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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A95-7555

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 30, 1995
- **Citation:** 60 FR 16534

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-7555. Public record. Not legal advice.