FASB Releases Cash Balance Definition

February 13, 2004 (PLANSPONSOR.com) - If companies, retirees and employers are going to continue their hot debate over the controversial cash balance pension plans, at least know they should all agree on what they're talking about.

Accounting rulemakers this week adopted a new definition of cash balance programs that keep track of workers’ benefits in so-called “notional” accounts, where no money is actually kept. It was the latest move by the Financial Accounting Standards Board (FASB) in the group’s formal review of cash balance rules, Dow Jones reported.
“A cash-balance pension plan is a defined-benefit pension plan that defines the promised employee benefit by reference to a notional account balance,” FASB staff said in the definition that was later adopted by the board. “An employees’ notional account balance is increased with periodic notional principal credits and notional fixed or variable interest or investment credits, and may be increased for other notional ad hoc credits.”
The FASB review of cash-balance rules follows an abortive move by the rulemaker last spring to require companies with cash-balance plans to value benefits using government bonds, rather than the high-grade corporate bonds other pensions rely on. FASB delayed the initiative after an outcry.

Employers have embraced cash-balance plans, but a growing controversy has cast doubt on their future. At issue are concerns that the pensions don’t pay older workers their fair share of benefits. Worries that they discriminate against older workers prompted the Internal Revenue Service to stop approving new cash-balance plans in 1999, but companies have maintained and adopted the pension nonetheless.

A major development was a court ruling in July against International Business Machines Corp. (IBM) in a class-action lawsuit claiming its cash-balance pension discriminated against older workers (See  Murphy’s Law: IBM Loses Cash Balance Ruling ).