1. The Hidden Problem on the Balance Sheet
For years, finance teams have had to deal with a confusing problem called "artificial" pension liabilities.
Many modern cash balance plans work a lot like defined contribution (DC) plans, such as a 401(k). Employees receive benefits based on contributions and investment returns. However, accounting rules still treat these plans like older defined benefit (DB) pension plans.
Because of this, companies often report large pension deficits that exist only because of the accounting rules. These reported losses do not reflect the true cost of the plan.
The push to fix this problem began during the Emerging Issues Task Force (EITF) meetings in September 2025. During these meetings, experts discussed a rule in Subtopic 715-30 and found that changing the discount rate could make reported pension values better match their real economic value.
This discussion led to the Proposed Accounting Standards Update (ASU) released in June 2026. The proposal could significantly change how certain market-return pension plans are measured.
2. Takeaway 1: Fixing the "Bond Rate Trap"
The biggest issue with today's accounting rules is what I call the "bond rate trap."
Current rules require companies to calculate pension liabilities using high-quality corporate bond interest rates.
However, market-return cash balance plans grow based on actual market performance, such as the S&P 500 or another investment fund.
When the market earns more than corporate bonds, the reported pension liability becomes much larger than the amount the company actually expects to pay.
This creates a "pension illusion." Companies appear to have much bigger pension obligations than they really do, simply because the accounting uses a different interest rate than the one driving the benefit.
3. Takeaway 2: The "Alternative A" Solution
To solve this problem, the EITF recommended a method called "Alternative A," and the FASB included it in its proposal.
Under Alternative A, companies can use the same interest rate for accounting that they use to calculate employee benefits.
The FASB rejected another option called "Alternative B."
As a strategy consultant, I believe this was the better choice because Alternative B could create unnecessary ups and downs in financial statements.
For example, if the stock market dropped on the day the pension was measured, Alternative B could temporarily increase the reported liability, even if the employee would not retire for another 20 years.
Alternative A avoids this problem by focusing on the benefits employees are expected to receive when they retire instead of short-term market changes.
4. Takeaway 3: Reaching "Funded Status Zero"
When the discount rate matches the interest crediting rate, the accounting for these plans becomes much simpler.
The plan begins to look like a defined contribution plan for financial reporting purposes. Investors see assets and liabilities that closely match each other.
However, finance teams should know that this result still depends on assumptions made by actuaries. Features like principal protection or annuity choices may still increase the reported liability when appropriate.
The FASB discussed this simple example.
Year 1: The employer contributes $1,000. The pension obligation is $1,000, and the plan assets are also $1,000. Funded Status = $0.
Year 2: The market earns 30.9%. After another $1,000 contribution, the account balance grows to $2,309. The pension obligation is also $2,309. Funded Status = $0.
This happens because three important parts of the accounting work together:
Service Cost = Principal Contributions: Annual pension expense reflects only the new benefits earned during the year.
Interest Cost = Expected Return: Interest expense is balanced by the expected return on plan assets because both use the same market-based rate.
Liability = Account Balance: The reported pension obligation matches the actual value of employee accounts.
5. Takeaway 4: A New Reason to Redesign Pension Plans
In the past, many companies avoided market-return cash balance plans because the accounting made them look risky.
This proposed rule removes much of that problem.
For company leaders, one of the biggest opportunities involves older pension plans that have more assets than they need.
Instead of leaving those extra assets unused, companies may be able to use them to provide new retirement benefits through a market-return cash balance plan without creating artificial swings in their financial statements.
Employees receive protection against investment losses, while employers get accounting results that are more stable and similar to a defined contribution plan.
6. What the Experts Say
"As a result of applying the defined benefit accounting model, the benefit obligation generally is greater than the accumulated hypothetical account balances of the plan. This accounting result does not reflect the economics of the arrangement, which is economically similar to a defined contribution plan, and has dissuaded entities from implementing market-return cash balance plans."
EITF Issue Summary No. 2, September 2025
7. Takeaway 5: Who Qualifies?
This proposal only applies to a limited group of pension plans.
A plan must meet two requirements:
Market-Based Returns: Interest credits must be based on the returns of plan assets, part of the plan's assets, or a Regulated Investment Company (RIC).
Lump-Sum Option: Employees must have the choice to receive their benefit as a lump-sum payment.
Important Limitation
The proposal does not apply to traditional fixed-rate cash balance plans or older pension plans that mainly pay monthly annuities.
It also does not change how benefits are measured after an employee retires and starts receiving monthly payments. Those payments would still be measured using the traditional bond-based method.
8. Conclusion: A New Future for Hybrid Pension Plans
If approved, the new rule would apply beginning with a company's next measurement date, making the transition relatively straightforward.
By allowing companies to use a discount rate that matches how benefits actually grow, the FASB would bring accounting rules closer to the real economics of these pension plans.
This change could make it easier for companies to balance employee retirement security with stable financial reporting.
For business leaders, the question may no longer be whether the accounting rules support market-return cash balance plans. Instead, the question becomes whether these plans are now one of the smartest ways to provide retirement benefits while managing company resources.