Cost Accounting Standards Board; Cost Accounting Standards for Composition, Measurement, Adjustment, and Allocation of Pension Costs

SUMMARY: The Office of Federal Procurement Policy, Cost Accounting

Standards Board (CASB), is revising the Cost Accounting Standards

relating to accounting for pension costs under negotiated government

contracts. Section 26(g)(1) of the Office of Federal Procurement Policy

Act, 41 U.S.C. 422(g)(1), requires that the Board, when promulgating

any new or revised Cost Accounting Standard, publish a final rule. This

final rule addresses certain problems that have emerged since the

original promulgation (in the 1970's) of the pension Standards: CAS

9904.412--``Cost Accounting Standard for composition and measurement of

pension cost,'' and CAS 9904.413, ``Adjustment and allocation of

pension cost.'' The changes address pension cost recognition for

qualified pension plans subject to the tax-deductibility limits of the

Federal Tax Code, problems associated with pension plans that are not

qualified plans under the Federal Tax Code, and problems associated

with overfunded pension plans.

EFFECTIVE DATE: March 30, 1995.

FOR FURTHER INFORMATION CONTACT: Richard C. Loeb, Executive Secretary,

Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

The Cost Accounting Standards Board's rules and regulations are

codified at 48 CFR Chapter 99. Section 26(g)(1) of the Office of

Federal Procurement Policy Act, 41 U.S.C. 422(g)(1), requires that the

Board, prior to the establishment of any new or revised Cost Accounting

Standard, complete a prescribed rulemaking process. This process

consists of the following four steps:

1. Consult with interested persons concerning the advantages,

disadvantages and improvements anticipated in the pricing and

administration of government contracts as a result of a proposed

Standard.

2. Promulgate an Advance Notice of Proposed Rulemaking.

3. Promulgate a Notice of Proposed Rulemaking.

4. Promulgate a final rule.

This final rule is step four in the four step process.

B. Background

Prior Promulgations: The previous CASB published CAS 9904.412--

``Cost Accounting Standard for Composition and Measurement of Pension

Cost'' on September 24, 1975 and CAS 9904.413--``Adjustment and

Allocation of Pension Cost'' on July 20, 1977. The effective dates of

these Standards were January 1, 1976 and March 10, 1978, respectively.

These Standards were developed in the early years of the applicability

of the Employee Retirement Income Security Act (ERISA). At that time,

the problems on which this final rule focuses were not significant.

Adequate or minimum, rather than excess funding, concerned pension

managers of that era. Over the intervening years, government

contractors' pension plans have become more adequately funded. At the

same time, limits on the maximum amount of benefits that can be

provided by a qualified pension plan have been considerably constrained

in real terms. At the time the previous coverage was promulgated, there

was little or no inconsistency between an orderly method of accruing

pension costs and a contractor's ability to concurrently fund those

accruals.

The Tax Reform Act of 1986 amended the Federal Tax Code to impose

an excise tax on contributions in excess of the maximum tax-deductible

amount for qualified pension plans. Immediately thereafter, the Omnibus

Budget Reconciliation Act of 1987 (OBRA 87) added a second, often more

restrictive full-funding limitation on the determination of the tax-

deductible amount. To avoid the incurrence of an unallowable excise

tax, government contractors generally did not fund any accrued pension

cost in excess of the maximum tax-deductible pension contribution.

However, portions of accrued pension costs that were not funded were

not allowable. Furthermore, because the Standards prohibited the

reassignment of accrued but unfunded pension costs, contractors could

not allocate such costs to contracts when funded in future periods. On

April 8, 1991, the Board issued a ``Memorandum for Agency Senior

Procurement Executives'' which granted temporary authority to reassign

to future periods pension costs that were not funded in the year of

accrual because they lacked tax-deductibility.

An overwhelming majority of respondents to the Board's November

1990 solicitation of agenda items gave a high priority to the problems

associated with fully-funded qualified plans and those connected with

the growing universe of nonqualified pension plans. The Board sought

public comments with a set of Staff Discussion Papers. A Paper

addressing the ``pay-as-you-go'' or unfunded plan issue was published

by the Board on June 17, 1991. See 56 FR 27780. A Paper seeking views

on the ``full funding'' problem was published on August 19, 1991. See

56 FR 41151. On January 26, 1993, after consideration of the public

comments received on these Staff Discussion Papers, the CASB published

an Advance Notice of Proposed Rulemaking (ANPRM) in the Federal

Register, 58 FR 6103. The ANPRM set forth proposed amendments to deal

with both the unfunded pension plan issue related to nonqualified

pension plans and the ``full-funding'' problem of qualified plans.

In the public comments to the ANPRM, the Board found two areas of

concern particularly persuasive. These dealt with the ANPRM lacking any

full-funding limitation, and the complexities and problems introduced

by drastic revisions to the amortization period for actuarial gains and

losses.

The ANPRM was premised on the idea that, by reducing such

amortization periods, there would be only a relatively short time lag

between cost/price recognition and the eventual funding. This premise,

as pointed out by the commenters, was unsound. Because the ANPRM lacked

any full-funding limitation, it could result in recognition of pension

costs in years in which surplus assets existed. This is of particular

concern to the Board because of the number of contractors that now have

overfunded plans.

The Board also determined that changing amortization periods, in

order to improve cost predictability, was unnecessary. Most commenters

believed that a satisfactory degree of predictability could be achieved

under the existing Standards' amortization rules.

On November 5, 1993, after consideration of the public comments

received on the ANPRM, the CASB published a Notice of Proposed

Rulemaking (NPRM), 58 FR 58999. The NPRM set forth proposed amendments

to resolve the regulatory conflict for qualified pension plans by

incorporating into the Standards the ERISA full-funding limitation,

while [[Page 16535]] maintaining the current amortization rules. To

address questions concerning overfunded pension plans, the Board added

coverage to CAS 9904.413 defining what constitutes a segment closing

and providing greater specificity regarding accounting for pension

costs when segments are closed or pension plans are terminated. The

NPRM retained the accounting approach for nonqualified pension plans

included in the ANPRM.

The public comments received in response to the NPRM raised some

new issues. In the final rule, the Board addresses these issues

focusing on three areas in particular. These deal with the restriction

of accrual accounting by an outside limit, incomplete and unclear

coverage for segment closings and pension plan terminations, and the

lack of accounting for differences between accrued and funded pension

costs. A majority of public comments expressed strong opinions, which

were divided between support for accrual accounting and support for

funding as the basis for determining allocable contract costs. In

addition, numerous public comments were submitted concerning specific

actuarial and technical issues.

The final rule reflects these and other concerns expressed by

commenters to the NPRM. In addition, certain pension actuaries and the

Pension Committee of the American Academy of Actuaries submitted

suggestions to address the actuarial soundness of the final rule.

Termination of Temporary Waiver Authority

The final rule removes the regulatory conflict between the funding

limits of ERISA and the period assignment provisions of CAS 9904.412-

40(c). Therefore, the Board terminates the temporary waiver authority

granted in the ``Memorandum for Agency Senior Procurement Executives''

issued on April 8, 1991.

Summary of Proposed Amendments

The Board's final rule provides for accrual accounting to initially

compute the pension cost for a cost accounting period. The Board also

recognizes that funding of such cost serves to substantiate the cost

and adds to the verifiability of the measurement of cost. For

assignment purposes, the computed cost is subject to a corridor with

zero as the floor and the maximum tax-deductible amount, where

applicable, as the ceiling. The computed cost is also subject to an

assignable cost limitation so that cost will not be assigned to an

overfunded pension plan. The cost assigned to the period must be funded

as specified in the Standard to be allocable to final cost objectives.

This four-step process of computing, assigning, funding, and allocating

pension cost applies to both qualified and nonqualified defined-benefit

pension plans.

This final rule affirms the complementary funding approach for

nonqualified plans that takes into account Federal income tax

deductibility. The Board views the complementary funding approach as a

reasonable compromise addressing the Government's concern that claimed

cost be substantiated by funding while providing contractors with

relief from adverse cash flow consequences of funding a cost that is

not tax-deductible. The Board decided that tax-exempt entities do not

experience such cash flow disadvantages, and therefore, they are

required to fund all pension cost that is assigned to the period.

For nonqualified defined-benefit plans that do not meet the

communication, nonforfeiture, or funding criteria, or for which the

contractor chooses to use the pay-as-you-go method, the assigned cost

is equal to the amount of benefits paid in that period. To promote

consistency between periods, this final rule requires that any lump sum

settlements or annuity purchases be amortized.

For qualified defined-benefit pension plans, the conflict between

the Standards and ERISA is removed. The cost assigned to a period is

limited to the accrued cost that can be funded without penalizing a

contractor. A $0 floor was added to the corridor to eliminate any

inequity between a requirement to credit negative costs to contracts

and the contractor's inability to make withdrawal from the funding

agency.

By not requiring the assignment of negative pension cost, the Board

has deferred the Government's recovery of excess assets in overfunded

plans. This delay is appropriate for on-going pension plans when no

assets have reverted or inured to the contractor. The effect of this

delay has been mitigated by clarifying and strengthening the

Government's rights or obligations for a cost adjustment when there is

a segment closing, plan termination, or freezing of benefits.

Portions of pension costs computed for a period that fall outside

of the assignable cost corridor ($0 floor and a ceiling based on tax-

deductibility) are reassigned to future periods, together with an

interest adjustment, as portions of unfunded actuarial liability and

are identified as assignable cost deficits or assignable cost credits,

respectively. Unfunded portions of assigned cost continue to be

separately identified and eliminated from future cost computations.

For nonqualified plans, a clarification in the final rule is made

by the addition of the concept of ``permitted unfunded accruals''; the

portion of the computed and assigned cost of a nonqualified plan

exempted from current funding based on the tax rate offset. These

amounts are updated and described as the accumulated value of permitted

unfunded accruals. All such previously assigned and allocated costs,

adjusted for earnings, expenses, and benefit payments, are treated as

plan assets retained by the contractor for purposes of assessing the

funding status of the plan.

The fundamental requirement for assignment of pension cost has been

expanded to include a ``CAS balance test'' modeled after the Internal

Revenue Service ``equation of balance''. The CAS balance test requires

that the entire actuarial accrued liability be accounted for by the

assets or the portions of unfunded actuarial liability identified under

subparagraphs 9904.412-50(a) (1) and (2). For the CAS balance test to

function, the definition of unfunded actuarial liability is revised to

clarify that an actuarial surplus exists whenever the actuarial value

of assets exceeds the actuarial accrued liability. The accumulated

value of prepayment credits, that is, funds that have yet to be applied

to assigned costs, is excluded from the assets.

Technical corrections have been made to enhance the actuarial

completeness of the final rule. Consistent with recent changes in ERISA

and Generally Accepted Accounting Principles, as embodied in Statement

87 of the Financial Accounting Standards Board, and reflecting the

sophistication of modern actuarial valuations, this final rule requires

the use of explicit actuarial assumptions that are individually

reasonable. Revisions have been made to distinguish the actuarial value

of assets used for computations of on-going pension costs from the

market value of assets used for current period adjustments. In

addition, Generally Accepted Actuarial Principles and Practices as

promulgated by the Actuarial Standards Board were considered in the

drafting of this final rule.

Finally, this rule implements an amendment to the CAS applicability

and exemption requirements contained in Section 9903.201-1(b)(11). This

amendment is made necessary due to recent statutory changes contained

in the Federal Acquisition Streamlining Act, Public Law 103-355.

[[Page 16536]]

Transition

The Board is aware that contracting officers and contractors have

negotiated many pragmatic agreements while awaiting the promulgation of

this final rule. The transition methods and illustrations of 9904.412-

64 and 9904.413-64 are presented as model solutions. The Board expects

that modifications of these methods and alternate approaches may be

necessary to ensure equity for both the Government and contractors.

Cognizant Federal officials are encouraged to ratify existing

agreements that comport with the concepts of this final rule. For prior

agreements or interim solutions based on a ``fresh-start'' amortization

of the unfunded actuarial liability of qualified defined-benefit

pension plans, the cognizant Federal official should verify that no

portion of unfunded actuarial liability for prior unfunded costs that

could have been funded, or, for other previously disallowed costs, have

in fact been inadvertently included in pension costs.

The transition rules are constructed on a few basic concepts. Prior

assigned costs of qualified plans, which were neither funded nor

allocated to contracts because they lacked tax-deductibility, may be

assigned, with interest, to periods beginning on or after the effective

date of this rule. Conversely, unfunded accrued costs of nonqualified

plans allocated to contracts should be treated as assets, updated for

earnings and benefit payments, and applied against either the actuarial

accrued liability used to compute cost accruals or the benefits paid

under the pay-as-you-go method.

C. Paperwork Reduction Act

The Paperwork Reduction Act, Public Law 96-511, does not apply to

this final rule, because this rule imposes no paperwork burden on

offerors, affected contractors and subcontractors, or members of the

public which requires the approval of OMB under 44 U.S.C. 3501, et seq.

D. Executive Order 12866 and the Regulatory Flexibility Act

The economic impact of this final rule on contractors and

subcontractors is expected to be minor. As a result, the Board has

determined that this final rule does not result in the promulgation of

a ``major rule'' under the provisions of Executive Order 12866, and

that a regulatory impact analysis will not be required. Furthermore,

this final rule does not have a significant effect on a substantial

number of small entities because small businesses are exempt from the

application of the Cost Accounting Standards. Therefore, this rule does

not require a regulatory flexibility analysis under the Regulatory

Flexibility Act of 1980.

E. Public Comments

Public Comments: This final rule is based upon the Board's Notice

of Proposed Rulemaking made available for public comment on November 5,

1993, 58 FR 58999. Thirty sets of public comments were received from

contractors, Government agencies, professional associations, actuarial

firms, law firms, public accounting firms, and individuals. The

comments received and the Board's actions taken in response thereto are

summarized below:

Comment: Twelve commenters expressed concern that the introduction

of a funding limit on accrual accounting was a significant departure

from the full accrual accounting approach of the ANPRM. Some commenters

were also concerned with the complexity inherent in any rule governing

pension costs. For these reasons the commenters supported the

promulgation of a second NPRM.

Response: The Staff Discussion Papers, the ANPRM, and the NPRM each

addressed the role of accrual accounting and the role of funding. The

Staff Discussion Paper on fully-funded defined-benefit pension plans

requested comments on the relative weights the Board should assign to

accrual accounting, funding, and predictability as a basis for cost

determination. The Staff Discussion Paper on unfunded nonqualified

defined-benefit pension plans balanced its avoidance of a funding

requirement with a very constrained method of accrual accounting for

so-called ``accruable'' plans.

In response to the comments on the Staff Discussion Papers, the

ANPRM adopted accrual accounting for both qualified plans and accruable

nonqualified plans, which permitted certain portions of computed

pension costs to be unfunded. Because the Board supported the need to

substantiate the accrual with funding, the ANPRM required that the

accrued costs for qualified plans be funded as soon as practicable. The

ANPRM presumed there would not be a lengthy delay between accrual and

funding, and so it did not link the period assignment of the accrual to

current period funding. For nonqualified plans, the assignment of

accrued costs was tied to funding, but the ANPRM introduced an

exception for the effect of taxes on contractor cashflows. As with the

Staff Discussion Paper, non-accruable plans, and accruable plans that

so elect, were limited to the pay-as-you-go method.

The NPRM kept the same accounting approach for nonqualified plans

as the ANPRM. Comments from the Government and contractors persuaded

the Board that the conflict between full accrual accounting and ERISA

funding, not predictability, was the significant problem. Finding that

there could be indefinitely extended delays in the funding of the

accruals of overfunded plans, the Board determined that it was

necessary to link the period assignment of costs to current period

funding in order to assure the verifiability of the accrued amounts. To

resolve the conflict with ERISA's funding limits, the ERISA full-

funding limitation was incorporated into the NPRM. Furthermore, aware

of the need to address overfunded plans, the Board added clarity and

specificity to the current period adjustment required when a segment

closes. The Board explicitly included an adjustment for plan

terminations because there has been some uncertainty as to the prior

Board's intent.

With this final rule, the Board affirms the accounting approaches

of the NPRM. Throughout the four-step promulgation process, accrual

accounting consistently has been the starting point for the recognition

of pension costs. The period assignment rule is tied to ERISA's tax-

deductible maximum to prevent conflict with any of ERISA's funding

limits. This final rule retains the complementary funding rule for

nonqualified plans. The Board adopted many technical corrections

suggested in public comments from actuaries and other professionals. To

ensure that the technical corrections did not alter the conceptual

approach of the NPRM, the Board sought and received input from certain

pension actuaries and the American Academy of Actuaries.

Besides continuing support for either unrestricted accrual

accounting or cost recognition based solely on funding, the public

comments on the NPRM generally addressed details of the coverage

requiring clarification or correction. This final rule does not deviate

from the conceptual construct of the NPRM. As intended by the four-step

promulgation process, this rule has evolved and the Board has found an

informed balance between the advantages of accrual accounting and

funding. Further public exposure would not alter the conceptual

approach exposed in the NPRM and expressed in this final rule.

Comment: Thirteen commenters expressed their opposition to the

adoption of the ERISA full-funding [[Page 16537]] limitation. These

commenters supported full accrual accounting as the only method that

provides true matching of the incurrence of pension costs with the

periods during which benefits were earned. They contend that tax law is

not good accrual accounting and that the Board should make accounting

rules independently of the concerns of taxability.

Response: The Board continues to recognize that one of the primary

benefits of accrual accounting, and one of the stated goals of the

Board, is the proper matching of benefiting contracts with the

incurrence of expense. The Board also continues to support accrual

accounting as the most effective means to promote consistency between

cost accounting periods.

This final rule is based on the use of accrual accounting to

initially compute the pension cost for a period. The assignable cost is

then determined by comparing the computed pension cost accrual to a

minimum of $0 and to the maximum tax-deductible amount. The Board has

determined that funding is needed to substantiate the cost allocation

because of the magnitude of the liability and the extended delay

between the accrual of the cost and the settlement of the liability.

This final rule has not adopted ERISA as an accounting method, but has

modified accrual accounting to fit within the confines of practicable

funding.

Comment: Eleven other commenters supported the imposition of the

full-funding limit. Two commenters recommended that the cost accrual be

subject to a $0 minimum because contractors are prohibited from

withdrawing funds from a qualified trust.

Response: In this final rule, the Board refines the NPRM concept of

a full-funding limitation. The full-funding limitation of the final

rule is implemented through the definition and operation of the

``assignable cost limitation'' which defines the point when the plan is

overfunded for cost recognition purposes. When a pension plan is

overfunded, the Government would be violating its fiduciary duty to the

taxpayers by advancing any further reimbursements to the contractor.

The assignable cost limitation is similar to ERISA's pre-OBRA 87 full

funding limitation, but uniquely defined to avoid confusion with ERISA

terminology. As with the NPRM, whenever a plan is determined to be

overfunded, that is, the actuarial value of assets exceeds the

liability, all existing amortization bases are deemed fully amortized

and eliminated.

The Board concurs that there should be a $0 floor imposed on the

assignable pension cost for the period. The Standard requires the

funding agency to be established for the ``exclusive benefit'' of the

participants so that withdrawals by the contractor are prohibited,

absent a plan termination. To be internally consistent, this final rule

eliminates the assignment of negative costs to a period and the

allocation of such credit to contracts, except when either assets

revert or inure to the contractor or the segment is no longer

continuing.

However, when a contractor makes a voluntary investment decision to

not fund the assigned cost of its qualified pension plan, which is

otherwise allocable to and payable as cost or price under Government

contracts, the contractor has knowingly accepted the consequences of

its decision. In this case, because there is no conflict between ERISA

and the Standards, there is no reason to alter the cost computation and

assignment for the period. Permitting arbitrary reassignment of the

cost to other periods would be contrary to the Board's stated goal of

enhancing the consistency of costs between periods and could create a

potential for gaming.

Comment: A major concern of thirteen commenters was that the full-

funding limitation is difficult to predict. Some commenters opined that

the emphasis on funding made the rule unnecessarily complex.

Response: In this final rule, full-funding, which is measured by

the assignable cost limitation based on the actuarial value of assets

and the actuarial accrued liability, is reasonably predictable. Through

the smoothing techniques of an asset valuation method, large swings in

assets values are dampened. In a relatively stable population, the

actuarial accrued liability can be fairly well predicted using

actuarial projection techniques for forward pricing purposes. Other

events that dramatically affect the liability are addressed in the

provisions on cost method changes, segmentation, segment closings, plan

terminations, and frozen plans. Finally, contractors have some

flexibility in determining the timing of certain other events, such as

assumption changes or plan amendments, that affect the size of the

actuarial accrued liability.

When pension plan assets and liabilities are sufficiently different

in amount, the impact of the tax-deductible limits of ERISA can be

forecast with a fair degree of certainty. The tax-deductible limit,

computed without regard to the full-funding limitation, is generally

based on the normal cost and 10 year amortization of the unfunded

actuarial liability and is also relatively predictable.

A predictability problem does arise when a plan is near the

threshold of ERISA's full-funding limitations. The impact of these

limits is sensitive to small changes in the market value of assets, the

actuarial accrued liability, and prevailing Treasury rates. The Board

believes that the ``all or nothing'' nature and the magnitude of the

impact are beyond the normal assumption of risk inherent in firm fixed-

priced contracting. However, the Board believes that this is a forward-

pricing problem that may be addressed by the contracting officer

through the negotiation of an advance agreement reflecting the

contractor's unique facts, circumstances, and expected level and mix of

Government contracting. Such advance agreements could provide a method

for achieving equity in the forecasting of pension costs for

contractors whose pension plans are close to entering or emerging from

the funding limits of ERISA.

While the special problems of forward-pricing will continue to

require attention by the contracting officer, this final rule does not

add more complication. The concepts of assignable cost limitation,

assignable cost deficit, and assignable cost credit contained in this

final rule are simply the accounting and actuarial mechanisms necessary

to assign computed costs that fall outside of the funding corridor to

future periods.

Comment: Twelve commenters noted that, despite the full-funding

limitation, the cost assigned under the NPRM could still be greater

than the tax-deductible maximum. Seven commenters remarked that ERISA

requires amortizations to continue, and a new base be established, when

the contribution is affected by the OBRA 87 full-funding limitation

only. Seven commenters recommended that subparagraph 9904.412-50(b)(1)

be clarified.

Response: This has been corrected in the final rule by using the

maximum tax-deductible amount, however determined, as the limit on

assignable cost for qualified plans. The accrued pension cost not

assigned to the current period is reassigned to future periods as an

assignable cost deficit. This final rule also specifies that any

negative accrued cost be reassigned to future periods as an assignable

cost credit.

This final rule specifies that all existing amortization bases are

deemed fully amortized when the accrued cost is affected by the

assignable cost limitation. This rule provides that any

[[Page 16538]] unfunded actuarial liability, including an actuarial

surplus, existing in the next accounting period is deemed to be an

actuarial gain or loss unless it is attributable to a change in

assumptions, plan amendment, or separately identified portions of

unfunded actuarial liability attributable to unfunded and/or disallowed

pension costs.

Comment: Fifteen commenters stated that funding would not be needed

to validate the liability of nonqualified defined-benefit plans if the

Board retained the existing requirement that the benefits be

``compelled''.

Response: The Board believes it is reasonable for the Government to

require that pension cost of both qualified and nonqualified pension

plans allocated to contracts, which the Government pays for through

cost or price, be subject to funding. This final rule ensures that any

unfunded portion of assigned cost is isolated from the computation of

future cost accruals. To prevent windfall gains or losses and to

minimize the need for advance agreements discussed above, costs

allocated to fixed-priced contracts must be funded to the extent

possible.

The Board notes that the excess funding, which occurs when a

contractor funds more than the assigned pension cost for the period, is

carried forward to future periods with interest. This final rule

retains the premature funding provisions of the original Standard

through the definition and operation of prepayment credits.

Comment: Five commenters stated that current period funding of

assigned costs for nonqualified pension plans is necessary to enhance

the verifiability of all costs allocated to contracts and to reduce the

risk that the promised benefits might never be paid.

Response: As already discussed, the Board is persuaded that funding

of the assigned cost is necessary to substantiate the liability. The

Board is also persuaded that requiring a taxable contractor to fund

100% of the pension cost could impose a cash flow penalty to the extent

the amount funded may not be tax-deductible. The Board has modified the

funding requirement accordingly. However, the Board does not wish to

provide a cash flow advantage to tax-exempt contractors for whom no

such cash flow penalty exists. Accordingly, the complementary funding

rule is restricted to taxable entities only.

This final rule addresses the risk that unfunded costs will not be

verified by providing for an accounting of all assigned costs. Funded

costs are captured and accounted for within the assets of the funding

agency. Amounts exempted from funding based on the tax-rate are

retained in the general assets of the contractor and accounted for

within the accumulated value of permitted unfunded accruals. Portions

of assigned cost not substantiated by complementary funding must be

separately identified and accounted for pursuant to 9904.412-50(a)(2).

This final rule ensures that all portions of assigned cost and

allocated cost are tracked and accounted for, and thereby removes much

of the risk.

Comment: Eight commenters were concerned that a ``Rabbi'' trust

would not satisfy the ``exclusive benefit'' requirement in the

definition of a funding agency since creditors might have superior

rights to those of the plan participants. Other commenters asked if

other nonqualified trust arrangements could qualify as a funding agency

under the Standard.

Response: The Board's intention when revising the definition of a

funding agency was to prohibit the use of bookkeeping reserves, escrow

accounts, or any other arrangement under which the rights of the plan

participants were not clearly superior to those of the plan sponsor.

The basic test of ``exclusive benefit'' is whether the contractor has

relinquished all rights to the funds and that, except for the

extraordinary event of bankruptcy, the participants have primary rights

to the funds. The solvency of a contractor is always a concern to the

Government that is not restricted merely to pension costs.

The Board does not intend that a ``Rabbi trust'' be the only

funding arrangement that satisfies the funding agency definition. Other

arrangements such as so-called secular trusts can be satisfactory. The

Board expects that as tax law changes and as qualified plan benefit

limits possibly become more or less restrictive, other funding

arrangements may become more effective and more widely adopted.

The Board does not intend for the ``exclusive benefit'' clause to

prohibit asset reversions where, after settling all benefit obligations

to plan participants, the residual assets of the trust revert or inure

to a contractor. The funding agency coverage in the pension Standards

is intended to be consistent with the coverage for funded insurance

reserves found at 9904.416-50(a)(1)(v)(B), which permits a reversion of

assets only after all benefit obligations have been satisfied through

insurance.

Comment: Nine commenters were concerned that taxes and

administrative costs associated with Rabbi trusts will increase pension

costs. Five commenters believe that the NPRM (and prior ANPRM)

complementary funding rule for nonqualified plans creates an

administrative burden.

Response: The Board recognizes that there will be some additional

expenses associated with the use of complementary funding and the use

of nonqualified trust funds. The specificity of the final rule gives

contractors clear rules under which they can choose to compute, assign,

and allocate the costs of a nonqualified plan. The benefits of an

accurate accounting of all assigned costs will offset any increased

administrative expense to the Government and contractors.

There will be an increase in the cost of such plans for the taxes

on the earnings of the nonqualified trust fund that are directly paid

by or reimbursed from the fund. These taxes are a valid expense of the

pension plan incurred in response to the final rule's requirement that

a portion of the assigned cost be funded. The Board notes that, in

fact, such increased costs are being returned to the Government through

the payment of the tax.

The rule specifies that income taxes on the earnings of a

nonqualified trust are treated as administrative expenses and not as

decrements to the assumed investment earning rate. This technical

correction clarifies that the interest assumption used to compute

actuarial values is not reduced to reflect taxes on fund earnings. This

rule is not intended to prevent contractors from expressing the

actuarial assumption for administrative expenses as a percentage of the

earnings.

Comment: Two commenters suggested that the final rule address how

ERISA's funding limits are allocated to segments.

Response: Only the maximum tax-deductible amount and the

contribution to the funding agency are determined for the pension plan

in its entirety. Under segmented accounting, all other aspects of

period cost; i.e., normal cost, unfunded actuarial liability,

assignable cost limitation, are measured at the segment level. This

final rule requires that the tax-deductible maximum, determined for the

plan as a whole, must be apportioned to segments using a basis that

considers the assignable costs or the funding levels of the segments.

Illustrations of how plan-wide values are apportioned to segments have

been added.

In addition, to ease the funding of costs attributable to

Government contracts, this final rule allows contractors with

predominantly commercial business to apportion contributions for

qualified defined- [[Page 16539]] benefit plans to their Government

segments first, but only if the contractor uses segmented accounting.

Unfunded assigned costs, whether attributable to Government contracts

or commercial business, will be separately identified under 9904.412-

50(a)(2) and thereby isolated from future cost computations and future

allocation. This provision allows the contractor to determine when to

fund costs of its qualified defined-benefit plan for segments that are

associated solely with commercial business.

Although the assets of a pension plan are subject to the claims of

all plan participants, the Board believes the funding requirements and

protections of ERISA will prevent any untenable differences in funding

levels of segments from arising. Because nonqualified plans lack the

funding requirement protection of ERISA, the funding of such plans must

be apportioned across all segments.

Comment: Four commenters suggested that the definition of a segment

closing should be clarified. Concerns were raised that an internal

reorganization would require a current period adjustment for a segment

closing even though neither the segment's nor the contractor's

relationship to the Government had changed.

Response: The definition has been revised to delineate three

conditions requiring a current period adjustment. The first condition

occurs when there is a change in ownership of the segment, not just a

simple reorganization within the contractor's internal structure. The

second event is the one addressed in the NPRM; that is, when the

contractual relationship ends because the segment operationally ceases

to exist. The third case addresses the end of the contractual

relationship with the Government, whether the segment continues in

operation or not.

Comment: Two commenters opposed using the accrued benefit cost

method (ABCM) to determine the actuarial liability for a segment

closing or plan termination adjustment. These commenters believe the

ABCM understates the liability. Four commenters supported limiting the

actuarial assumptions used to determine the segment closing and plan

termination adjustment. These commenters also supported a phase-in of

benefit improvements adopted within 5 years of a segment closing or

plan termination.

Response: In this final rule, the actuarial accrued liability, used

for determining the adjustment for a segment closing or curtailment of

benefits, is determined using the accrued benefit cost method. For a

curtailment of benefits or for plan participants who are terminated

from employment in a segment closing, the accrued benefit is the

appropriate measure of the ultimate benefit that will be paid under the

plan. If plan participants remain employed by the contractor, whether

in the same or another segment, the Board believes the responsibility

for future salary increases, which are attributable to future

productivity, merit, and inflation, belongs to the future customers

that benefit from the participants' continued employment. The Board

notes that the ABCM does recognize the cost of vesting earned by the

participants' future service.

The Board also believes that when there is an immediate period

liquidation of the liability through the payment of lump sum

settlements or the purchase of annuities, the cost of such settlements

and annuities is an exact measure of the liability, although the

Government does have a right to share in any future dividends or

refunds. This final rule has been revised accordingly.

Consistent with the requirement that actuarial assumptions be

individual best-estimates of future long-term economic and demographic

trends, this final rule requires that the assumptions used to determine

the actuarial liability be consistent with the assumptions that have

been in use. This is consistent with the fact that the pension plan is

continuing even though the segment has closed or the earning of future

benefits has been curtailed. The Board does not intend this rule to

prevent contractors from using assumptions that have been revised based

on a persuasive actuarial experience study or a change in a plan's

investment policy.

This final rule does include a sixty-month phase-in of voluntary

benefit improvements to forestall an increase in the liability in

contemplation of a segment closing or plan termination. Improvements

mandated by law or granted though collective bargaining negotiations

are not considered voluntary. A plan termination or curtailment of

benefits is viewed as negating the intent of any recent voluntary

benefit improvements.

Under the revised definition of a segment closing, some employees

may remain in a segment performing non-Government work while other

employees may be transferred to other segments. For consistency, the

provisions for transfers of either active or retired participants

specify that the assets transferred must equal the actuarial accrued

liability determined under the accrued benefit cost method.

Comment: One commenter asked if a contractor must determine whether

a termination of plan gain or loss has occurred before an adjustment is

required. Another commenter asked if a termination of plan gain or loss

occurs when a pension plan is ``frozen.''

Response: The definition has been changed to refer to an event;

that is, the termination of a pension plan. Any resultant gain or loss

for Government contracting purposes is determined by the 9904.413-

50(c)(12) adjustment. The ``freezing'' of a pension plan is addressed

by the addition of a definition for a ``Curtailment of Benefits.''

Comment: Two commenters supported the amortization of any segment

closing adjustment, rather than an immediate period adjustment.

Response: Under this final rule, the 9904.413-50(c)(12) adjustment

is determined as a current period adjustment, whether or not assets

actually revert from the trust. The Board believes a current period

adjustment is appropriate when there is a disruption of the contracting

relationship, a discontinuance of the operational segment, or a

discontinuance of the pension plan. When such events occur, pension

costs can no longer be computed and adjusted on an on-going basis since

there are either no future accounting periods in which credits or

charges can be allocated to contracts or no future periods in which

benefits will be earned.

If a contractor will continue to have a contracting relationship

with the Government, the final rule does permit the cognizant Federal

official and the contractor to negotiate an amortization schedule. This

provision will allow a contractor to allocate an adjustment credit to

future years during which it can recover the amount of credited assets

either through decreased pension costs or through prices charged to

other customers benefiting from the future work performed by plan

participants.

Comment: Eleven commenters requested that the Board clarify that

the 9904.413-50(c)(12) adjustment could result in a charge to final

cost objectives if the liabilities exceeded the assets.

Response: The final rule refers to the ``difference'' between

assets and liabilities without prejudice towards either adjustment

credits or adjustment charges. An illustration of the adjustment when

liabilities exceed assets has been added.

Comment: Four commenters asked the Board to clarify how the

Government's share of the adjustment was to be determined. Five

commenters opposed the inclusion of fixed-price contracts in

[[Page 16540]] any formula used to determine the Government's share.

Response: The asset value used to determine the adjustment amount

is the market value of the assets, including permitted unfunded

accruals, plus portions of unfunded liability identified pursuant to

9904.412-50(a)(2), i.e., plan assets retained by the contractor due to

allocated but unfunded costs. The asset value is reduced for the

accumulated value of any prepayment credits since such assets have

never been assigned to past periods nor allocated to Government

contracts. Because this asset value represents the current value of

assigned costs of prior periods, the sum of previously assigned pension

costs is the denominator of the fraction. The portion of these assets

attributable to the Government's participation in the funding of the

pension plan through cost or price is measured by the sum of costs

allocated to Government contracts. The fraction is determined based on

data from years that are representative of the Government's

participation, which is a factual determination best made by the

contracting officer.

Costs allocated to fixed-price contracts subject to CAS 9904.412

and 9904.413 are included since the Government has participated in the

funding of the plan through the payment of the estimated pension cost

considered in the pricing of the contract. A risk/reward of a fixed-

price contract is the deviation of actual costs from the estimated cost

considered in the price. If a single period event, e.g., segment

closing, plan termination, or benefit curtailment, alters the on-going

nature of the pension plan or segment, the effect on fixed-price

contracts should be similar to that of an accounting practice change.

Comment: Four commenters supported amending the NPRM coverage to

explicitly state that the 9904.413-50(c)(12) adjustment is determined

net of the excise tax on pension plan asset reversions.

Response: The Board agrees. Before applying the fraction that

determines the Government's share, subdivision 9904.413-50(c)(12)(vi)

reduces the adjustment amount for any excise taxes assessed on assets

that revert to the contractor as part of a pension plan termination.

The excise tax is intended to discourage plan sponsors from terminating

their qualified pension plans, and under this final rule, Government

contractors are subject to the same termination penalty as their

commercial counterparts. Since the excise tax is returned to the

Government, albeit the Internal Revenue Service, the Board believes

equity warrants determining the Government's share based on the net

adjustment amount.

While the Board believes the Government's allocable share of any

adjustment should be net of any reversion excise tax, the allowability

of such excise taxes continues to be determined by the applicable cost

principles. Income taxes, which are paid to the Internal Revenue

Service as an offset against prior tax deductions, continue not to be

allocable.

Comment: Six commenters suggested that a segment closing adjustment

is not necessary if the assets and liabilities of the segment were

transferred to the successor contractor.

Response: The Board agrees. The appropriate coverage and

illustrations have been added.

List of Subjects in 48 CFR Parts 9903 and 9904

Cost accounting standards, Government procurement.

Richard C. Loeb,

Executive Secretary, Cost Accounting Standards Board.

PART 9903--CONTRACT COVERAGE

1. The authority citations for Parts 9903 and 9904 continue to read

as follows:

Authority: Public Law 100-679, 102 Stat 4056, 41 U.S.C. 422.

9903.201 [Amended]

2. Subsection 9903.201-1 is amended by removing and reserving

paragraph (b)(11).

PART 9904--COST ACCOUNTING STANDARDS

3. Subsection 9904.412-30 is amended by revising paragraph (a) to

read as follows:

9904.412-30 Definitions.

(a) The following are definitions of terms which are prominent in

this Standard. Other terms defined elsewhere in this chapter 99 shall

have the meanings ascribed to them in those definitions unless

paragraph (b) of this subsection requires otherwise.

(1) Accrued benefit cost method means an actuarial cost method

under which units of benefits are assigned to each cost accounting

period and are valued as they accrue; that is, based on the services

performed by each employee in the period involved. The measure of

normal cost under this method for each cost accounting period is the

present value of the units of benefit deemed to be credited to

employees for service in that period. The measure of the actuarial

accrued liability at a plan's inception date is the present value of

the units of benefit credited to employees for service prior to that

date. (This method is also known as the Unit Credit cost method without

salary projection.)

(2) Actuarial accrued liability means pension cost attributable,

under the actuarial cost method in use, to years prior to the current

period considered by a particular actuarial valuation. As of such date,

the actuarial accrued liability represents the excess of the present

value of future benefits and administrative expenses over the present

value of future normal costs for all plan participants and

beneficiaries. The excess of the actuarial accrued liability over the

actuarial value of the assets of a pension plan is the Unfunded

Actuarial Liability. The excess of the actuarial value of the assets of

a pension plan over the actuarial accrued liability is an actuarial

surplus and is treated as a negative unfunded actuarial liability.

(3) Actuarial assumption means an estimate of future conditions

affecting pension cost; for example, mortality rate, employee turnover,

compensation levels, earnings on pension plan assets, changes in values

of pension plan assets.

(4) Actuarial cost method means a technique which uses actuarial

assumptions to measure the present value of future pension benefits and

pension plan administrative expenses, and which assigns the cost of

such benefits and expenses to cost accounting periods. The actuarial

cost method includes the asset valuation method used to determine the

actuarial value of the assets of a pension plan.

(5) Actuarial gain and loss means the effect on pension cost

resulting from differences between actuarial assumptions and actual

experience.

(6) Actuarial valuation means the determination, as of a specified

date, of the normal cost, actuarial accrued liability, actuarial value

of the assets of a pension plan, and other relevant values for the

pension plan.

(7) Assignable cost credit means the decrease in unfunded actuarial

liability that results when the pension cost computed for a cost

accounting period is less than zero.

(8) Assignable cost deficit means the increase in unfunded

actuarial liability that results when the pension cost computed for a

qualified defined-benefit pension plan exceeds the maximum tax-

deductible amount for the cost accounting period determined in

accordance with the Employee Retirement Income Security Act of 1974

[[Page 16541]] (ERISA), 29 U.S.C. 1001 et seq., as amended.

(9) Assignable cost limitation means the excess, if any, of the

actuarial accrued liability plus the current normal cost over the

actuarial value of the assets of the pension plan.

(10) Defined-benefit pension plan means a pension plan in which the

benefits to be paid or the basis for determining such benefits are

established in advance and the contributions are intended to provide

the stated benefits.

(11) Defined-contribution pension plan means a pension plan in

which the contributions are established in advance and the benefits are

determined thereby.

(12) Funded pension cost means the portion of pension cost for a

current or prior cost accounting period that has been paid to a funding

agency.

(13) Funding agency means an organization or individual which

provides facilities to receive and accumulate assets to be used either

for the payment of benefits under a pension plan, or for the purchase

of such benefits, provided such accumulated assets form a part of a

pension plan established for the exclusive benefit of the plan

participants and their beneficiaries. The fair market value of the

assets held by the funding agency as of a specified date is the Funding

Agency Balance as of that date.

(14) Immediate-gain actuarial cost method means any of the several

cost methods under which actuarial gains and losses are included as

part of the unfunded actuarial liability of the pension plan, rather

than as part of the normal cost of the plan.

(15) Market value of the assets means the sum of the funding agency

balance plus the accumulated value of any permitted unfunded accruals

belonging to a pension plan. The Actuarial Value of the Assets means

the value of cash, investments, permitted unfunded accruals, and other

property belonging to a pension plan, as used by the actuary for the

purpose of an actuarial valuation.

(16) Multiemployer pension plan means a plan to which more than one

employer contributes and which is maintained pursuant to one or more

collective bargaining agreements between an employee organization and

more than one employer.

(17) Nonforfeitable means a right to a pension benefit, either

immediate or deferred, which arises from an employee's service, which

is unconditional, and which is legally enforceable against the pension

plan or the contractor. Rights to benefits that do not satisfy this

definition are considered forfeitable. A right to a pension benefit is

not forfeitable solely because it may be affected by the employee's or

beneficiary's death, disability, or failure to achieve vesting

requirements. Nor is a right considered forfeitable because it can be

affected by the unilateral actions of the employee.

(18) Normal cost means the annual cost attributable, under the

actuarial cost method in use, to current and future years as of a

particular valuation date, excluding any payment in respect of an

unfunded actuarial liability.

(19) Pay-as-you-go cost method means a method of recognizing

pension cost only when benefits are paid to retired employees or their

beneficiaries.

(20) Pension plan means a deferred compensation plan established

and maintained by one or more employers to provide systematically for

the payment of benefits to plan participants after their retirement,

provided that the benefits are paid for life or are payable for life at

the option of the employees. Additional benefits such as permanent and

total disability and death payments, and survivorship payments to

beneficiaries of deceased employees may be an integral part of a

pension plan.

(21) Pension plan participant means any employee or former employee

of an employer, or any member or former member of an employee

organization, who is or may become eligible to receive a benefit from a

pension plan which covers employees of such employer or members of such

organization who have satisfied the plan's participation requirements,

or whose beneficiaries are receiving or may be eligible to receive any

such benefit. A participant whose employment status with the employer

has not been terminated is an active participant of the employer's

pension plan.

(22) Permitted unfunded accrual means the amount of pension cost

for nonqualified defined-benefit pension plans that is not required to

be funded under 9904.412-50(d)(2). The Accumulated Value of Permitted

Unfunded Accruals means the value, as of the measurement date, of the

permitted unfunded accruals adjusted for imputed earnings and for

benefits paid by the contractor.

(23) Prepayment credit means the amount funded in excess of the

pension cost assigned to a cost accounting period that is carried

forward for future recognition. The Accumulated Value of Prepayment

Credits means the value, as of the measurement date, of the prepayment

credits adjusted for interest at the valuation rate and decreased for

amounts used to fund pension costs or liabilities, whether assignable

or not.

(24) Projected benefit cost method means either (i) any of the

several actuarial cost methods which distribute the estimated total

cost of all of the employees' prospective benefits over a period of

years, usually their working careers, or (ii) a modification of the

accrued benefit cost method that considers projected compensation

levels.

(25) Qualified pension plan means a pension plan comprising a

definite written program communicated to and for the exclusive benefit

of employees which meets the criteria deemed essential by the Internal

Revenue Service as set forth in the Internal Revenue Code for

preferential tax treatment regarding contributions, investments, and

distributions. Any other plan is a Nonqualified Pension Plan.

(b) * * *

4. Subsection 9904.412-40 is revised to read as follows:

9904.412-40 Fundamental requirement.

(a) Components of pension cost. (1) For defined-benefit pension

plans, except for plans accounted for under the pay-as-you-go cost

method, the components of pension cost for a cost accounting period are

(i) the normal cost of the period, (ii) a part of any unfunded

actuarial liability, (iii) an interest equivalent on the unamortized

portion of any unfunded actuarial liability, and (iv) an adjustment for

any actuarial gains and losses.

(2) For defined-contribution pension plans, the pension cost for a

cost accounting period is the net contribution required to be made for

that period, after taking into account dividends and other credits,

where applicable.

(3) For defined-benefit pension plans accounted for under the pay-

as-you-go cost method, the components of pension cost for a cost

accounting period are:

(i) The net amount of periodic benefits paid for that period, and

(ii) An amortization installment, including an interest equivalent

on the unamortized settlement amount, attributable to amounts paid to

irrevocably settle an obligation for periodic benefits due in current

and future cost accounting periods.

(b) Measurement of pension cost. (1) For defined-benefit pension

plans other than those accounted for under the pay-as-you-go cost

method, the amount of pension cost of a cost accounting period shall be

determined by use of an immediate-gain actuarial cost method.

[[Page 16542]]

(2) Each actuarial assumption used to measure pension cost shall be

separately identified and shall represent the contractor's best

estimates of anticipated experience under the plan, taking into account

past experience and reasonable expectations. The validity of each

assumption used shall be evaluated solely with respect to that

assumption. Actuarial assumptions used in calculating the amount of an

unfunded actuarial liability shall be the same as those used for other

components of pension cost.

(c) Assignment of pension cost. Except costs assigned to future

periods by 9904.412-50(c) (2) and (5), the amount of pension cost

computed for a cost accounting period is assignable only to that

period. For defined-benefit pension plans other than those accounted

for under the pay-as-you-go cost method, the pension cost is assignable

only if the sum of (1) the unamortized portions of assignable unfunded

actuarial liability developed and amortized pursuant to 9904.412-50(a)

(1), and (2) the unassignable portions of unfunded actuarial liability

separately identified and maintained pursuant to 9904.412-50(a)(2)

equals the total unfunded actuarial liability.

(d) Allocation of pension cost. Pension costs assigned to a cost

accounting period are allocable to intermediate and final cost

objectives only if they meet the requirements for allocation in

9904.412-50(d). Pension costs not meeting these requirements may not be

reassigned to any future cost accounting period.

5. Subsection 9904.412-50 is revised to read as follows:

9904.412-50 Techniques for application.

(a) Components of pension cost. (1) The following portions of

unfunded actuarial liability shall be included as a separately

identified part of the pension cost of a cost accounting period and

shall be included in equal annual installments. Each installment shall

consist of an amortized portion of the unfunded actuarial liability

plus an interest equivalent on the unamortized portion of such

liability. The period of amortization shall be established as follows:

(i) If amortization of an unfunded actuarial liability has begun

prior to the date this Standard first becomes applicable to a

contractor, no change in the amortization period is required by this

Standard.

(ii) If amortization of an unfunded actuarial liability has not

begun prior to the date this Standard first becomes applicable to a

contractor, the amortization period shall begin with the period in

which the Standard becomes applicable and shall be no more than 30

years nor less than 10 years. However, if the plan was in existence as

of January 1, 1974, the amortization period shall be no more than 40

years nor less than 10 years.

(iii) Each increase or decrease in unfunded actuarial liability

resulting from the institution of new pension plans, from the adoption

of improvements, or other changes to pension plans subsequent to the

date this Standard first becomes applicable to a contractor shall be

amortized over no more than 30 years nor less than 10 years.

(iv) If any assumptions are changed during an amortization period,

the resulting increase or decrease in unfunded actuarial liability

shall be separately amortized over no more than 30 years nor less than

10 years.

(v) Actuarial gains and losses shall be identified separately from

unfunded actuarial liabilities that are being amortized pursuant to the

provisions of this Standard. The accounting treatment to be afforded to

such gains and losses shall be in accordance with Cost Accounting

Standard 9904.413.

(vi) Each increase or decrease in unfunded actuarial liability

resulting from an assignable cost deficit or credit, respectively,

shall be amortized over a period of 10 years.

(vii) Each increase or decrease in unfunded actuarial liability

resulting from a change in actuarial cost method, including the asset

valuation method, shall be amortized over a period of 10 to 30 years.

This provision shall not affect the requirements of 9903.302 to adjust

previously priced contracts.

(2) Except as provided in 9904.412-50(d)(2), any portion of

unfunded actuarial liability attributable to either (i) pension costs

applicable to prior years that were specifically unallowable in

accordance with then existing Government contractual provisions or (ii)

pension costs assigned to a cost accounting period that were not funded

in that period, shall be separately identified and eliminated from any

unfunded actuarial liability being amortized pursuant to paragraph

(a)(1) of this subsection. Such portions of unfunded actuarial

liability shall be adjusted for interest at the valuation rate of

interest. The contractor may elect to fund, and thereby reduce, such

portions of unfunded actuarial liability and future interest

adjustments thereon. Such funding shall not be recognized for purposes

of 9904.412-50(d).

(3) A contractor shall establish and consistently follow a policy

for selecting specific amortization periods for unfunded actuarial

liabilities, if any, that are developed under the actuarial cost method

in use. Such policy may give consideration to factors such as the size

and nature of the unfunded actuarial liabilities. Except as provided in

9904.412-50(c)(2) or 9904.413-50(c)(12), once the amortization period

for a portion of unfunded actuarial liability is selected, the

amortization process shall continue to completion.

(4) Any amount funded in excess of the pension cost assigned to a

cost accounting period shall be accounted for as a prepayment credit.

The accumulated value of such prepayment credits shall be adjusted for

interest at the valuation rate of interest until applied towards

pension cost in a future accounting period. The accumulated value of

prepayment credits shall be reduced for portions of the accumulated

value of prepayment credits used to fund pension costs or to fund

portions of unfunded actuarial liability separately identified and

maintained in accordance with 9904.412-50(a)(2). The accumulated value

of any prepayment credits shall be excluded from the actuarial value of

the assets used to compute pension costs for purposes of this Standard

and Cost Accounting Standard 9904.413.

(5) An excise tax assessed pursuant to a law or regulation because

of excess, inadequate, or delayed funding of a pension plan is not a

component of pension cost. Income taxes paid from the funding agency of

a nonqualified defined-benefit pension plan on earnings or other asset

appreciation of such funding agency shall be treated as an

administrative expense of the fund and not as a reduction to the

earnings assumption.

(6) For purposes of this Standard, defined-benefit pension plans

funded exclusively by the purchase of individual or group permanent

insurance or annuity contracts, and thereby exempted from ERISA's

minimum funding requirements, shall be treated as defined-contribution

pension plans. However, all other defined-benefit pension plans

administered wholly or in part through insurance company contracts

shall be subject to the provisions of this Standard relative to

defined-benefit pension plans.

(7) If a pension plan is supplemented by a separately-funded plan

which provides retirement benefits to all of the participants in the

basic plan, the two plans shall be considered as a single plan for

purposes of this Standard. If the effect of the combined plans is to

provide defined-benefits for the plan participants, the combined plans

shall [[Page 16543]] be treated as a defined-benefit plan for purposes

of this Standard.

(8) A multiemployer pension plan established pursuant to the terms

of a collective bargaining agreement shall be considered to be a

defined-contribution pension plan for purposes of this Standard.

(9) A pension plan applicable to a Federally-funded Research and

Development Center (FFRDC) that is part of a State pension plan shall

be considered to be a defined-contribution pension plan for purposes of

this Standard.

(b) Measurement of pension cost. (1) For defined-benefit pension

plans other than those accounted for under the pay-as-you-go cost

method, the amount of pension cost assignable to cost accounting

periods shall be measured by an immediate-gain actuarial cost method.

(2) Where the pension benefit is a function of salaries and wages,

the normal cost shall be computed using a projected benefit cost

method. The normal cost for the projected benefit shall be expressed

either as a percentage of payroll or as an annual accrual based on the

service attribution of the benefit formula. Where the pension benefit

is not a function of salaries and wages, the normal cost shall be based

on employee service.

(3) For defined-benefit plans accounted for under the pay-as-you-go

cost method, the amount of pension cost assignable to a cost accounting

period shall be measured as the sum of:

(i) The net amount for any periodic benefits paid for that period,

and

(ii) The level annual installment required to amortize over 15

years any amounts paid to irrevocably settle an obligation for periodic

benefits due in current or future cost accounting periods.

(4) Actuarial assumptions shall reflect long-term trends so as to

avoid distortions caused by short-term fluctuations.

(5) Pension cost shall be based on provisions of existing pension

plans. This shall not preclude contractors from making salary

projections for plans whose benefits are based on salaries and wages,

or from considering improved benefits for plans which provide that such

improved benefits must be made.

(6) If the evaluation of the validity of actuarial assumptions

shows that any assumptions were not reasonable, the contractor shall:

(i) Identify the major causes for the resultant actuarial gains or

losses, and

(ii) Provide information as to the basis and rationale used for

retaining or revising such assumptions for use in the ensuing cost

accounting period(s).

(c) Assignment of pension cost. (1) Amounts funded in excess of the

pension cost computed for a cost accounting period pursuant to the

provisions of this Standard shall be accounted for as a prepayment

credit and carried forward to future accounting periods.

(2) For qualified defined-benefit pension plans, the pension cost

computed for a cost accounting period is assigned to that period

subject to the following adjustments, in order of application:

(i) Any amount of computed pension cost that is less than zero

shall be assigned to future accounting periods as an assignable cost

credit. The amount of pension cost assigned to the period shall be

zero.

(ii) When the pension cost equals or exceeds the assignable cost

limitation:

(A) The amount of computed pension cost, adjusted pursuant to

paragraph (c)(2)(i) of this subsection, shall not exceed the assignable

cost limitation,

(B) All amounts described in 9904.412-50(a)(1) and 9904.413-50(a),

which are required to be amortized, shall be considered fully

amortized, and

(C) Except for portions of unfunded actuarial liability separately

identified and maintained in accordance with 9904.413-50(a)(2), any

portion of unfunded actuarial liability, which occurs in the first cost

accounting period after the pension cost has been limited by the

assignable cost limitation, shall be considered an actuarial gain or

loss for purposes of this Standard. Such actuarial gain or loss shall

exclude any increase or decrease in unfunded actuarial liability

resulting from a plan amendment, change in actuarial assumptions, or

change in actuarial cost method effected after the pension cost has

been limited by the assignable cost limitation.

(iii) Any amount of computed pension cost of a qualified pension

plan, adjusted pursuant to paragraphs (c)(2) (i) and (ii) of this

subsection that exceeds the sum of (A) the maximum tax-deductible

amount, determined in accordance with ERISA, and (B) the accumulated

value of prepayment credits shall be assigned to future accounting

periods as an assignable cost deficit. The amount of pension cost

assigned to the current period shall not exceed the sum of the maximum

tax-deductible amount plus the accumulated value of prepayment credits.

(3) The cost of nonqualified defined-benefit pension plans shall be

assigned to cost accounting periods in the same manner as qualified

plans (with the exception of paragraph (c)(2)(iii) of this subsection)

under the following conditions:

(i) The contractor, in disclosing or establishing his cost

accounting practices, elects to have a plan so accounted for;

(ii) The plan is funded through the use of a funding agency; and,

(iii) The right to a pension benefit is nonforfeitable and is

communicated to the participants.

(4) The costs of nonqualified defined-benefit pension plans that do

not meet all of the requirements in 9904.412-50(c)(3) shall be assigned

to cost accounting periods using the pay-as-you-go cost method.

(5) Any portion of pension cost computed for a cost accounting

period that exceeds the amount required to be funded pursuant to a

waiver granted under the provisions of ERISA shall not be assigned to

the current period. Rather, such excess shall be treated as an

assignable cost deficit, except that it shall be assigned to future

cost accounting periods using the same amortization period as used for

ERISA purposes.

(d) Allocation of pension costs. The amount of pension cost

assigned to a cost accounting period allocated to intermediate and

final cost objectives shall be limited according to the following

criteria:

(1) Except for nonqualified defined-benefit plans, the costs of a

pension plan assigned to a cost accounting period are allocable to the

extent that they are funded.

(2) For nonqualified defined-benefit pension plans that meet the

criteria set forth at 9904.412-50(c)(3), pension costs assigned to a

cost accounting period are fully allocable if they are funded at a

level at least equal to the percentage of the complement (i.e., 100%-

tax rate % = percentage of assigned cost to be funded) of the highest

published Federal corporate income tax rate in effect on the first day

of the cost accounting period. If the contractor is not subject to

Federal income tax, the assigned costs are allocable to the extent such

costs are funded. Funding at other levels and benefit payments of such

plans are subject to the following:

(i) Funding at less than the foregoing levels shall result in

proportional reductions of the amount of assigned cost that can be

allocated within the cost accounting period.

(ii) (A) Payments to retirees or beneficiaries shall contain an

amount drawn from sources other than the funding agency of the pension

plan that is, at least, proportionately equal to the

[[Page 16544]] accumulated value of permitted unfunded accruals divided

by an amount that is the market value of the assets of the pension plan

excluding any accumulated value of prepayment credits.

(B) The amount of assigned cost of a cost accounting period that

can be allocated shall be reduced to the extent that such payments are

drawn in a higher ratio from the funding agency.

(iii) The permitted unfunded accruals shall be identified and

accounted for year to year, adjusted for benefit payments directly paid

by the contractor and for interest at the actual annual earnings rate

on the funding agency balance.

(3) For nonqualified defined-benefit pension plans accounted for

under the pay-as-you-go method, pension costs assigned to a cost

accounting period are allocable in that period.

(4) Funding of pension cost shall be considered to have taken place

within the cost accounting period if it is accomplished by the

corporate tax filing date for such period including any permissible

extensions thereto.

6. Subsection 9904.412-60 is revised to read as follows:

9904.412-60 Illustrations.

(a) Components of pension cost. (1) Contractor A has insured

pension plans for each of two small groups of employees. One plan is

exclusively funded through a group permanent life insurance contract

and is exempt from the minimum funding requirements of ERISA. The other

plan is funded through a deposit administration contract, which is a

form of group deferred annuity contract that is not exempt from ERISA's

minimum funding requirements. Both plans provide for defined benefits.

Pursuant to 9904.412-50(a)(6), for purposes of this Standard the plan

financed through a group permanent insurance contract shall be

considered to be a defined-contribution pension plan; the net premium

required to be paid for a cost accounting period (after deducting

dividends and any credits) shall be the pension cost for that period.

However, the deposit administration contract plan is subject to the

provisions of this Standard that are applicable to defined-benefit

plans.

(2) Contractor B provides pension benefits for certain hourly

employees through a multiemployer defined-benefit plan. Under the

collective bargaining agreement, the contractor pays six cents into the

fund for each hour worked by the covered employees. Pursuant to

9904.412-50(a)(8), the plan shall be considered to be a defined-

contribution pension plan. The payments required to be made for a cost

accounting period shall constitute the assignable pension cost for that

period.

(3) Contractor C provides pension benefits for certain employees

through a defined-contribution pension plan. However, the contractor

has a separate fund that is used to supplement pension benefits for all

of the participants in the basic plan in order to provide a minimum

monthly retirement income to each participant. Pursuant to 9904.412-

50(a)(7), the two plans shall be considered as a single plan for

purposes of this Standard. Because the effect of the supplemental plan

is to provide defined-benefits for the plan's participants, the

provisions of this Standard relative to defined-benefit pension plans

shall be applicable to the combined plan.

(4) Contractor D provides supplemental benefits to key management

employees through a nonqualified defined-benefit pension plan funded by

a so-called ``Rabbi Trust.'' The trust agreement provides that Federal

income taxes levied on the earnings of the Rabbi trust may be paid from

the trust. The contractor's actuarial cost method recognizes the

administrative expenses of the plan and trust, such as broker and

attorney fees, by adding the prior year's expenses to the current

year's normal cost. The income taxes paid by the trust on trust

earnings shall be accorded the same treatment as any other

administrative expense in accordance with 9904.412-50(a)(5).

(5) (i) Contractor E has been using the entry age normal actuarial

cost method to compute pension costs. The contractor has three years

remaining under a firm fixed price contract subject to this Standard.

The contract was priced using the unfunded actuarial liability, normal

cost, and net amortization installments developed using the entry age

normal method. The contract was priced as follows:

Entry Age Normal Values

------------------------------------------------------------------------

Cost component Year 1 Year 2 Year 3

------------------------------------------------------------------------

Normal cost............................ $100,000 $105,000 $110,000

Amortization........................... 50,000 50,000 50,000

--------------------------------

Pension cost......................... 150,000 155,000 160,000

------------------------------------------------------------------------

(ii) The contractor, after notifying the cognizant Federal

official, switches to the projected unit credit actuarial cost method.

The unfunded actuarial liability and normal cost decreased when

redetermined under the projected unit credit method. Pursuant to

9904.412-50(a)(1)(vii), the contractor determines that an annual

installment credit of $20,000 will amortize the decrease in unfunded

actuarial liability (UAL) over ten years. The following pension costs

are determined under the projected unit credit method:

Projected Unit Credit Values

------------------------------------------------------------------------

Cost component Year 1 Year 2 Year 3

------------------------------------------------------------------------

Normal cost............................ $80,000 $85,000 $90,000

Amortization:

Prior method......................... 50,000 50,000 50,000

UAL decrease......................... (20,000) (20,000) (20,000)

--------------------------------

Pension cost........................... 110,000 115,000 120,000

------------------------------------------------------------------------

[[Page 16545]] (iii) The change in cost method is a change in

accounting method that decreased previously priced pension costs by

$40,000 per year. In accordance with 9903.302, Contractor E shall

adjust the cost of the firm fixed-price contract for the remaining

three years by $120,000 ($40,000 x 3 years).

(6) Contractor F has a defined-benefit pension plan for its

employees. Prior to being subject to this Standard the contractor's

policy was to compute and fund as annual pension cost normal cost plus

only interest on the unfunded actuarial liability. Pursuant to

9904.412-40(a)(1), the components of pension cost for a cost accounting

period must now include not only the normal cost for the period and

interest on the unfunded actuarial liability, but also an amortized

portion of the unfunded actuarial liability. The amortization of the

liability and the interest equivalent on the unamortized portion of the

liability must be computed in equal annual installments.

(b) Measurement of pension cost. (1) Contractor G has a pension

plan whose costs are assigned to cost accounting periods by use of an

actuarial cost method that does not separately identify actuarial gains

and losses or the effect on pension cost resulting from changed

actuarial assumptions. Contractor G's method is not an immediate-gain

cost method and does not comply with the provisions of 9904.412-

50(b)(1).

(2) For several years Contractor H has had an unfunded nonqualified

pension plan which provides for payments of $200 a month to employees

after retirement. The contractor is currently making such payments to

several retired employees and recognizes those payments as its pension

cost. The contractor paid monthly annuity benefits totaling $24,000

during the current year. During the prior year, Contractor H made lump

sum payments to irrevocably settle the benefit liability of several

participants with small benefits. The annual installment to amortize

these lump sum payments over fifteen years at the valuation interest

rate assumption is $5,000. Since the plan does not meet the criteria

set forth in 9904.412-50(c)(3)(ii), pension cost must be accounted for

using the pay-as-you-go cost method. Pursuant to 9904.412-50(b)(3), the

amount of assignable cost allocable to cost objectives of that period

is $29,000, which is the sum of the amount of benefits actually paid in

that period ($24,000) plus the second annual installment to amortize

the prior year's lump sum settlements ($5,000).

(3) Contractor I has two qualified defined-benefit pension plans

that provide for fixed dollar payments to hourly employees. Under the

first plan, the contractor's actuary believes that the contractor will

be required to increase the level of benefits by specified percentages

over the next several years. In calculating pension costs, the

contractor may not assume future benefits greater than that currently

required by the plan. With regard to the second plan, a collective

bargaining agreement negotiated with the employees' labor union

provides that pension benefits will increase by specified percentages

over the next several years. Because the improved benefits are required

to be made, the contractor can consider such increased benefits in

computing pension costs for the current cost accounting period in

accordance with 9904.412-50(b)(5).

(4) In addition to the facts of 9904.412-60(b)(3), assume that

Contractor I was required to contribute at a higher level for ERISA

purposes because the plan was underfunded. To compute pension costs

that are closer to the funding requirements of ERISA, Contractor I

decides to ``fresh start'' the unfunded actuarial liability being

amortized pursuant to 9904.412-50(a)(1); i.e., treat the entire amount

as a newly established portion of unfunded actuarial liability, which

is amortized over 10 years in accordance with 9904.412-50(a)(1)(ii).

Because the contractor has changed the periods for amortizing the

unfunded actuarial liability established pursuant to 9904.412-50(a)(3),

the contractor has made a change in accounting practice subject to the

provisions of Cost Accounting Standard 9903.302.

(c) Assignment of pension cost. (1) Contractor J maintains a

qualified defined-benefit pension plan. The actuarial value of the

assets of $18 million is subtracted from the actuarial accrued

liability of $20 million to determine the total unfunded actuarial

liability of $2 million. Pursuant to 9904.412-50(a)(1), Contractor J

has identified and is amortizing twelve separate portions of unfunded

actuarial liabilities. The sum of the unamortized balances for the

twelve separately maintained portions of unfunded actuarial liability

equals $1.8 million. In accordance with 9904.412-50(a)(2), the

contractor has separately identified, and eliminated from the

computation of pension cost, $200,000 attributable to a pension cost

assigned to a prior period that was not funded. The sum of the twelve

amortization bases maintained pursuant to 9904.412-50(a)(1) and the

amount separately identified under 9904.412-50(a)(2) equals $2 million

($1,800,000+200,000). Because the sum of all identified portions of

unfunded actuarial liability equals the total unfunded actuarial

liability, the plan is in actuarial balance and Contractor J can assign

pension cost to the current cost accounting period in accordance with

9904.412-40(c).

(2) Contractor K's pension cost computed for 1996, the current

year, is $1.5 million. This computed cost is based on the components of

pension cost described in 9904.412-40(a) and 9904.412-50(a) and is

measured in accordance with 9904.412-40(b) and 9904.412-50(b). The

assignable cost limitation, which is defined at 9904.412-30(a)(9), is

$1.3 million. In accordance with the provisions of 9904.412-

50(c)(2)(ii)(A), Contractor K's assignable pension cost for 1996 is

limited to $1.3 million. In addition, all amounts that were previously

being amortized pursuant to 9904.412-50(a)(1) and 9904.413-50(a) are

considered fully amortized in accordance with 9904.412-50(c)(2)(ii)(B).

The following year, 1997, Contractor K computes an unfunded actuarial

liability of $4 million. Contractor K has not changed his actuarial

assumptions nor amended the provisions of his pension plan. Contractor

K has not had any pension costs disallowed or unfunded in prior

periods. Contractor K must treat the entire $4 million of unfunded

actuarial liability as an actuarial loss to be amortized over fifteen

years beginning in 1997 in accordance with 9904.412-50(c)(2)(ii)(C).

(3) Assume the same facts shown in illustration 9904.412-60(c)(2),

except that in 1995, the prior year, Contractor K's assignable pension

cost was $800,000, but Contractor K only funded and allocated $600,000.

Pursuant to 9904.412-50(a)(2), the $200,000 of unfunded assignable

pension cost was separately identified and eliminated from other

portions of unfunded actuarial liability. This portion of unfunded

actuarial liability was adjusted for 8% interest, which is the interest

assumption for 1995 and 1996, and was brought forward to 1996 in

accordance with 9904.412-50(a)(2). Therefore, $216,000

($200,000 x 1.08) is excluded from the amount considered fully

amortized in 1996. The next year, 1997, Contractor K must eliminate

$233,280 ($216,000 x 1.08) from the $4 million so that only $3,766,720

is treated as an actuarial loss in accordance with 9904.412-

50(c)(2)(ii)(C).

(4) Assume, as in 9904.412-60(c)(2), the 1996 pension cost computed

for Contractor K's qualified defined-benefit pension plan is $1.5

million and the assignable cost limitation is $1.7

[[Page 16546]] million. However, because of the ERISA limitation on

tax-deductible contributions, Contractor K cannot fund more than $1

million without incurring an excise tax, which 9904.412-50(a)(5) does

not permit to be a component of pension cost. In accordance with the

provisions of 9904.412-50(c)(2)(iii), Contractor K's assignable pension

cost for the period is limited to $1 million. The $500,000 ($1.5

million-$1 million) of pension cost not funded is reassigned to the

next ten cost accounting periods beginning in 1997 as an assignable

cost deficit in accordance with 9904.412-50(a)(1)(vi).

(5) Assume the same facts for Contractor K in 9904.412-60(c)(4),

except that the accumulated value of prepayment credits equals

$700,000. Therefore, in addition to the $1 million, Contractor K can

apply $500,000 of the accumulated value of prepayment credits towards

the pension cost computed for the period. In accordance with the

provisions of 9904.412-50(c)(2)(iii), Contractor K's assignable pension

cost for the period is the full $1.5 million ($1 million+$500,000)

computed for the period. The $200,000 of remaining accumulated value of

prepayment credits ($700,000-$500,000) is adjusted for interest at the

valuation rate and carried forward until needed in future accounting

periods in accordance with 9904.412-50(a)(4).

(6) Assume the same facts for Contractor K in 9904.412-60(c)(4),

except that the 1996 assignable cost limitation is $1.3 million.

Pension cost of $1.5 million is computed for the cost accounting

period, but the assignable cost is limited to $1.3 million in

accordance with 9904.412-50(c)(2)(ii)(A). Pursuant to 9904.412-

50(c)(2)(ii)(B), all existing amortization bases maintained in

accordance with subparagraph 9904.412-50(a)(1) are considered fully

amortized. The assignable cost of $1.3 million is then compared to the

maximum tax-deductible amount of $1 million. Pursuant to 9904.412-

50(c)(2)(iii), Contractor K's assignable pension cost for the period is

limited to $1 million. The $300,000 ($1.3 million-$1 million) excess of

the assignable cost limitation over the tax-deductible maximum is

assigned to future periods as an assignable cost deficit.

(7) Contractor L is currently amortizing a large decrease in

unfunded actuarial liability over a period of ten years. A similarly

large increase in unfunded actuarial liability is being amortized over

30 years. The absolute value of the resultant net amortization credit

is greater than the normal cost so that the pension cost computed for

the period is a negative $200,000. Contractor L first applies the

provisions of 9904.412-50(c)(2)(i) and determines the assignable

pension cost is $0. The negative pension cost of $200,000 is assigned

to the next ten cost accounting periods as an assignable cost credit in

accordance with 9904.412-50(a)(1)(vi). However, when Contractor L

applies the provisions of 9904.412-50(c)(2)(ii), the assignable cost

limitation is also $0. Because the assignable cost of $0 determined

under 9904.412-50(c)(2)(i) is equal to the assignable cost limitation,

the assignable cost credit of $200,000 is considered fully amortized

along with all other portions of unfunded actuarial liability being

amortized pursuant to 9904.412-50(a)(1). Conversely, if the assignable

cost limitation had been greater than zero, the assignable cost credit

of $200,000 would have carried-forward and amortized in future periods.

(8) Contractor M has a qualified defined-benefit pension plan which

is funded through a funding agency. It computes $1 million of pension

cost for a cost accounting period. However, pursuant to a waiver

granted under the provisions of ERISA, Contractor M is required to fund

only $800,000. Under the provisions of 9904.412-50(c)(5), the remaining

$200,000 shall be accounted for as an assignable cost deficit and

assigned to the next five cost accounting periods in accordance with

the terms of the waiver.

(9) Contractor N has a company-wide defined-benefit pension plan,

wherein benefits are calculated on one consistently applied formula.

That part of the formula defining benefits within ERISA limits is

administered and reported as a qualified plan and funded through a

funding agency. The remainder of the benefits are considered to be a

supplemental or excess plan which, while it meets the criteria at

9904.412-50(c)(3)(iii) as to nonforfeitability and communication, is

not funded. The costs of the qualified portion of the plan shall be

comprised of those elements of costs delineated at 9904.412-40(a)(1),

while the supplemental or excess portion of the plan shall be accounted

for and assigned to cost accounting periods under the pay-as-you-go

cost method provided at 9904.412-40(a)(3) and 9904.412-50(c)(4).

(10) Assuming the same facts as in 9904.412-60(c)(9), except that

Contractor N funds its supplemental or excess plan using a so-called

``Rabbi Trust'' vehicle. Because the nonqualified plan is funded, the

plan meets the criteria set forth at 9904.412-50(c)(3)(ii). Contractor

N may account for the supplemental or excess plan in the same manner as

its qualified plan, if it elects to do so pursuant to 9904.412-

50(c)(3)(i).

(11) Assuming the same facts as in 9904.412-60(c)(10), except that

under the nonqualified portion of the pension plan a former employee

will forfeit his pension benefit if the employee goes to work for a

competitor within three years of terminating employment. Since the

right to a benefit cannot be affected by the unilateral action of the

contractor, the right to a benefit is considered to be nonforfeitable

for purposes of 9904.412-30(a)(17). The nonqualified plan still meets

the criteria set forth at 9904.412-50(c)(3)(iii), and Contractor N may

account for the supplemental or excess plan in the same manner as its

qualified plan, if it elects to do so.

(12) Assume the same facts as in 9904.412-60(c)(11), except that

Contractor N, while maintaining a ``Rabbi Trust'' funding vehicle

elects to have the plan accounted for under the pay-as-you-go cost

method so as to have greater latitude in annual funding decisions. It

may so elect pursuant to 9904.412-50(c)(3)(i).

(13) The assignable pension cost for Contractor O's qualified

defined-benefit plan is $600,000. For the same period Contractor O

contributes $700,000, which is the minimum funding requirement under

ERISA. In addition, there exists $75,000 of unfunded actuarial

liability that has been separately identified pursuant to 9904.412-

50(a)(2). Contractor O may use $75,000 of the contribution in excess of

the assignable pension cost to fund this separately identified unfunded

actuarial liability, if he so chooses. The effect of the funding is to

eliminate the unassignable $75,000 portion of unfunded actuarial

liability that had been separately identified and thereby eliminated

from the computation of pension costs. Contractor O shall then account

for the remaining $25,000 of excess contribution as a prepayment credit

in accordance with 9904.412-50(a)(4).

(d) Allocation of pension cost. (1) Assume the same set of facts

for Contractor M in 9904.412-60(c)(8) except there was no ERISA waiver;

i.e., only $800,000 was funded against $1 million of assigned pension

cost for the period. Under the provisions of 9904.412-50(d)(1), only

$800,000 may be allocated to Contractor M's intermediate and final cost

objectives. The remaining $200,000 of assigned cost, which has not been

funded, shall be separately identified and maintained in accordance

with 9904.412-50(a)(2) so [[Page 16547]] that it will not be reassigned

to any future accounting periods.

(2) Contractor P has a nonqualified defined-benefit pension plan

which covers benefits in excess of the ERISA limits. Contractor P has

elected to account for this plan in the same manner as its qualified

plan and, therefore, has established a ``Rabbi Trust'' as the funding

agency. For the current cost accounting period, the contractor computes

and assigns $100,000 as pension cost. The contractor funds $65,000,

which is equivalent to a funding level equal to the complement of the

highest published Federal corporate income tax rate of 35%. Under the

provisions of 9904.412-50(d)(2), the entire $100,000 is allocable to

cost objectives of the period.

(3) Assume the set of facts in 9904.412-60(d)(2), except that

Contractor P's contribution to the Trust is $59,800. In that event, the

provisions of 9904.412-50(d)(2)(i) would limit the amount of assigned

cost allocable within the cost accounting period to the percentage of

cost funded (i.e., $59,800/$65,000 = 92%). This results in allocable

cost of $92,000 (92% of $100,000) for the cost accounting period. Under

the provisions of 9904.412-40(c) and 9904.412-50(d)(2)(i),

respectively, the unallocable $8,000 may not be assigned to any future

cost accounting period. In addition, in accordance with 9904.412-

50(a)(2), the $8,000 must be separately identified and no amount of

interest on such separately identified $8,000 shall be a component of

pension cost in any future cost accounting period.

(4) Again, assume the set of facts in 9904.412-60(d)(2) except

that, Contractor P's contribution to the Trust is $105,000 based on a

valuation interest assumption of 8%. Under the provisions of 9904.412-

50(d)(2) the entire $100,000 is allocable to cost objectives of the

period. In accordance with the provisions of 9904.412-50(c)(1)

Contractor P has funded $5,000 ($105,000--$100,000) in excess of the

assigned pension cost for the period. The $5,000 shall be accounted for

as a prepayment credit. Pursuant to 9904.412-50(a)(4), the $5,000 shall

be adjusted for interest at the 8% valuation rate of interest and

excluded from the actuarial value of assets used to compute the next

year's pension cost computations. The accumulated value of prepayment

credits of $5,400 (5,000 x 1.08) may be used to fund the next year's

assigned pension cost, if needed.

(5) Contractor Q maintains a nonqualified defined-benefit pension

plan which satisfies the requirements of 9904.412-50(c)(3). As of the

valuation date, the reported funding agency balance is $3.4 million

excluding any accumulated value of prepayment credits. When the

adjusted funding agency balance is added to the accumulated value of

permitted unfunded accruals of $1.6 million, the market value of assets

equals $5.0 million ($3.4 million + $1.6 million) in accordance with

9904.412-30(a)(13). During the plan year, retirees receive monthly

benefits totalling $350,000. Pursuant to 9904.412-50(d)(2)(ii)(A), at

least 32% ($1.6 million divided by $5 million) of these benefit

payments shall be made from sources other than the funding agency.

Contractor Q, therefore, draws $238,000 from the funding agency assets

and pays the remaining $112,000 using general corporate funds.

(6) Assume the same facts as 9904.412-60(d)(5), except that by the

time Contractor Q receives its actuarial valuation it has paid

retirement benefits equalling $288,000 from funding agency assets. The

contractor has made deposits to the funding agency equal to the tax

complement of the $500,000 assignable pension cost for the period.

Pursuant to 9904.412-50(d)(2)(ii)(B), the assignable $500,000 shall be

reduced by the $50,000 ($288,000--$238,000) of benefits paid from the

funding agency in excess of the permitted $238,000, unless the

contractor makes a deposit to replace the $50,000 inadvertently drawn

from the funding agency. If this corrective action is not taken within

the time permitted by 9904.412-50(d)(4), Contractor Q shall allocate

only $450,000 ($500,000-$50,000) to final cost objectives. Furthermore,

the $50,000, which was thereby attributed to benefit payments instead

of funding, must be separately identified and maintained in accordance

with 9904.412-50(a)(2).

(7) Contractor R has a nonqualified defined-benefit plan that meets

the criteria of 9904.412-50(c)(3). For 1996, the funding agency balance

was $1,250,000 and the accumulated value of permitted unfunded accruals

was $600,000. During 1996 the earnings and appreciation on the assets

of the funding agency equalled $125,000, benefit payments to

participants totalled $300,000, and administrative expenses were

$60,000. All transactions occurred on the first day of the period. In

accordance with 9904.412-50(d)(2)(ii)(A), $200,000 of benefits were

paid from the funding agency and $100,000 were paid directly from

corporate assets. Pension cost of $400,000 was assigned to 1996. Based

on the current corporate tax rate of 35%, $260,000 ($400,000 x (1-

35%)) was deposited into the funding agency at the beginning of 1996.

For 1997 the funding agency balance is $1,375,000 ($1,250,000 +

$260,000 + $125,000--$200,000--$60,000). The actual annual earnings

rate of the funding agency was 10% for 1996. Pursuant to 9904.412-

50(d)(2)(iii), the accumulated value of permitted unfunded accruals is

updated from 1996 to 1997 by: (i) adding $140,000 (35% x $400,000),

which is the unfunded portion of the assigned cost; (ii) subtracting

the $100,000 of benefits paid directly by the contractor; and (iii)

increasing the value of the assets by $64,000 for imputed earnings at

10% (10% x ($600,000 + $140,000--$100,000)). The accumulated value of

permitted unfunded accruals for 1997 is $704,000 ($600,000 + $140,000--

$100,000 + $64,000).

7. Subsection 9904.412-63 is revised to read as follows:

9904.412-63 Effective date.

(a) This Standard is effective as of March 30, 1995.

(b) This Standard shall be followed by each contractor on or after

the start of its next cost accounting period beginning after the

receipt of a contract or subcontract to which this Standard is

applicable.

(c) Contractors with prior CAS-covered contracts with full coverage

shall continue to follow the Standard in 9904.412 in effect prior to

March 30, 1995, until this Standard, effective March 30, 1995, becomes

applicable following receipt of a contract or subcontract to which this

Standard applies.

8. A new subsection 9904.412-64 is added to read as follows:

9904.412-64 Transition method.

To be acceptable, any method of transition from compliance with

Standard 9904.412 in effect prior to March 30, 1995, to compliance with

the Standard effective March 30, 1995, must follow the equitable

principle that costs, which have been previously provided for, shall

not be redundantly provided for under revised methods. Conversely,

costs that have not previously been provided for must be provided for

under the revised method. This transition subsection is not intended to

qualify for purposes of assignment or allocation, pension costs which

have previously been disallowed for reasons other than ERISA tax-

deductibility limitations. The sum of all portions of unfunded

actuarial liability identified pursuant to Standard 9904.412, effective

March 30, 1995, including such portions of unfunded actuarial liability

determined for transition purposes, is subject to the

[[Page 16548]] provisions of 9904.412-40(c) on requirements for

assignment. The method, or methods, employed to achieve an equitable

transition shall be consistent with the provisions of Standard

9904.412, effective March 30, 1995, and shall be approved by the

contracting officer. Examples and illustrations of such transition

methods include, but are not limited to, the following:

(a) Reassignment of certain prior unfunded accruals.

(1) Any portion of pension cost for a qualified defined-benefit

pension plan, assigned to a cost accounting period prior to [insert

date of publication in the Federal Register], which was not funded

because such cost exceeded the maximum tax-deductible amount,

determined in accordance with ERISA, shall be assigned to subsequent

accounting periods, including an adjustment for interest, as an

assignable cost deficit. However, such costs shall be assigned to

periods on or after March 30, 1995, only to the extent that such costs

have not previously been allocated as cost or price to contracts

subject to this Standard.

(2) Alternatively, the transition method described in paragraph (d)

of this subsection may be applied separately to costs subject to

paragraph (a)(1) of this subsection.

(b) Reassignment of certain prior unallocated credits.

(1) Any portion of pension cost for a defined-benefit pension plan,

assigned to a cost accounting period prior to March 30, 1995, which was

not allocated as a cost or price credit to contracts subject to this

Standard because such cost was less than zero, shall be assigned to

subsequent accounting periods, including an adjustment for interest, as

an assignable cost credit.

(2) Alternatively, the transition method described in paragraph (d)

of this subsection may be applied separately to costs subject to

paragraph (b)(1) of this subsection.

(c) Accounting for certain prior allocated unfunded accruals. Any

portion of unfunded pension cost for a nonqualified defined-benefit

pension plan, assigned to a cost accounting period prior to March 30,

1995, that was allocated as cost or price to contracts subject to this

Standard, shall be recognized in subsequent accounting periods,

including adjustments for imputed interest and benefit payments, as an

accumulated value of permitted unfunded accruals.

(d) ``Fresh start'' alternative transition method. The transition

methods of paragraphs (a)(1), (b)(1), and (c) of this subsection may be

implemented using the so-called ``fresh start'' method whereby a

portion of the unfunded actuarial liability of a defined-benefit

pension plan, which occurs in the first cost accounting period after

March 30, 1995, shall be treated in the same manner as an actuarial

gain or loss. Such portion of unfunded actuarial liability shall

exclude any portion of unfunded actuarial liability that must continue

to be separately identified and maintained in accordance with 9904.412-

50(a)(2), including interest adjustments. If the contracting officer

already has approved a different amortization period for the fresh

start amortization, then such amortization period shall continue.

(e) Change to pay-as-you-go method. A change in accounting method

subject to 9903.302 will have occurred whenever costs of a nonqualified

defined-benefit pension plan have been accounted for on an accrual

basis prior to March 30, 1995, and the contractor must change to the

pay-as-you-go cost method because the plan does not meet the

requirement of 9904.412-50(c)(3), either by election or otherwise. In

such case, any portion of unfunded pension cost, assigned to a cost

accounting period prior to March 30, 1995 that was allocated as cost or

price to contracts subject to this Standard, shall be assigned to

future accounting periods, including adjustments for imputed interest

and benefit payments, as an accumulated value of permitted unfunded

accruals. Costs computed under the pay-as-you-go cost method shall be

charged against such accumulated value of permitted unfunded accruals

before such costs may be allocated to contracts.

(f) Actuarial assumptions. The actuarial assumptions used to

calculate assignable cost deficits, assignable cost credits, or

accumulated values of permitted unfunded accruals for transition

purposes shall be consistent with the long term assumptions used for

valuation purposes for such prior periods unless the contracting

officer has previously approved the use of other reasonable

assumptions.

(g) Transition illustrations. Unless otherwise noted, paragraphs

(g) (1) through (9) of this subsection address pension costs and

transition amounts determined for the first cost accounting period

beginning on or after the date this revised Standard becomes applicable

to a contractor. For purposes of these illustrations an interest

assumption of 7% is presumed to be in effect for all periods.

(1) For the cost accounting period immediately preceding the date

this revised Standard was applicable to a contractor, Contractor S

computed and assigned pension cost of $1 million for a qualified

defined-benefit pension plan. The contractor made a contribution equal

to the maximum tax-deductible amount of $800,000 for the period leaving

$200,000 of assigned cost unfunded for the period. Except for this

$200,000, no other assigned pension costs have ever been unfunded or

otherwise disallowed. Using the transition method of paragraph (a)(1)

of this subsection, the contractor shall establish an assignable cost

deficit equal to $214,000 ($200,000 x 1.07), which is the prior

unfunded assigned cost plus interest. If this assignable cost deficit

amount, plus all other portions of unfunded actuarial liability

identified in accordance with 9904.412-50(a) (1) and (2), equal the

total unfunded actuarial liability, pension cost may be assigned to the

current period.

(2) Assume that Contractor S in 9904.412-64(g)(1) priced the entire

$1 million into firm fixed-price contracts. In this case, no assignable

cost deficit amount may be established. In addition, the $214,000

($200,000 x 1.07) shall be separately identified and maintained in

accordance with 9904.412-50(a)(2). If all portions of unfunded

actuarial liability identified in accordance with 9904.412-50(a) (1)

and (2), equal the total unfunded actuarial liability, pension cost may

be assigned to the period.

(3) Assume the same facts as in 9904.412-64(g)(1), except

Contractor S only funded and allocated $500,000. The $300,000 of

assigned cost that was not funded, but could have been funded without

exceeding the tax-deductible maximum, may not be recognized as an

assignable cost deficit. Instead, the $300,000 must be separately

identified and maintained in accordance with 9904.412-50(a)(2). If the

$321,000 ($300,000 x 1.07) plus the $214,000 already identified as an

assignable cost deficit plus all other portions of unfunded actuarial

liability identified in accordance with 9904.412-50(a) (1) and (2),

equal the total unfunded actuarial liability, pension cost may be

assigned to the period.

(4) Assume that, for Contractor S in 9904.412-64(g)(3), the only

portion of unfunded actuarial liability that must be identified under

9904.412-50(a)(2) is the $321,000. If Contractor S chooses to use the

``fresh start'' transition method, the $321,000 of unfunded assigned

cost must be subtracted from the total unfunded actuarial liability in

accordance with 9904.412-63(d). The net amount of unfunded actuarial

liability shall then be amortized over a [[Page 16549]] period of

fifteen years as an actuarial loss in accordance with 9904.412-

50(a)(1)(v) and Cost Accounting Standard 9904.413.

(5) For the cost accounting period immediately preceding the date

this revised Standard becomes applicable to a contractor, Contractor T

computed and assigned pension cost of negative $400,000 for a qualified

defined-benefit plan. Because the contractor could not withdraw assets

from the trust fund, the contracting officer agreed that instead of

allocating a current period credit to contracts, the negative costs

would be carried forward, with interest, and offset against future

pension costs allocated to the contract. Using the transition method of

paragraph (b)(1) of this subsection, the contractor shall establish an

assignable cost credit equal to $428,000 ($400,000 x 1.07). If this

assignable cost credit amount, plus all other portions of unfunded

actuarial liability identified in accordance with 9904.412-50(a) (1)

and (2), equals the total unfunded actuarial liability, pension cost

may be assigned to the period.

(6) Assume that in 9904.412-64(g)(5), following guidance issued by

the contracting agency the contracting officer had deemed the cost for

the prior period to be $0. In order to satisfy the requirements of

9904.412-40(c) and assign pension cost to the current period,

Contractor S must account for the prior period negative accruals that

have not been specifically identified. Following the transition method

of paragraph (b)(1) of this subsection, the contractor shall identify

$428,000 as an assignable cost credit.

(7) Assume the facts of 9904.412-64(g)(5), except Contractor S uses

the ``fresh start'' transition method. In addition, for the current

period the plan is overfunded since the actuarial value of the assets

is greater than the actuarial accrued liability. In this case, an

actuarial gain equal to the negative unfunded actuarial liability;

i.e., actuarial surplus, is recognized since there are no portions of

unfunded actuarial liability that must be identified under 9904.412-

50(a)(2).

(8) Since March 28, 1989 Contractor U has computed, assigned, and

allocated pension costs for a nonqualified defined-benefit plan on an

accrual basis. The value of these past accruals, increased for imputed

interest at 7% and decreased for benefits paid by the contractor, is

equal to $2 million as of the beginning of the current period.

Contractor U elects to establish a ``Rabbi trust'' and the plan meets

the other criteria at 9904.412-50(c)(3). Using the transition method of

paragraph (c) of this subsection, Contractor U shall recognize the $2

million as the accumulated value of permitted unfunded accruals, which

will then be included in the market value and actuarial value of the

assets. Because the accumulated value of permitted unfunded accruals is

exactly equal to the current period market value of the assets, 100% of

benefits for the current period must be paid from sources other than

the funding agency in accordance with 9904.412-50(d)(2)(ii).

(9) Assume that Contractor U in 9904.412-64(g)(8) establishes a

funding agency, but elects to use the pay-as-you-go method for current

and future pension costs. Furthermore, plan participants receive

$500,000 in benefits on the last day of the current period. Using the

transition method of paragraph (e) of this subsection to ensure prior

costs are not redundantly provided for, the contractor shall establish

assets; i.e., an accumulated value of permitted unfunded accruals, of

$2 million. Since these assets are sufficient to provide for the

current benefit payments, no pension costs can be allocated in this

period. Furthermore, previously priced contracts subject to this

Standard shall be adjusted in accordance with 9903.302. The accumulated

value of permitted unfunded accruals shall be carried forward to the

next period by adding $140,000 (7% x $2 million) of imputed interest,

and subtracting the $500,000 of benefit payments made by the

contractor. The accumulated value of permitted unfunded accruals for

the next period equals $1,640,000 ($2 million + $140,000--$500,000).

9904.413 [Amended]

9. Subsection 9904.413-30 is amended by revising paragraph (a) to

read as follows:

9904.413-30 Definitions.

(a) The following are definitions of terms which are prominent in

this Standard. Other terms defined elsewhere in this chapter 99 shall

have the meaning ascribed to them in those definitions unless paragraph

(b) of this subsection requires otherwise.

(1) Accrued benefit cost method means an actuarial cost method

under which units of benefits are assigned to each cost accounting

period and are valued as they accrue; that is, based on the services

performed by each employee in the period involved. The measure of

normal cost under this method for each cost accounting period is the

present value of the units of benefit deemed to be credited to

employees for service in that period. The measure of the actuarial

accrued liability at a plan's inception date is the present value of

the units of benefit credited to employees for service prior to that

date. (This method is also known as the Unit Credit cost method without

salary projection.)

(2) Actuarial accrued liability means pension cost attributable,

under the actuarial cost method in use, to years prior to the current

period considered by a particular actuarial valuation. As of such date,

the actuarial accrued liability represents the excess of the present

value of future benefits and administrative expenses over the present

value of future normal costs for all plan participants and

beneficiaries. The excess of the actuarial accrued liability over the

actuarial value of the assets of a pension plan is the Unfunded

Actuarial Liability. The excess of the actuarial value of the assets of

a pension plan over the actuarial accrued liability is an actuarial

surplus and is treated as a negative unfunded actuarial liability.

(3) Actuarial assumption means an estimate of future conditions

affecting pension cost; for example, mortality rate, employee turnover,

compensation levels, earnings on pension plan assets, changes in values

of pension plan assets.

(4) Actuarial cost method means a technique which uses actuarial

assumptions to measure the present value of future pension benefits and

pension plan administrative expenses, and which assigns the cost of

such benefits and expenses to cost accounting periods. The actuarial

cost method includes the asset valuation method used to determine the

actuarial value of the assets of a pension plan.

(5) Actuarial gain and loss means the effect on pension cost

resulting from differences between actuarial assumptions and actual

experience.

(6) Actuarial valuation means the determination, as of a specified

date, of the normal cost, actuarial accrued liability, actuarial value

of the assets of a pension plan, and other relevant values for the

pension plan.

(7) Curtailment of benefits means an event; e.g., a plan amendment,

in which the pension plan is frozen and no further material benefits

accrue. Future service may be the basis for vesting of nonvested

benefits existing at the time of the curtailment. The plan may hold

assets, pay benefits already accrued, and receive additional

contributions for unfunded benefits. Employees may or may not continue

working for the contractor.

(8) Funding agency means an organization or individual which

provides facilities to receive and [[Page 16550]] accumulate assets to

be used either for the payment of benefits under a pension plan, or for

the purchase of such benefits, provided such accumulated assets form a

part of a pension plan established for the exclusive benefit of the

plan participants and their beneficiaries. The fair market value of the

assets held by the funding agency as of a specified date is the Funding

Agency Balance as of that date.

(9) Immediate-gain actuarial cost method means any of the several

cost methods under which actuarial gains and losses are included as

part of the unfunded actuarial liability of the pension plan, rather

than as part of the normal cost of the plan.

(10) Market value of the assets means the sum of the funding agency

balance plus the accumulated value of any permitted unfunded accruals

belonging to a pension plan. The Actuarial Value of the Assets means

the value of cash, investments, permitted unfunded accruals, and other

property belonging to a pension plan, as used by the actuary for the

purpose of an actuarial valuation.

(11) Normal cost means the annual cost attributable, under the

actuarial cost method in use, to current and future years as of a

particular valuation date, excluding any payment in respect of an

unfunded actuarial liability.

(12) Pension plan means a deferred compensation plan established

and maintained by one or more employers to provide systematically for

the payment of benefits to plan participants after their retirement,

provided that the benefits are paid for life or are payable for life at

the option of the employees. Additional benefits such as permanent and

total disability and death payments, and survivorship payments to

beneficiaries of deceased employees may be an integral part of a

pension plan.

(13) Pension plan participant means any employee or former employee

of an employer, or any member or former member of an employee

organization, who is or may become eligible to receive a benefit from a

pension plan which covers employees of such employer or members of such

organization who have satisfied the plan's participation requirements,

or whose beneficiaries are receiving or may be eligible to receive any

such benefit. A participant whose employment status with the employer

has not been terminated is an active participant of the employer's

pension plan.

(14) Pension plan termination means an event; i.e., plan amendment,

in which either the pension plan ceases to exist and all benefits are

settled by purchase of annuities or other means, or the trusteeship of

the plan is assumed by the Pension Benefit Guarantee Corporation or

other conservator. The plan may or may not be replaced by another plan.

(15) Permitted unfunded accruals means the amount of pension cost

for nonqualified defined-benefit pension plans that is not required to

be funded under 9904.412-50(d)(2). The Accumulated Value of Permitted

Unfunded Accruals means the value, as of the measurement date, of the

permitted unfunded accruals adjusted for imputed earnings and for

benefits paid by the contractor.

(16) Prepayment credit means the amount funded in excess of the

pension cost assigned to a cost accounting period that is carried

forward for future recognition. The Accumulated Value of Prepayment

Credits means the value, as of the measurement date, of the prepayment

credits adjusted for interest at the valuation rate and decreased for

amounts used to fund pension costs or liabilities, whether assignable

or not.

(17) Projected benefit cost method means either (i) any of the

several actuarial cost methods which distribute the estimated total

cost of all of the employees' prospective benefits over a period of

years, usually their working careers, or (ii) a modification of the

accrued benefit cost method that considers projected compensation

levels.

(18) Qualified pension plan means a pension plan comprising a

definite written program communicated to and for the exclusive benefit

of employees which meets the criteria deemed essential by the Internal

Revenue Service as set forth in the Internal Revenue Code for

preferential tax treatment regarding contributions, investments, and

distributions. Any other plan is a nonqualified pension plan.

(19) Segment means one of two or more divisions, product

departments, plants, or other subdivisions of an organization reporting

directly to a home office, usually identified with responsibility for

profit and/or producing a product or service. The term includes

Government-owned contractor-operated (GOCO) facilities, and joint

ventures and subsidiaries (domestic and foreign) in which the

organization has a majority ownership. The term also includes those

joint ventures and subsidiaries (domestic and foreign) in which the

organization has less than a majority ownership, but over which it

exercises control.

(20) Segment closing means that a segment has (i) been sold or

ownership has been otherwise transferred, (ii) discontinued operations,

or (iii) discontinued doing or actively seeking Government business

under contracts subject to this Standard.

(21) Termination of employment gain or loss means an actuarial gain

or loss resulting from the difference between the assumed and actual

rates at which plan participants separate from employment for reasons

other than retirement, disability, or death.

(b) * * *

10. Subsection 9904.413-40 is amended by revising paragraphs (b)

and (c) to read as follows:

9904.413-40 Fundamental requirement.

(a) * * *

(b) Valuation of the assets of a pension plan. The actuarial value

of the assets of a pension plan shall be determined under an asset

valuation method which takes into account unrealized appreciation and

depreciation of the market value of the assets of the pension plan,

including the accumulated value of permitted unfunded accruals, and

shall be used in measuring the components of pension costs.

(c) Allocation of pension cost to segments. Contractors shall

allocate pension costs to each segment having participants in a pension

plan. A separate calculation of pension costs for a segment is required

when the conditions set forth in 9904.413-50(c)(2) or (3) are present.

When these conditions are not present, allocations may be made by

calculating a composite pension cost for two or more segments and

allocating this cost to these segments by means of an allocation base.

When pension costs are separately computed for a segment or segments,

the provisions of Cost Accounting Standard 9904.412 regarding the

assignable cost limitation shall be based on the assets and liabilities

for the segment or segments for purposes of such computations. In

addition, the amount of pension cost assignable to a segment or

segments shall not exceed the maximum tax-deductible amount computed

for the plan as a whole and apportioned among the segment(s).

11. Subsection 9904.413-50 is revised to read as follows:

9904.413-50 Techniques for application.

(a) Assignment of actuarial gains and losses. (1) In accordance

with the provisions of Cost Accounting Standard 9904.412, actuarial

gains and losses shall be identified separately from other unfunded

actuarial liabilities.

(2) Actuarial gains and losses determined under a pension plan

whose [[Page 16551]] costs are measured by an immediate-gain actuarial

cost method shall be amortized over a 15 year period in equal annual

installments, beginning with the date as of which the actuarial

valuation is made. The installment for a cost accounting period shall

consist of an element for amortization of the gain or loss plus an

element for interest on the unamortized balance at the beginning of the

period. If the actuarial gain or loss determined for a cost accounting

period is not material, the entire gain or loss may be included as a

component of the current or ensuing year's pension cost.

(3) Pension plan terminations and curtailments of benefits shall be

subject to adjustment in accordance with 9904.413-50(c)(12).

(b) Valuation of the assets of a pension plan. (1) The actuarial

value of the assets of a pension plan shall be used:

(i) In measuring actuarial gains and losses, and

(ii) For purposes of measuring other components of pension cost.

(2) The actuarial value of the assets of a pension plan may be

determined by the use of any recognized asset valuation method which

provides equivalent recognition of appreciation and depreciation of the

market value of the assets of the pension plan. However, the actuarial

value of the assets produced by the method used shall fall within a

corridor from 80 to 120 percent of the market value of the assets,

determined as of the valuation date. If the method produces a value

that falls outside the corridor, the actuarial value of the assets

shall be adjusted to equal the nearest boundary of the corridor.

(3) The method selected for valuing pension plan assets shall be

consistently applied from year to year within each plan.

(4) The provisions of paragraphs (b) (1) through (3) of this

subsection are not applicable to plans that are treated as defined-

contribution plans in accordance with 9904.412-50(a)(6).

(5) The market and actuarial values of the assets of a pension plan

shall not be adjusted for any fee, reserve charge, or other investment

charge for withdrawals from or termination of an investment contract,

trust agreement, or other funding arrangement, unless such fee is

determined in an arm's length transaction, and actually incurred and

paid.

(c) Allocation of pension cost to segments. (1) For contractors who

compute a composite pension cost covering plan participants in two or

more segments, the base to be used for allocating such costs shall be

representative of the factors on which the pension benefits are based.

For example, a base consisting of salaries and wages shall be used for

pension costs that are calculated as a percentage of salaries and

wages; a base consisting of the number of participants shall be used

for pension costs that are calculated as an amount per participant. If

pension costs are separately calculated for one or more segments, the

contractor shall make a distribution among the segments for the maximum

tax-deductible amount and the contribution to the funding agency as

follows:

(i) When apportioning the maximum tax-deductible amount, which is

determined for a qualified defined-benefit pension plan as a whole

pursuant to the Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. 1001 et seq., as amended, to segments, the

contractor shall use a base that considers the otherwise assignable

pension costs or the funding levels of the individual segments.

(ii) When apportioning amounts deposited to a funding agency to

segments, contractors shall use a base that is representative of the

assignable pension costs, determined in accordance with 9904.412-50(c)

for the individual segments. However, for qualified defined-benefit

pension plans, the contractor may first apportion amounts funded to the

segment or segments subject to this Standard.

(2) Separate pension cost for a segment shall be calculated

whenever any of the following conditions exist for that segment,

provided that such condition(s) materially affect the amount of pension

cost allocated to the segment:

(i) There is a material termination of employment gain or loss

attributable to the segment,

(ii) The level of benefits, eligibility for benefits, or age

distribution is materially different for the segment than for the

average of all segments, or

(iii) The appropriate actuarial assumptions are, in the aggregate,

materially different for the segment than for the average of all

segments. Calculations of termination of employment gains and losses

shall give consideration to factors such as unexpected early

retirements, benefits becoming fully vested, and reinstatements or

transfers without loss of benefits. An amount may be estimated for

future reemployments.

(3) Pension cost shall also be separately calculated for a segment

under circumstances where--

(i) The pension plan for that segment becomes merged with that of

another segment, or the pension plan is divided into two or more

pension plans, and in either case,

(ii) The ratios of market value of the assets to actuarial accrued

liabilities for each of the merged or separated plans are materially

different from one another after applying the benefits in effect after

the pension plan merger or pension plan division.

(4) For a segment whose pension costs are required to be calculated

separately pursuant to paragraphs (c) (2) or (3) of this subsection,

such calculations shall be prospective only; pension costs need not be

redetermined for prior years.

(5) For a segment whose pension costs are either required to be

calculated separately pursuant to paragraph (c)(2) or (c)(3) of this

subsection or calculated separately at the election of the contractor,

there shall be an initial allocation of a share in the undivided market

value of the assets of the pension plan to that segment, as follows:

(i) If the necessary data are readily determinable, the funding

agency balance to be allocated to the segment shall be the amount

contributed by, or on behalf of, the segment, increased by income

received on such assets, and decreased by benefits and expenses paid

from such assets. Likewise, the accumulated value of permitted unfunded

accruals to be allocated to the segment shall be the amount of

permitted unfunded accruals assigned to the segment, increased by

interest imputed to such assets, and decreased by benefits paid from

sources other than the funding agency; or

(ii) If the data specified in paragraph (c)(5)(i) of this

subsection are not readily determinable for certain prior periods, the

market value of the assets of the pension plan shall be allocated to

the segment as of the earliest date such data are available. Such

allocation shall be based on the ratio of the actuarial accrued

liability of the segment to the plan as a whole, determined in a manner

consistent with the immediate gain actuarial cost method or methods

used to compute pension cost. Such assets shall be brought forward as

described in paragraph (c)(7) of this subsection.

(iii) The actuarial value of the assets of the pension plan shall

be allocated to the segment in the same proportion as the market value

of the assets.

(6) If, prior to the time a contractor is required to use this

Standard, it has been calculating pension cost separately for

individual segments, the amount of assets previously allocated to those

segments need not be changed.

(7) After the initial allocation of assets, the contractor shall

maintain a record of the portion of subsequent

[[Page 16552]] contributions, permitted unfunded accruals, income,

benefit payments, and expenses attributable to the segment and paid

from the assets of the pension plan: Income and expenses shall include

a portion of any investment gains and losses attributable to the assets

of the pension plan. Income and expenses of the pension plan assets

shall be allocated to the segment in the same proportion that the

average value of assets allocated to the segment bears to the average

value of total pension plan assets for the period for which income and

expenses are being allocated.

(8) If plan participants transfer among segments, contractors need

not transfer assets or actuarial accrued liabilities unless a transfer

is sufficiently large to distort the segment's ratio of pension plan

assets to actuarial accrued liabilities determined using the accrued

benefit cost method. If assets and liabilities are transferred, the

amount of assets transferred shall be equal to the actuarial accrued

liabilities, determined using the accrued benefit cost method,

transferred.

(9) Contractors who separately calculate the pension cost of one or

more segments may calculate such cost either for all pension plan

participants assignable to the segment(s) or for only the active

participants of the segment(s). If costs are calculated only for active

participants, a separate segment shall be created for all of the

inactive participants of the pension plan and the cost thereof shall be

calculated. When a contractor makes such an election, assets shall be

allocated to the segment for inactive participants in accordance with

paragraphs (c) (5), (6), and (7) of this subsection. When an employee

of a segment becomes inactive, assets shall be transferred from that

segment to the segment established to accumulate the assets and

actuarial liabilities for the inactive plan participants. The amount of

assets transferred shall be equal to the actuarial accrued liabilities,

determined under the accrued benefit cost method, for these inactive

plan participants. If inactive participants become active, assets and

liabilities shall similarly be transferred to the segments to which the

participants are assigned. Such transfers need be made only as of the

last day of a cost accounting period. The total annual pension cost for

a segment having active employees shall be the amount calculated for

the segment plus an allocated portion of the pension cost calculated

for the inactive participants. Such an allocation shall be on the same

basis as that set forth in paragraph (c)(1) of this subsection.

(10) Where pension cost is separately calculated for one or more

segments, the actuarial cost method used for a plan shall be the same

for all segments. Unless a separate calculation of pension cost for a

segment is made because of a condition set forth in paragraph

(c)(2)(iii) of this subsection, the same actuarial assumptions may be

used for all segments covered by a plan.

(11) If a pension plan has participants in the home office of a

company, the home office shall be treated as a segment for purposes of

allocating the cost of the pension plan. Pension cost allocated to a

home office shall be a part of the costs to be allocated in accordance

with the appropriate requirements of Cost Accounting Standard 9904.403.

(12) If a segment is closed, if there is a pension plan

termination, or if there is a curtailment of benefits, the contractor

shall determine the difference between the actuarial accrued liability

for the segment and the market value of the assets allocated to the

segment, irrespective of whether or not the pension plan is terminated.

The difference between the market value of the assets and the actuarial

accrued liability for the segment represents an adjustment of

previously-determined pension costs.

(i) The determination of the actuarial accrued liability shall be

made using the accrued benefit cost method. The actuarial assumptions

employed shall be consistent with the current and prior long term

assumptions used in the measurement of pension costs. If there is a

pension plan termination, the actuarial accrued liability shall be

measured as the amount paid to irrevocably settle all benefit

obligations or paid to the Pension Benefit Guarantee Corporation.

(ii) In computing the market value of assets for the segment, if

the contractor has not already allocated assets to the segment, such an

allocation shall be made in accordance with the requirements of

paragraphs (c)(5) (i) and (ii) of this subsection. The market value of

the assets shall be reduced by the accumulated value of prepayment

credits, if any. Conversely, the market value of the assets shall be

increased by the current value of any unfunded actuarial liability

separately identified and maintained in accordance with 9904.412-

50(a)(2).

(iii) The calculation of the difference between the market value of

the assets and the actuarial accrued liability shall be made as of the

date of the event (e.g., contract termination, plan amendment, plant

closure) that caused the closing of the segment, pension plan

termination, or curtailment of benefits. If such a date is not readily

determinable, or if its use can result in an inequitable calculation,

the contracting parties shall agree on an appropriate date.

(iv) Pension plan improvements adopted within 60 months of the date

of the event which increase the actuarial accrued liability shall be

recognized on a prorata basis using the number of months the date of

adoption preceded the event date. Plan improvements mandated by law or

collective bargaining agreement are not subject to this phase-in.

(v) If a segment is closed due to a sale or other transfer of

ownership to a successor in interest in the contracts of the segment

and all of the pension plan assets and actuarial accrued liabilities

pertaining to the closed segment are transferred to the successor

segment, then no adjustment amount pursuant to this paragraph (c)(12)

is required. If only some of the pension plan assets and actuarial

accrued liabilities of the closed segment are transferred, then the

adjustment amount required under this paragraph (c)(12) shall be

determined based on the pension plan assets and actuarial accrued

liabilities remaining with the contractor. In either case, the effect

of the transferred assets and liabilities is carried forward and

recognized in the accounting for pension cost at the successor

contractor.

(vi) The Government's share of the adjustment amount determined for

a segment shall be the product of the adjustment amount and a fraction.

The adjustment amount shall be reduced for any excise tax imposed upon

assets withdrawn from the funding agency of a qualified pension plan.

The numerator of such fraction shall be the sum of the pension plan

costs allocated to all contracts and subcontracts (including Foreign

Military Sales) subject to this Standard during a period of years

representative of the Government's participation in the pension plan.

The denominator of such fraction shall be the total pension costs

assigned to cost accounting periods during those same years. This

amount shall represent an adjustment of contract prices or cost

allowance as appropriate. The adjustment may be recognized by modifying

a single contract, several but not all contracts, or all contracts, or

by use of any other suitable technique.

(vii) The full amount of the Government's share of an adjustment is

allocable, without limit, as a credit or charge during the cost

accounting period in which the event occurred and contract prices/costs

will be adjusted accordingly. However, if the contractor continues to

perform Government contracts, the contracting parties may negotiate an

amortization schedule, [[Page 16553]] including interest adjustments.

Any amortization agreement shall consider the magnitude of the

adjustment credit or charge, and the size and nature of the continuing

contracts.

12. Subsection 9904.413-60 is revised to read as follows:

9904.413-60 Illustrations.

(a) Assignment of actuarial gains and losses. Contractor A has a

defined-benefit pension plan whose costs are measured under an

immediate-gain actuarial cost method. The contractor makes actuarial

valuations every other year. In the past, at each valuation date, the

contractor has calculated the actuarial gains and losses that have

occurred since the previous valuation date and has merged such gains

and losses with the unfunded actuarial liabilities that are being

amortized. Pursuant to 9904.413-40(a), the contractor must make an

actuarial valuation annually. Any actuarial gains or losses measured

must be separately amortized over a 15-year period beginning with the

period for which the actuarial valuation is made in accordance with

9904.413-50(a) (1) and (2).

(b)(1) Valuation of the assets of a pension plan. Contractor B has

a qualified defined-benefit pension plan, the assets of which are

invested in equity securities, debt securities, and real property. The

contractor, whose cost accounting period is the calendar year, has an

annual actuarial valuation of the pension plan assets in June of each

year; the effective date of the valuation is the beginning of that

year. The contractor's method for valuing the assets of the pension

plan is as follows: debt securities expected to be held to maturity are

valued on an amortized basis running from initial cost at purchase to

par value at maturity; land and buildings are valued at cost less

depreciation taken to date; all equity securities and debt securities

not expected to be held to maturity are valued on the basis of a five-

year moving average of market values. In making an actuarial valuation,

the contractor must compare the values reached under the asset

valuation method used with the market value of all the assets as

required by 9904.413-40(b). In this case, the assets are valued as of

January 1 of that year. The contractor established the following values

as of the valuation date.

------------------------------------------------------------------------

Asset

valuation Market

method

------------------------------------------------------------------------

Cash.......................................... $100,000 100,000

Equity securities............................. 6,000,000 7,800,000

Debt securities, expected to be held to

maturity..................................... 550,000 600,000

Other debt securities......................... 600,000 750,000

Land and Buildings, net of depreciation....... 400,000 750,000

-------------------------

Total................................... 7,650,000 10,000,000

------------------------------------------------------------------------

(2) Section 9904.413-50(b)(2) requires that the actuarial value of

the assets of the pension plan fall within a corridor from 80 to 120

percent of market. The corridor for the plan's assets as of January 1

is from $12 million to $8 million. Because the asset value reached by

the contractor, $7,650,000, falls outside that corridor, the value

reached must be adjusted to equal the nearest boundary of the corridor:

$8 million. In subsequent years the contractor must continue to use the

same method for valuing assets in accordance with 9904.413-50(b)(3). If

the value produced falls inside the corridor, such value shall be used

in measuring pension costs.

(c) Allocation of pension costs to segments. (1) Contractor C has a

defined-benefit pension plan covering employees at five segments.

Pension cost is computed by use of an immediate-gain actuarial cost

method. One segment (X) is devoted primarily to performing work for the

Government. During the current cost accounting period, Segment X had a

large and unforeseeable reduction of employees because of a contract

termination at the convenience of the Government and because the

contractor did not receive an anticipated follow-on contract to one

that was completed during the period. The segment does continue to

perform work under several other Government contracts. As a consequence

of this termination of employment gain, a separate calculation of the

pension cost for Segment X would result in materially different

allocation of costs to the segment than would a composite calculation

and allocation by means of a base. Accordingly, pursuant to 9904.413-

50(c)(2), the contractor must calculate a separate pension cost for

Segment X. In doing so, the entire termination of employment gain must

be assigned to Segment X and amortized over fifteen years. If the

actuarial assumptions for Segment X continue to be substantially the

same as for the other segments, the termination of employment gain may

be separately amortized and allocated only to Segment X; all other

Segment X computations may be included as part of the composite

calculation. After the termination of employment gain is amortized, the

contractor is no longer required to separately calculate the costs for

Segment X unless subsequent events require each separate calculation.

(2) Contractor D has a defined-benefit pension plan covering

employees at ten segments, all of which have some contracts subject to

this Standard. The contractor's calculation of normal cost is based on

a percentage of payroll for all employees covered by the plan. One of

the segments (Segment Y) is entirely devoted to Government work. The

contractor's policy is to place junior employees in this segment. The

salary scale assumption for employees of the segment is so different

from that of the other segments that the pension cost for Segment Y

would be materially different if computed separately. Pursuant to

9904.413-50(c)(2)(iii), the contractor must compute the pension cost

for Segment Y as if it were a separate pension plan. Therefore, the

contractor must allocate a portion of the market value of pension

plan's assets to Segment Y in accordance with 9904.413-50(c)(5).

Memorandum records may be used in making the allocation. However,

because the necessary records only exist for the last five years,

9904.413-50(c)(5)(ii) permits an initial allocation to be made as of

the earliest date such records are available. The initial allocation

must be made on the basis of the immediate gain actuarial cost method

or methods used to calculate prior years' pension cost for the plan.

Once the assets have been allocated, they shall be brought forward to

the current period as described in 9904.413-50(c)(7). A portion of the

undivided actuarial value of assets shall then be allocated to the

segment based on the segment's proportion of the market value of assets

in accordance with 9904.413-50(c)(5)(iii). In future cost accounting

periods, the contractor shall make separate pension cost calculations

for Segment Y based on the appropriate salary scale assumption. Because

the factors comprising pension cost for the other nine segments are

relatively equal, the contractor may compute pension cost for these

nine segments by using composite factors. As required by 9904.413-

50(c)(1), the base to be used for allocating such costs shall be

representative of the factors on which the pension benefits are based.

(3) Contractor E has a defined-benefit pension plan which covers

employees at twelve segments. The contractor uses composite actuarial

assumptions to [[Page 16554]] develop a pension cost for all segments.

Three of these segments primarily perform Government work; the work at

the other nine segments is primarily commercial. Employee turnover at

the segments performing commercial work is relatively stable. However,

employment experience at the Government segments has been very

volatile; there have been large fluctuations in employment levels and

the contractor assumes that this pattern of employment will continue to

occur. It is evident that separate termination of employment

assumptions for the Government segments and the commercial segments

will result in materially different pension costs for the Government

segments. Therefore, the cost for these segments must be separately

calculated, using the appropriate termination of employment assumptions

for these segments in accordance with 9904.413-50(c)(2)(iii).

(4) Contractor F has a defined-benefit pension plan covering

employees at 25 segments. Twelve of these segments primarily perform

Government work; the remaining segments perform primarily commercial

work. The contractor's records show that the termination of employment

experience and projections for the twelve segments are so different

from that of the average of all of the segments that separate pension

cost calculations are required for these segments pursuant to 9904.413-

50(c)(2). However, because the termination of employment experience and

projections are about the same for all twelve segments, Contractor F

may calculate a composite pension cost for the twelve segments and

allocate the cost to these segments by use of an appropriate allocation

base in accordance with 9904.413-50(c)(1).

(5) After this Standard becomes applicable to Contractor G, it

acquires Contractor H and makes it Segment H. Prior to the merger, each

contractor had its own defined-benefit pension plan. Under the terms of

the merger, Contractor H's pension plan and plan assets were merged

with those of Contractor G. The actuarial assumptions, current salary

scale, and other plan characteristics are about the same for Segment H

and Contractor G's other segments. However, based on the same benefits

at the time of the merger, the plan of Contractor H had a

disproportionately larger unfunded actuarial liability than did

Contractor G's plan. Any combining of the assets and actuarial

liabilities of both plans would result in materially different pension

cost allocation to Contractor G's segments than if pension cost were

computed for Segment H on the basis that it had a separate pension

plan. Accordingly, pursuant to 9904.413-50(c)(3), Contractor G must

allocate to Segment H a portion of the assets of the combined plan. The

amount to be allocated shall be the market value of Segment H's pension

plan assets at the date of the merger determined in accordance with

9904.413-50(c)(5), and shall be adjusted for subsequent receipts and

expenditures applicable to the segment in accordance with 9904.413-

50(c)(7). Pursuant to 9904.413-40(b)(1) and 9904.413-50(c)(5)(iii),

Contractor G must use these amounts of assets as the basis for

determining the actuarial value of assets used for calculating the

annual pension cost applicable to Segment H.

(6) Contractor I has a defined-benefit pension plan covering

employees at seven segments. The contractor has been making a composite

pension cost calculation for all of the segments. However, the

contractor determines that, pursuant to this Standard, separate pension

costs must be calculated for one of the segments. In accordance with

9904.413-50(c)(9), the contractor elects to allocate pension plan

assets only for the active participants of that segment. The contractor

must then create a segment to accumulate the assets and actuarial

accrued liabilities for the plan's inactive participants. When active

participants of a segment become inactive, the contractor must transfer

assets to the segment for inactive participants equal to the actuarial

accrued liabilities for the participants that become inactive.

(7) Contractor J has a defined-benefit pension plan covering

employees at ten segments. The contractor makes a composite pension

cost calculation for all segments. The contractor's records show that

the termination of employment experience for one segment, which is

performing primarily Government work, has been significantly different

from the average termination of employment experience of the other

segments. Moreover, the contractor assumes that such different

experience will continue. Because of this fact, and because the

application of a different termination of employment assumption would

result in significantly different costs being charged the Government,

the contractor must develop separate pension cost for that segment. In

accordance with 9904.413-50(c)(2)(ii), the amount of pension cost must

be based on an acceptable termination of employment assumption for that

segment; however, as provided in 9904.413-50(c)(10), all other

assumptions for that segment may be the same as those for the remaining

segments.

(8) Contractor K has a five-year contract to operate a Government-

owned facility. The employees of that facility are covered by the

contractor's overall qualified defined-benefit pension plan which

covers salaried and hourly employees at other locations. At the

conclusion of the five-year period, the Government decides not to renew

the contract. Although some employees are hired by the successor

contractor, because Contractor K no longer operates the facility, it

meets the 9904.413-30(a)(20)(i) definition of a segment closing.

Contractor K must compute the actuarial accrued liability for the

pension plan for that facility using the accrued benefit cost method as

of the date the contract expired in accordance with 9904.413-

50(c)(12)(i). Because many of Contractor K's employees are terminated

from the pension plan, the Internal Revenue Service considers it to be

a partial plan termination, and thus requires that the terminated

employees become fully vested in their accrued benefits to the extent

such benefits are funded. Taking this mandated benefit improvement into

consideration in accordance with 9904.413-50(c)(12)(iv), the actuary

calculates the actuarial accrued liability to be $12.5 million. The

contractor must then determine the market value of the pension plan

assets allocable to the facility, in accordance with 9904.413-50(c)(5),

as of the date agreed to by the contracting parties pursuant to

9904.413-50(c)(12)(iii), the date the contract expired. In making this

determination, the contractor is able to do a full historical

reconstruction of the market value of the assets allocated to the

segment. In this case, the market value of the segment's assets

amounted to $13.8 million. Thus, for this facility the value of pension

plan assets exceeded the actuarial accrued liability by $1.3 million.

Pursuant to 9904.413-50(c)(12)(vi), this amount indicates the extent to

which the Government over-contributed to the pension plan for the

segment and, accordingly, is the amount of the adjustment due to the

Government.

(9) Contractor L operated a segment over the last five years during

which 80% of its work was performed under Government CAS-covered

contracts. The Government work was equally divided each year between

fixed-price and cost-type contracts. The employees of the facility are

covered by a funded nonqualified defined-benefit pension plan accounted

for in accordance with 9904.412-50(c)(3). For each of the last five

years the highest Federal corporate income tax rate has been 30%.

Pension costs of $1 million per year were [[Page 16555]] computed using

a projected benefit cost method. Contractor L funded at the complement

of the tax rate ($700,000 per year). The pension plan assets held by

the funding agency earned 8% each year. At the end of the five-year

period, the funding agency balance; i.e., the market value of invested

assets, was $4.4 million. As of that date, the accumulated value of

permitted unfunded accruals; i.e., the current value of the $300,000

not funded each year, is $1.9 million. As defined by 9904.413-

30(a)(20)(i), a segment closing occurs when Contractor L sells the

segment at the end of the fifth year. Thus, for this segment, the

market value of the assets of the pension plan determined in accordance

with 9904.413-30(a)(10) is $6.3 million, which is, the sum of the

funding account balance ($4.4 million) and the accumulated value of

permitted unfunded accruals ($1.9 million). Pursuant to 9904.413-

50(c)(12)(i), the contractor uses the accrued benefit cost method to

calculate an actuarial accrued liability of $5 million as of that date.

There is no transfer of plan assets or liabilities to the buyer. The

difference between the market value of the assets and the actuarial

accrued liability for the segment is $1.3 million ($6.3 million--$5

million). Pursuant to 9904.413-50(c)(12)(vi), the adjustment due the

Government for its 80% share of previously-determined pension costs for

CAS-covered contracts is $1.04 million (80% times $1.3 million).

Because contractor L has no other Government contracts the $1.04

million is a credit due to the Government.

(10) Assume the same facts as in 9904.413-60(c)(9), except that

Contractor L continues to perform substantial Government contract work

through other segments. After considering the amount of the adjustment

and the current level of contracts, the contracting officer and the

contractor establish an amortization schedule so that the $1.04 million

is recognized as credits against ongoing contracts in five level annual

installments, including an interest adjustment based on the interest

assumption used to compute pension costs for the continuing contracts.

This amortization schedule satisfies the requirements of 9904.413-

50(c)(12))(vii).

(11) Assume the same facts as in 9904.413-60(c)(9). As part of the

transfer of ownership, Contractor L also transfers all pension

liabilities and assets of the segment to the buyer. Pursuant to

9904.413-50(c)(12)(v), the segment closing adjustment amount for the

current period is transferred to the buyer and is subsumed in the

future pension cost accounting of the buyer. If the transferred

liabilities and assets of the segment are merged into the buyer's

pension plan which has a different ratio of market value of pension

plan assets to actuarial accrued liabilities, then pension costs must

be separately computed in accordance with 9904.413-50(c)(3).

(12) Contractor M sells its only government segment. Through a

contract novation, the buyer assumes responsibility for performance of

the segment's government contracts. Just prior to the sale, the

actuarial accrued liability under the actuarial cost method in use is

$18 million and the market value of assets allocated to the segment of

$22 million. In accordance with the sales agreement, Contractor M is

required to transfer $20 million of assets to the new plan. In

determining the segment closing adjustment under 9904.413-12(c)(12) the

actuarial accrued liability and the market value of assets are reduced

by the amounts transferred to the buyer by the sale. The adjustment

amount, which is the difference between the remaining assets ($2

million) and the remaining actuarial liability ($0), is $2 million.

(13) Contractor N has three segments that perform primarily

government work and has been separately calculating pension costs for

each segment. As part of a corporate reorganization, the contractor

closes the production facility for Segment A and transfers all of that

segment's contracts and employees to Segments B and C, the two

remaining government segments. The pension assets from Segment A are

allocated to the remaining segments based on the actuarial accrued

liability of the transferred employees. Because Segment A has

discontinued operations, a segment closing has occurred pursuant to

9904.413-30(a)(20)(ii). However, because all pension assets and

liabilities have been transferred to segments that are the successors

in interest of the contracts of Segment A, an immediate period

adjustment is not required if Contractor N and the cognizant Federal

official negotiate an amortization schedule pursuant to 9904.413-

50(c)(12)(vii).

(14) Contractor O does not renew its government contract and

decides to not seek additional government contracts for the affected

segment. The contractor reduces the work force of the segment that had

been dedicated to the government contract and converts the segment's

operations to purely commercial work. In accordance with 9904.413-

30(a)(20)(iii), the segment has closed. Immediatel

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