Federal Acquisition Regulation; Pay-As-You-Go Pension Costs

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation (FAR) to provide consistency with the cost

accounting standards for composition and measurement of pension cost

and adjustment and allocation of pension cost. This regulatory action

was not subject to Office of Management and Budget review under

Executive Order 12866, dated September 30, 1993. This is not a major

rule under 5 U.S.C. 804.

DATES: Comments should be submitted on or before November 24, 1997 to

be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (MVRS), 1800 F Street,

NW, Room 4035, Washington, DC 20405.

E-mail comments submitted over Internet should be addressed to:

[email protected].

Please cite FAR case 89-012 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS

Building, Washington, DC 20405 (202) 501-4755 for information

pertaining to status or publication schedules. For clarification of

content, contact Mr. Jeremy Olson, Procurement Analyst, at (202) 501-

3221. Please cite FAR case 89-012.

SUPPLEMENTARY INFORMATION:

A. Background

This rule proposes to amend FAR 31.001, Definitions; FAR 31.205-6,

Compensation for personal services; and FAR 52.215-27, Termination of

Defined Benefit Pension Plans, to provide consistency with 48 CFR

9904.412, Cost Accounting Standard for composition and measurement of

pension cost (CAS 412), and 48 CFR 9904.413, Adjustment and allocation

of pension cost (CAS 413). The interim rule, which was published in the

Federal Register at 54 FR 13022, March 29, 1989 was necessary because

the United States Court of Appeals had ruled that FAR 31.205-6(j)(5)

was inconsistent with CAS 412, and that the controlling regulation was

CAS 412.

Since the 1989 interim FAR rule was published, the Office of

Federal Procurement Policy, Cost Accounting Standards Board, made

substantial changes to CAS 412 and 413 relating to accounting for

pension costs under negotiated Government contracts. These changes were

published in the Federal Register as a proposed rule with request for

comment at 58 FR 58999, November 5, 1993. Public comments were received

and considered in the development of the final CAS rule published in

the Federal Register at 60 FR 16534, March 30, 1995. The changes in the

final CAS rule addressed 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.

This proposed rule would: (1) Revise the definitions at FAR 31.001

to conform with the CAS Board's definitions; (2) delete references to

``unfunded pension plans'' since CAS 412 and CAS 413 no longer refer to

unfunded pension plans; (3) add new language to FAR 31.205-6(j) to

address transfer of assets to another account within the same fund, to

address the allowability of costs for nonqualified pension plans using

the pay-as-you-go cost method, and to address both CAS requirements and

all other situations not covered by CAS; (4) add new language at FAR

31.205-6(j)(6), which was previously reserved, to refer to CAS 412 and

CAS 413 for treatment of pension plans using the pay-as-you-go cost

method; (5) provide other editorial changes to make FAR 31.001 and

31.205-6 consistent with the language of CAS 412 and CAS 413; and (6)

revise the clause at FAR 52.215-27, Termination of Defined Benefit

Pension Plans, to conform the clause with the proposed FAR Part 31

changes.

Eighteen comments were received in response to the interim FAR

rule. All comments were considered in the development of this proposed

rule.

B. Regulatory Flexibility Act

This proposed rule is not expected to have a significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because most

contracts awarded to small entities use simplified acquisition

procedures or are awarded on a competitive, fixed-price basis, and do

not require application of the cost principle contained in this rule.

An Initial Regulatory Flexibility Analysis has, therefore, not been

performed. Comments from small entities concerning the affected FAR

subpart will be considered in accordance with 5 U.S.C. 610 of the Act.

Such comments must be submitted separately and should cite 5 U.S.C.

601, et seq. (FAR case 89-012), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

changes to the FAR do not impose recordkeeping or information

collection requirements, or collections of information from offerors,

contractors, or members of the public which require the approval of the

Office of Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Parts 15, 31 and 52

Government procurement.

Dated: September 17, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Parts 15, 31 and 52 be

amended as set forth below:

1. The authority citation for 48 CFR Parts 15, 31 and 52 continues

to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 15--CONTRACTING BY NEGOTIATION

15.804-8 [Amended]

1a. Section 15.804-8 is amended in paragraph (e) by revising

``Termination of Defined Benefit Pension Plans'' to read ``Pension

Adjustments and Asset Reversions''.

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

2. Section 31.001 is amended by removing the definitions

``Actuarial liability'' and ``Unfunded pension plan''; by adding, in

alphabetical order, the definitions ``Actuarial accrued liability'',

``Nonqualified pension plan'', and ``Qualified pension plan''; by

[[Page 49901]]

revising the definitions of ``Accrued benefit cost method'',

``Actuarial assumption'', ``Actuarial cost method'', ``Actuarial

valuation'', ``Funded pension cost'', ``Normal cost'', ``Pension

plan'', ``Projected benefit cost method'', and revising the definition

heading ``Termination gain or loss'' to read ``Temination of employment

gain or loss'' as follows:

31.001 Definitions.

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; i.e., 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.

* * * * *

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.

Actuarial assumption means an estimate of future conditions

affecting pension cost; e.g., mortality rate, employee turnover,

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

values of pension plan assets.

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.

* * * * *

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 liability, actuarial value of the assets of

a pension plan, and other relevant values for the pension plan.

* * * * *

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.

* * * * *

Nonqualified pension plan means any pension plan other than a

qualified pension plan as defined in this part.

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.

* * * * *

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 retirements,

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.

* * * * *

Projected benefit cost method means either

(1) 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

(2) A modification of the accrued benefit cost method that

considers projected compensation levels.

* * * * *

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.

* * * * *

3. Section 31.205-6 is amended by revising paragraphs (j)1) through

(j)(6) to read as follows:

31.205-6 Compensation for personal services.

* * * * *

(j) Pension costs. (1) A pension plan is a deferred compensation

plan as defined in 31.001. Additional benefits such as permanent and

total disability and death payments and survivorship payments to

beneficiaries of deceased employees may be treated as pension costs,

provided the benefits are an integral part of the pension plan and meet

all the criteria pertaining to pension costs.

(2) Pension plans are normally segregated into two types of plans:

defined-benefit or defined-contribution pension plans. The cost of all

defined-benefit pension plans shall be measured, allocated, and

accounted for in compliance with the provisions of 48 CFR 9904.412,

Cost accounting standard for composition and measurement of pension

cost, and 48 CFR 9904.413, Adjustment and allocation of pension cost.

The costs of all defined-contribution pension plans shall be measured,

allocated and accounted for in accordance with the provisions of 48 CFR

9904.412. Pension costs are allowable subject to the referenced

standards and the cost limitations and exclusions set forth in

paragraph (j)(2)(i) and in paragraphs (j)(3) through (8) of this

subsection.

(i) Except for nonqualified pension plans using the pay-as-you-go

cost method to be allowable in the current year, pension costs must be

funded by the time set for filing of the Federal income tax return or

any extension thereof. Pension costs assigned to the current year, but

not funded by the tax return time, shall not be allowable in any

subsequent year. For nonqualified pension plans using the pay-as-you-go

cost method, to be allowable in the current year, pension costs must be

allocable in accordance with 48 CFR 9904.412-50(d)(3).

(ii) Pension payments must be reasonable in amount and be paid

pursuant to (A) an agreement entered into in good faith between the

contractor and employees before the work or services are performed and

(B) the terms and conditions of the established plan. The cost of

changes in pension plans which are discriminatory to the Government or

are not intended to be applied consistently for all employees under

similar circumstances in the future are not allowable.

(iii) Except as provided for early retirement benefits in paragraph

(j)(7) of this subsection, one-time-only pension supplements not

available to all participants of the basic plan are not allowable as

pension costs unless the

[[Page 49902]]

supplemental benefits represent a separate pension plan and the

benefits are payable for life at the option of the employee.

(iv) Increases in payments to previously retired plan participants

covering cost-of-living adjustments are allowable if paid in accordance

with a policy or practice consistently followed.

(3) Defined-benefit pension plans. This paragraph covers pension

plans 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. The cost limitations and

exclusions pertaining to defined-benefit plans are as follows:

(i)(A) Except for nonqualified pension plans, pension costs (see 48

CFR 9904.412-40(a)(1)) assigned to the current accounting period but

not funded during it, shall not be allowable in subsequent years

(except that a payment made to a fund by the time set for filing the

Federal income tax return or any extension thereof is considered to

have been made during such taxable year).

(B) For nonqualified pension plans, except those using the pay-as-

you-go cost method, allowable costs are limited to the amount allocable

in accordance with 48 CFR 9904.412-50(d)(2).

(C) For nonqualified pension plans using the pay-as-you-go cost

method, allowable costs are limited to the amounts allocable in

accordance with 48 CFR 9904.412-50(d)(3).

(ii) Any amount funded before the time it becomes assignable is not

allowable and shall be accounted for as set forth at 48 CFR 9904.412-

50(a)(4), and shall be allowable in the future period to which it is

assigned, to the extent it is allocable, reasonable, and not otherwise

unallowable.

(iii) Increased pension costs caused by delay in funding beyond 30

days after each quarter of the year to which they are assignable are

unallowable. If a composite rate is used for allocating pension costs

between the segments of a company and if, because of differences in the

timing of the funding by the segments, an inequity exists, allowable

pension costs for each segment will be limited to that particular

segments calculation of pension costs as provided for in 48 CFR

9904.413-50(c). Determination of unallowable costs shall be made in

accordance with the actuarial cost method used in calculating pension

costs.

(iv) Allowability of the cost of indemnifying the Pension Benefit

Guaranty Corporation (PBGC) under Section 4062 or 4064 of the

Employee's Retirement Income Security Act of 1974 (ERISA) arising from

terminating an employee deferred compensation plan will be considered

on a case-by-case basis; provided that if insurance was required by the

PBGC under ERISA Section 4023, it was so obtained and the

indemnification payment is not recoverable under the insurance.

Consideration under the foregoing circumstances will be primarily for

the purpose of appraising the extent to which the indemnification

payment is allocable to Government work. If a beneficial or other

equitable relationship exists, the Government will participate, despite

the requirements of 31.205-19 (a)(3) and (b), in the indemnification

payment to the extent of its fair share.

(v) Increased pension costs resulting from the withdrawal of assets

from a pension fund and transfer to another employee benefit plan fund,

or transfer of assets to another account within the same fund, are

unallowable except to the extent authorized by an advance agreement.

The advance agreement shall:

(A) State the amount of the Government's equitable share in the

gross amount withdrawn or transferred; and

(B) Provide that the Government receive a credit equal to the

amount of the Government's equitable share of the gross withdrawal or

transfer.

(4) Pension adjustments and asset reversions. (i) For segment

closings, pension plan terminations, or curtailment of benefits,

whether or not the contract or subcontract is subject to Cost

Accounting Standards (CAS), the adjustment amounts shall be the amounts

measured, assigned, and allocated in accordance with 48 CFR 9904.413-

50(c)(12). Notwithstanding the language in 48 CFR 9904.413-

50(c)(12)(vi), which limits the numerator of the adjustment to CAS-

covered contracts, for the purposes of the calculations under this

paragraph, all contracts and subcontracts that are subject to subpart

31.2 or for which cost or pricing data were submitted shall be treated

as if they were subject to 48 CFR 9904.413 and shall be included in the

numerator of the adjustment.

(ii) For all other situations when assets revert to the contractor,

or such assets are constructively received by it for any reason, the

contractor shall, at the Governments option, make a refund or give a

credit to the Government for its equitable share of the gross amount

withdrawn. The Governments equitable share shall reflect the

Governments participation in pension costs through those contracts for

which cost or pricing data were submitted or which are subject to

subpart 31.2. Excise taxes on pension plan asset reversions or

withdrawals are unallowable under this paragraph (j)(4)(ii) in

accordance with 31.205-41(b)(6).

(5) Defined-contribution pension plans. This paragraph covers those

pension plans in which the contributions are established in advance and

the level of benefits is determined by the contributions made. It also

covers profit sharing, savings plans, and other such plans provided the

plans fall within the definition of a pension plan in paragraph (j)(1)

of this subsection.

(i) Allowable pension cost is limited to the net contribution

required to be made for a cost accounting period after taking into

account dividends and other credits, where applicable. However, 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 will be allowable in those future

accounting periods in which the funding of such excess amounts occurs

(see 48 CFR 9904.412-50(c)(5)).

(ii) Any amount funded before the time it becomes assignable is not

allowable and shall be accounted for as set forth at 48 CFR 9904.412-

50(a)(4), and shall be allowable in the future period to which it is

assigned, to the extent it is allocable, reasonable, and not otherwise

unallowable.

(iii) The provisions of paragraph (j)(3)(iv) of this subsection

apply to defined-contribution plans.

(6) Pension plans using the pay-as-you-go cost method. The cost of

pension plans using the pay-as-you-go cost method shall be measured,

allocated, and accounted for in accordance with 48 CFR 9904.412 and

9904.413. Pension costs for a pension plan using the pay-as-you-go cost

method shall be allowable to the extent they are allocable, reasonable,

and not otherwise unallowable.

* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

4. Section 52.215-27 is revised to read as follows:

52.215-27 Pension Adjustments and Asset Reversions.

As prescribed in 15.804-8(e), insert the following clause:

Pension Adjustments and Asset Reversions (Date)

(a) The Contractor shall promptly notify the Contracting Officer

in writing when it determines that it will terminate a defined-

benefit pension plan or otherwise recapture such pension fund

assets.

[[Page 49903]]

(b) For segment closings, pension plan terminations, or

curtailment of benefits, whether or not this contract or the

applicable subcontract is subject to Cost Accounting Standards

(CAS), the adjustment amounts shall be the amounts measured,

assigned, and allocated in accordance with 48 CFR 9904.413-

50(c)(12). Notwithstanding the language in 48 CFR 9904.413-

50(c)(12)(vi), which limits the numerator of the adjustment to CAS-

covered contracts, for the purposes of the calculations under this

paragraph, all contracts and subcontracts that are subject to

Subpart 31.2 or for which cost or pricing data were submitted shall

be treated as if they were subject to 48 CFR 9904.413 and shall be

included in the numerator of the adjustment.

(c) For all other situations when assets revert to the

Contractor, or such assets are constructively received by it for any

reason, the Contractor shall, at the Government's option, make a

refund or give a credit to the Government for its equitable share of

the gross amount withdrawn. The Government's equitable share shall

reflect the Government's participation in pension costs through

those contracts for which cost or pricing data were submitted or

which are subject to Subpart 31.2 of the Federal Acquisition

Regulation (FAR).

(d) The Contractor shall include the substance of this clause in

all subcontracts under this contract which meet the applicability

requirements of FAR 15.804-8(e).

(End of clause)

[FR Doc. 97-25244 Filed 9-22-97; 8:45 am]

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