health care and welfare benefits. 401(h) accounts may be funded by employer contributions or "qualified transfers" of excess pension assets under Section 420(f) of the IRC. If the full amount of the funds set aside in the 401(h) account is not used in the current year, it can be accumulated in the account to pay future retiree health care and welfare benefits. Refer to the illustrative examples in ASC 960-205-55-2, ASC 960-205-50-4, and ASC 960-205-50-5, and the AAG-EBP for further discussion and examples of required disclosures.

ASC 960 provides that the discount rate used to determine the actuarial present value of accumulated plan benefits can reflect the expected rates of return during the periods over which payments of benefits will occur. These rates should be consistent with returns realistically achievable on the types of assets held by the plan and the plan's investment policy. In general, use of the expected asset return assumption for corporate reporting of the pension plan under ASC 715-30 would be appropriate for determining the actuarial present value of accumulated plan benefits.

Alternatively, employers are permitted to use a settlement rate approach to set the discount rate. This approach would be consistent with how discount rates are established under ASC 715-30, see PEB 2.4.1. Therefore, use of the discount rate assumption used for corporate reporting of the pension plan would also be acceptable for determining the actuarial present value of accumulated plan benefits.

A switch between the expected rate of return approach and the settlement rate approach would be considered a change in accounting principle. Preferability would need to be assessed in order to change the approach used. See FSP 30.4 for a discussion on accounting changes.

Under the Pension Protection Act of 2006 (PPA) guidance for plan funding valuation purposes, the present value of benefits is generally determined using three 24-month average interest rates ("segment rates"), each of which applies to cash flows during specified periods. As such, use of the PPA funding rates as the discount rate under ASC 960 is not appropriate because the PPA rate is not based on expected asset returns in accordance with paragraph ASC 960-20-35-1 nor is it a settlement rate under ASC 960-20-35-1A.

Nongovernmental employee benefit plans should consider the specific requirements of US GAAP, which require the use of mortality assumptions that reflect the best estimate of the plan’s future experience for purposes of estimating the plan’s obligation as of the current measurement date (that is, the date at which the obligation is presented in the financial statements). Therefore, plan management should consider the specific demographics of their plan when evaluating the appropriate mortality or other assumptions to use, as well as relevant available mortality data.

The Society of Actuaries (SOA) publishes mortality tables from time to time, which are generally considered to be reliable sources for developing mortality assumptions. These tables are based on observed experience over a defined study period and considering past trends, and reflect more recent data and the latest actuarial techniques.

The SOA also releases updated mortality improvement scales on an annual basis, which reflect additional mortality data from the Social Security Administration (SSA). Companies should consider any published new mortality data for their plans in relation to their plan-specific mortality experience and future expectations. AICPA Technical Practice Aid 3700.01 – Pension Obligations provides guidance on how and when to consider updated mortality tables in financial statements that have not yet been issued at the time the updated tables are published, including the effect when the plan obligations are presented as of the beginning of the plan year. In estimating mortality, GAAP requires that all available information through the date the financial statements are available to be issued should be evaluated to determine if the information provides additional evidence about conditions that existed at the balance sheet date.

The existence of updated mortality conditions is not predicated upon the date that updated mortality tables are published, as tables are based on historical trends that go back many years. Management should understand and evaluate the reasonableness of the assumptions chosen, which may require assistance from an actuary acting as a management specialist, and document its evaluation and the basis for selecting the mortality tables and other assumptions it decides to use for its current financial period.

A plan’s assumptions of expected mortality and other relevant assumptions are based on each plan’s specific demographics and other relevant factors, and changes in actuarial assumptions made to reflect changes in a plan's expected experience would be viewed as a change in estimate in accordance with ASC 960-20-35-4. That is, the effects of those changes are accounted for in the year of change (or in the year of change and future years, if the change affects both) and would not be accounted for by restating amounts reported in financial statements for prior years or by reporting pro forma amounts for prior years.

For additional information on mortality tables, see PEB 2.3.1.