accounting for cash balance plans

[Guest Paul Miller]

I have had an inquiry from a colleague in Japan who is a member of the equivalent of our FASB. He is eager to learn about the accounting methods and disclosures for "cash balance" plans. It is unclear to me whether they should be accounted for as defined contribution or defined benefit plans. Any advice would be appreciated.

[richard]

Cash balance plans are defined benefit plans, and are accounted under FAS87 as defined benefit plans.

Even though cash balance plans are described as having "lump-sum" accounts that increase with an employee's service, each "lump sum" can be converted to a deferred annuity. So, the pattern of lump sum accounts over an employee's career can be translated into a pattern of deferred annuities (i.e., accrued benefits) over the employee's career. Standard FAS-87 treatment can then be applied.

Several issues present themselves. First of all, is the ABO equal to the lump sum. No. The ABO is the lump sum convered to a deferred annuity (based on the terms of the plan), and then discounted to the present time by the FAS87 settlement rate. They would only be equal if the settlement rate happened to equal the interest crediting rate under the plan.

Also, the "benefits attribution" in FAS87 was designed with final average pay plans in mind, cash balance plans (which are akin to career pay plans) are therefore tricky.

The disclosures are identical to any other defined benefit plan.

There are quite a few other unique cash balance issues, but the above should get you started.

Good luck