For conceptual purposes the total periodic cost of a pension plan to the sponsor plan can be divided into the required cash contribution and the pension expense for the plan.  However, it is important to be able to differentiate these two items, as the former is a funding measure defined by ERISA, while the latter is an accounting measure defined by the Financial Accounting Standards Board (FASB).

The cash contribution is a direct cash outflow from the plan sponsor reported in the cash from operating activities section of the plan sponsor’s cash flow statement.  Pension expense is an adjustment to the plan sponsor’s earnings that is reported in the income statement and calculated using specified methods of accrual accounting that does not result in a direct cash outflow.  Pension expense consists of the sum of service cost, interest cost, expected return on plan assets, amortization of prior service cost and amortization of experience loss/gain.  A further difference is that, while a plan sponsor receives a tax deduction for its cash contribution, no such deduction is granted for pension expense.

In order to better understand and evaluate, plan sponsors and analysts need to be able to distinguish and to contrast these two items which, though originating from different parts of the firm’s financial statements, too often are confused or conflated with one another.

If you have questions about cash costs and accounting expense for pension plans, please contact a Nyhart pension professional.

This article was last updated on December 6, 2011