[Federal Register: December 11, 2003 (Volume 68, Number 238)]
[Rules and Regulations]
[Page 69251-69257]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de03-25]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 31 and 52
[FAC 2001-18; FAR Case 2001-037; Item VI]
RIN 9000-AJ57
Federal Acquisition Regulation; Insurance and Pension Costs
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
[[Page 69252]]
amending the Federal Acquisition Regulation (FAR) to revise the
insurance and indemnification cost principle, and the portion of the
compensation for personal services cost principle relating to pension
costs. The rule revises both cost principles by improving clarity and
structure and removing unnecessary and duplicative language. The
revisions are intended to revise contract cost principles and
procedures, in light of the evolution of Generally Accepted Accounting
Principles (GAAP), the advent of Acquisition Reform, and experience
gained from implementation pertaining to contract cost principles and
procedures.
DATES: Effective Date: January 12, 2004.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755,
for information pertaining to status or publication schedules. For
clarification of content, contact Mr. Edward Loeb, Policy Advisor, at
(202) 501-0650. Please cite FAC 2001-18, FAR case 2001-037.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 68 FR 4880, January 30, 2003, with a request for comments.
Four respondents submitted comments. A discussion of the comments is
provided below. The Councils considered all comments and concluded that
the proposed rule should be converted to a final rule, with changes to
the proposed rule. Differences between the proposed rule and final rule
are discussed below:
B. Public Comments
General Reformatting of FAR 31.205
Comment 1: In addition to specific comments regarding the subject
case, a respondent also recommended reformatting this cost principle as
part of a general reformat effort of FAR Part 31, Contract Cost
Principles and Procedures. The respondent advocates establishing a
common format for the selected costs detailed in FAR 31.205 will
increase the clarity of the cost principles and reduce
misinterpretation.
Councils' response: Nonconcur. The Councils are unaware of any
significant clarity problems with the current FAR cost principles and
see no benefit in this recommendation. While it is true that the cost
principles do not all share an identical format, it does not follow
that this makes them difficult to understand. Moreover, such a
comprehensive revision of the cost principles could actually increase
disputes by substituting new wording for longstanding, court-tested
language.
Of the 48 current FAR cost principles, 16 are only one paragraph
long, and 11 more are only two or three paragraphs long. The Councils
question the need to ``force-fit'' such short cost principles into a
uniform format, particularly in the absence of any significant clarity
problems. Not only would the recommended general reformatting of the
cost principles be difficult to accomplish, but it would also offer no
obvious benefit to either industry or the Government.
The Councils recommend instead that industry continue to identify
those individual cost principles which it views as problematic and to
provide specific proposals for appropriate revisions. It should be
noted that the continuing Defense Procurement and Acquisition Policy
initiative to reduce accounting and administrative burdens in the cost
principles, without jeopardizing the Government's interests, has
resulted in significant changes or deletions involving more than 20
different cost principles to date. The Councils continue to believe
that such a case-by-case cooperative effort with industry offers the
best opportunity for meaningful change in this often controversial
area.
Incorporating CAS Provisions in FAR Cost Principles
Comment 2: A respondent asserted that the proposed rule
incorporates substantial cost accounting standard (CAS) provisions into
the FAR cost principles. The respondent believes this creates de facto
CAS coverage when, by law, promulgations covering the measurement,
assignment, and allocation of costs to cost objectives is assigned to
the CAS Board, including the thresholds for which contracts will and
will not include CAS provisions. The respondent further states that if
the FAR includes CAS concepts, the inclusion should be done using
direct quotes or references.
Councils' response: Nonconcur. The Councils considered this
proposal, but believe that eliminating all CAS from the FAR would
create significant problems.
It is the responsibility of the Councils, not the CAS Board, to
promulgate rules for the measurement, assignment, and allocation of
costs for non-CAS covered contracts. The CAS Board does not have
jurisdiction over non-CAS covered contracts. For some costs,
particularly deferred compensation including pension costs (CAS 412,
413, and 415), cost of money (CAS 414/417), and self-insurance (CAS
416), the Councils have chosen to use the same requirements for non-CAS
covered contracts as the CAS Board has chosen to use for CAS-covered
contracts. To eliminate all CAS from the FAR would require removal of
these key FAR Part 31 provisions.
As for the subject rule, the issue of an alternative to CAS 412/413
for non-CAS covered contracts was discussed at the public meetings
during the spring of 2001. None of the attendees proposed an
alternative to the use of CAS 412/413. In fact, most of the attendees
supported the application of CAS 412/413 to non-CAS covered contracts.
As such, the Councils do not believe there is currently a viable
alternative to applying CAS 412/413 to non-CAS covered contracts.
In regard to CAS 416, the proposed rule included the CAS
requirements for self-insurance. Without this provision, insurance
costs for non-CAS covered contracts would be subject to Generally
Accepted Accounting Principles (GAAP), which do not permit a self-
insurance charge. The Councils believe it would be inequitable to
permit contractors with CAS-covered contracts to charge self-insurance
costs while denying such charges for contractors with non-CAS covered
contracts. In addition, a contractor with both CAS and non-CAS covered
contracts would need two sets of accounting practices if it wanted to
charge self-insurance for CAS-covered contracts. Such a requirement
would result in an unnecessary administrative burden to both the
contractor and the Government.
As for the incorporation of the CAS provisions into the FAR, the
respondent did not specify any particular language that it believes has
been paraphrased. Nevertheless, the Councils reviewed the proposed rule
to see if any such paraphrasing existed and found that the proposed
rule references the specific CAS standards (412, 413, and 416); it does
not paraphrase any CAS requirements.
FAR 31.205-6--Compensation for Personal Services
FAR 31.205-6(j)--Definition of Pension Plan
Comment 3: A respondent recommends that the current language at FAR
31.205-6(j)(1) be retained and asserts that the current language
includes allowability criteria that would be eliminated if the
definition is removed. The language currently reads as follows:
(1) A pension plan, as defined in 31.001, is a deferred
compensation plan. Additional benefits such as permanent and total
disability and death payments and survivorship payments to
beneficiaries of deceased employees may be treated as
[[Page 69253]]
pension costs, provided the benefits are an integral part of the
pension plan and meet all the criteria pertaining to pension costs.
(Emphasis added.)
Councils' response: Nonconcur. The Councils do not believe the
above-italicized language provides allowability criteria. It simply
states when additional benefits ``may be treated as pension costs.'' In
defining a pension plan, FAR 31.001, Definitions, reads in part:
* * * 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.
The Councils believe this definition, which is identical to that
used in CAS 412, should not be supplemented by the language currently
at FAR 31.205-6(j)(1). Under the language at FAR 31.205-6(j)(1),
additional benefits that are an integral part of a pension plan ``may
be treated as pension costs.'' This phrase could be misinterpreted to
mean that a contractor has the right to subjectively choose when such
benefits will be pension costs and when they will not. Conversely, the
definition at FAR 31.001 and CAS 412 simply states that such benefits
may be an integral part of the pension plan.
FAR 31.205-6(j)(3)(i)(C) and FAR Clause 52.215-15(b)(3)--Segment
Closings
Comment 4: Two respondents stated that the language at FAR 31.205-
6(j) regarding segment closings is more restrictive than the CAS
requirements. One respondent asserts there are optional settlement
methods provided for in CAS 413, specifically amortization, and that
the proposed FAR language does not address underfunding as does the
CAS.
Councils' response: Concur in part. Upon further review, the
Councils determined that the proposed language on settlement should be
deleted. The current language in CAS 413, which is incorporated into
FAR 31.205-6(j) by reference, adequately addresses the issue of
settlement. Thus, there is no need to include the specific language in
the FAR. The Councils, therefore, deleted the proposed language at FAR
31.205-6(j)(3)(C) and the FAR clause at 52.215-5(b)(3).
FAR 31.205-6(j)(6)--Early Retirement Incentive Plans
Comment 5: A respondent asserts that current FAR language clearly
states that plans based on life income settlements are not treated as
early retirement incentives plans and recommends retaining that
language.
Councils' response: Nonconcur. Based on a review of the original
promulgation documents, it is clear that the drafters intended to
include early retirement incentive payments made from within, as well
as outside, the pension trust. Although the drafters believed it would
be rare for a pension plan to include an early retirement incentive
with a life income settlement, they intended that such amendments be
included as early retirement incentives and be subject to the
conditions outlined in the cost principle. There was no intention by
the drafters to exclude such settlements.
The Councils believe this continues to be an appropriate policy.
Early retirement incentive plans include any incentive given to an
employee to retire early, regardless of whether payment is made in the
form of a life income settlement or a lump sum. The method of payment
should not determine whether the cost is allowable. The limitation
should apply regardless of whether the contractor decides to make the
payment over a period of years or in a single payment.
FAR 31.205-6(q)--Defer Revision to Employee Stock Ownership Plans
(ESOPs)
Comment 6: Two respondents recommend that further FAR action be
deferred until the CAS Board proposal on ESOPs can be reviewed for
consistency.
Councils' response: Nonconcur. The proposed rule does not add any
new measurement, assignment, or allocation provisions for ESOPs. Under
both the existing and proposed rules, ESOPs that meet the definition of
a pension plan are covered by CAS 412, and those that do not are
covered by CAS 415. While the proposed rule consolidates the
allowability requirements for ESOP costs into a single provision, it
does not change the measurement, assignment, or allocability
requirements for such costs. Since this FAR provision does not revise
existing measurement, assignment, or allocation requirements, the
Councils do not believe it should be delayed in anticipation of actions
by the CAS Board. The Councils recognize that this FAR provision may
require further modification as a result of the current ESOP project
being pursued by the CAS Board.
FAR 31.205-6(q)(2)(iii)--Allowability Limitation on ESOP Contributions
Comment 7: A respondent asserts that the proposed provision that
limits ESOP contributions in any one year to 25 percent of compensation
is inconsistent with the IRS Code and should be revised accordingly.
Councils' response: Concur in part. The fact that the cost is
deductible by the IRS does not necessarily mean that it is reasonable
or allowable for Government contract costing purposes. Nevertheless,
since ESOP costs are included in determining the overall reasonableness
of compensation costs, the Councils revised the specific allowability
ceiling for ESOP costs to only require that they be deductible under
the IRS Code.
FAR 31.205-6(q)(2)(v)--ESOP Stock in Excess of Fair Market Value.
Comment 8: A respondent expressed concern regarding the ``new''
provision that disallows purchases in excess of fair market value. The
respondent believes that this provision could be interpreted as either
(a) requiring that valuation be based on the value of the stock
immediately after a leveraged ESOP transaction occurs (the ``Farnum
Theory'', which the respondent states has been discredited), or (b)
measurement of the value of the stock based on its annual value, rather
than the value at the time the shares were acquired by the ESOP trust
Councils' response: Nonconcur. The Councils have not added a new
provision. The provision in the proposed rule currently exists in FAR
31.205-6(j)(8)(i)(E), which applies to ESOPs that meet the definition
of a pension plan. The proposed rule merely extends the application of
that provision to all ESOPs. The Councils believe that purchases in
excess of fair market value should not be allowable costs. The words in
the proposed FAR 31.205-6(q) are identical to those currently at FAR
31.205-6(j)(8). As such, the Councils do not agree that this change
could be interpreted as an endorsement of any new valuation technique.
FAR 31.205-6(q)(2)(iv)--Valuation of ESOP Stock Using IRS Guidelines
Comment 9: A respondent expressed concern regarding the new
language that requires valuation of ESOP stock using IRS guidelines on
a ``case-by-case basis.'' The respondent recommends that, if the
valuation has been done by a competent independent valuation expert,
there is no need for the auditing agency to start with a valuation from
``scratch.''
Councils' response: Nonconcur. The Councils have not added a new
provision. The provision in the proposed rule currently exists in FAR
31.205-6(j)(8)(i)(E), which applies to ESOPs that meet the definition
of a pension plan. The proposed rule merely extends the application of
that provision to all ESOPs. In addition, the Councils believe that
deleting the words ``case-by-case basis'' would cause potential
[[Page 69254]]
confusion. The IRS guidelines must be applied based on the particular
facts and circumstances of each case, i.e., on a ``case-by-case
basis.'' Furthermore, the concerns of the respondent focus on the
extent to which the auditor is required to rely upon the work of
others, in this case the valuation expert. An independent audit
requires that the auditor determine the scope of the audit, including
the extent of reliance on the work of others. This issue is properly
addressed in Generally Accepted Government Auditing Standards. It is
not something that should be addressed in the FAR.
FAR 31.205-19--Insurance and Indemnification
FAR 31.205-19(c)(4)--Definition of Catastrophic Losses
Comment 10: One respondent asserts that self-insurance charges for
catastrophic losses should be allowable, and that the definition in the
proposed rule could be interpreted to include deductibles or over
ceiling amounts for property insurance policies and other high dollar
policies. Another respondent states that the new definition of
catastrophic losses may cause contention and uncertainty in the field
because it does not account for the relatively large losses among
different sized contractors. The respondent also believes ``very low
frequency of loss'' adds confusion. The respondent further contends
that the definition should be deleted and existing practices that rely
upon individual circumstances and general reasonableness should
continue to be used.
Councils' response: Concur in part. Upon further review, the
Councils deleted the definition of catastrophic losses from the final
rule. The Councils continue to believe that the proposed definition is
consistent with the intent of the promulgators of the current language,
as evidenced by the March 19, 1979, report underlying DAR case 78-400-
7.
The intent of the proposed coverage was to distinguish catastrophic
losses as used in the cost principle from the type of catastrophic loss
anticipated by the illustration at CAS 416.60(h). In that illustration,
motor vehicle liability losses in excess of a specified amount were
absorbed by the home office and reallocated to all segments. In the
particular case described, the specified amount was too low based on
loss experience to be considered catastrophic under the provisions of
CAS 416. However, the illustration appears to anticipate losses that
may be catastrophic to a particular segment of a company but not
necessarily catastrophic in a more general sense. The Councils do not
believe the drafters of the cost principle intended to disallow self-
insurance charges for the type of loss anticipated by the CAS
illustration. However, since CAS does not include a definition of
catastrophic loss, defining the term in the FAR could cause confusion
by the users of these regulations.
As to the respondent's recommendation that self-insurance charges
for catastrophic losses should be allowable, the Councils disagree. As
was noted in the report on DAR case 78-400-7, the Government should not
allow self-insurance charges for catastrophic losses, such as
earthquakes, which have a very small likelihood of occurring for any
particular contractor.
C. Regulatory Planning and Review
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
D. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not 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 discussed in this rule.
E. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the changes to
the FAR do not impose information collection requirements that 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 31 and 52
Government procurement.
Dated: December 4, 2003.
Laura Auletta,
Director, Acquisition Policy Division.
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Therefore, DoD, GSA, and NASA amend 48 CFR parts 31 and 52 as set forth
below:
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1. The authority citation for 48 CFR parts 31 and 52 is revised to read
as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
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2. Amend section 31.205-6 by--
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a. Removing from the second sentence of paragraph (g)(1) ``(j)(7)'' and
adding ``(j)(6)'' in its place;
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b. Revising paragraph (j);
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c. Removing from the second parenthetical in paragraph (p)(2)(i)
``paragraphs (j)(5) and (j)(8)'' and adding ``paragraphs (j)(4) and
(q)'' in its place; and
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d. Adding paragraph (q) to read as follows:
31.205-6 Compensation for personal services.
* * * * *
(j) Pension costs. (1) Pension plans are normally segregated into
two types of plans: defined-benefit and defined-contribution pension
plans. The contractor shall measure, assign, and allocate the costs of
all defined-benefit pension plans and the costs of all defined-
contribution pension plans in compliance with 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. Pension
costs are allowable subject to the referenced standards and the cost
limitations and exclusions set forth in paragraph (j)(1)(i) and in
paragraphs (j)(2) through (j)(6) of this subsection.
(i) Except for nonqualified pension plans using the pay-as-you-go
cost method, to be allowable in the current year, the contractor shall
fund pension costs by the time set for filing of the Federal income tax
return or any extension. Pension costs assigned to the current year,
but not funded by the tax return time, are not allowable in any
subsequent year. For nonqualified pension plans using the pay-as-you-go
method, to be allowable in the current year, the contractor shall
allocate pension costs in the cost accounting period that the pension
costs are assigned.
(ii) Pension payments must be paid pursuant to an agreement entered
into in good faith between the contractor and employees before the work
or services are performed and to the terms and conditions of the
established plan. The cost of changes in pension plans are not
allowable if the changes are discriminatory to the Government or are
not intended to be applied consistently for all employees under similar
circumstances in the future.
(iii) Except as provided for early retirement benefits in paragraph
(j)(6) of
[[Page 69255]]
this subsection, one-time-only pension supplements not available to all
participants of the basic plan are not allowable as pension costs,
unless the 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.
(2) Defined-benefit pension plans. 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, are not 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). 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 the
Employee Retirement Income Security Act of 1974 (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)).
(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 in excess of the pension cost assigned to a
cost accounting period is not allowable in that period and shall be
accounted for as set forth at 48 CFR 9904.412-50(a)(4). The excess
amount is allowable in the future period to which it is assigned, to
the extent it is not otherwise unallowable.
(iii) Increased pension costs are unallowable if the increase is
caused by a delay in funding beyond 30 days after each quarter of the
year to which they are assignable. 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 segment's calculation of pension costs as
provided for in 48 CFR 9904.413-50(c). The contractor shall make
determinations of unallowable costs in accordance with the actuarial
method used in calculating pension costs.
(iv) The contracting officer will consider the allowability of the
cost of indemnifying the Pension Benefit Guaranty Corporation (PBGC)
under ERISA section 4062 or 4064 arising from terminating an employee
deferred compensation plan 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(c)(3) and (d)(3), 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. If
the withdrawal of assets from a pension fund is a plan termination
under ERISA, the provisions of paragraph (j)(3) of this subsection
apply. 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 receives a credit equal to the
amount of the Government's equitable share of the gross withdrawal or
transfer.
(3) Pension adjustments and asset reversions. (i) For segment
closings, pension plan terminations, or curtailment of benefits, the
amount of the adjustment shall be--
(A) For contracts and subcontracts that are subject to full
coverage under the Cost Accounting Standards (CAS) Board rules and
regulations, the amount measured, assigned, and allocated in accordance
with 48 CFR 9904.413-50(c)(12); and
(B) For contracts and subcontracts that are not subject to full
coverage under the CAS, the amount measured, assigned, and allocated in
accordance with 48 CFR 9904.413-50(c)(12), except the numerator of the
fraction at 48 CFR 9904.413-50(c)(12)(vi) is the sum of the pension
plan costs allocated to all non-CAS-covered contracts and subcontracts
that are subject to Subpart 31.2 or for which cost or pricing data were
submitted.
(ii) For all other situations where 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 that are subject to
Subpart 31.2. Excise taxes on pension plan asset reversions or
withdrawals under this paragraph (j)(3)(ii) are unallowable in
accordance with 31.205-41(b)(6).
(4) Defined-contribution pension plans. In addition to defined-
contribution pension plans, this paragraph also covers profit sharing,
savings plans, and other such plans, provided the plans fall within the
definition of a pension plan at 31.001.
(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) The provisions of paragraphs (j)(2)(ii) and (iv) of this
subsection apply to defined-contribution plans.
(5) Pension plans using the pay-as-you-go cost method. When using
the pay-as-you-go cost method, the contractor shall measure, assign,
and allocate the cost of pension plans in accordance with 48 CFR
9904.412 and 9904.413. Pension costs for a pension plan using the pay-
as-you-go cost method are allowable to the extent they are not
otherwise unallowable.
(6) Early retirement incentives. An early retirement incentive is
an incentive given to an employee to retire early. For contract costing
purposes, costs of early retirement incentives are allowable subject to
the pension cost criteria contained in paragraphs (j)(2)(i) through
(iv) of this subsection provided--
(i) The contractor measures, assigns, and allocates the costs in
accordance with the contractor's accounting practices for pension
costs;
[[Page 69256]]
(ii) The incentives are in accordance with the terms and conditions
of an early retirement incentive plan;
(iii) The contractor applies the plan only to active employees. The
cost of extending the plan to employees who retired or were terminated
before the adoption of the plan is unallowable; and
(iv) The present value of the total incentives given to any
employee in excess of the amount of the employee's annual salary for
the previous fiscal year before the employee's retirement is
unallowable. The contractor shall compute the present value in
accordance with its accounting practices for pension costs. The
contractor shall account for any unallowable costs in accordance with
48 CFR 9904.412-50(a)(2).
* * * * *
(q) Employee stock ownership plans (ESOP). (1) An ESOP is a stock
bonus plan designed to invest primarily in the stock of the employer
corporation. The contractor's contributions to an Employee Stock
Ownership Trust (ESOT) may be in the form of cash, stock, or property.
(2) Costs of ESOPs are allowable subject to the following
conditions:
(i) For ESOPs that meet the definition of a pension plan at 31.001,
the contractor--
(A) Measures, assigns, and allocates the costs in accordance with
48 CFR 9904.412;
(B) Funds the pension costs by the time set for filing of the
Federal income tax return or any extension. Pension costs assigned to
the current year, but not funded by the tax return time, are not
allowable in any subsequent year; and
(C) Meets the requirements of paragraph (j)(2)(ii) of this
subsection.
(ii) For ESOPs that do not meet the definition of a pension plan at
31.001, the contractor measures, assigns, and allocates costs in
accordance with 48 CFR 9904.415.
(iii) Contributions by the contractor in any one year that exceed
the deductibility limits of the Internal Revenue Code for that year are
unallowable.
(iv) When the contribution is in the form of stock, the value of
the stock contribution is limited to the fair market value of the stock
on the date that title is effectively transferred to the trust.
(v) When the contribution is in the form of cash--
(A) Stock purchases by the ESOT in excess of fair market value are
unallowable; and
(B) When stock purchases are in excess of fair market value, the
contractor shall credit the amount of the excess to the same indirect
cost pools that were charged for the ESOP contributions in the year in
which the stock purchase occurs. However, when the trust purchases the
stock with borrowed funds which will be repaid over a period of years
by cash contributions from the contractor to the trust, the contractor
shall credit the excess price over fair market value to the indirect
cost pools pro rata over the period of years during which the
contractor contributes the cash used by the trust to repay the loan.
(vi) When the fair market value of unissued stock or stock of a
closely held corporation is not readily determinable, the valuation
will be made on a case-by-case basis taking into consideration the
guidelines for valuation used by the IRS.
* * * * *
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3. Revise section 31.205-19 to read as follows:
31.205-19 Insurance and indemnification.
(a) Insurance by purchase or by self-insuring includes--
(1) Coverage the contractor is required to carry or to have
approved, under the terms of the contract; and
(2) Any other coverage the contractor maintains in connection with
the general conduct of its business.
(b) For purposes of applying the provisions of this subsection, the
Government considers insurance provided by captive insurers (insurers
owned by or under control of the contractor) as self-insurance, and
charges for it shall comply with the provisions applicable to self-
insurance costs in this subsection. However, if the captive insurer
also sells insurance to the general public in substantial quantities
and it can be demonstrated that the charge to the contractor is based
on competitive market forces, the Government will consider the
insurance as purchased insurance.
(c) Whether or not the contract is subject to CAS, self-insurance
charges are allowable subject to paragraph (e) of this subsection and
the following limitations:
(1) The contractor shall measure, assign, and allocate costs in
accordance with 48 CFR 9904.416, Accounting for Insurance Costs.
(2) The contractor shall comply with (48 CFR) part 28. However,
approval of a contractor's insurance program in accordance with part 28
does not constitute a determination as to the allowability of the
program's cost.
(3) If purchased insurance is available, any self-insurance charge
plus insurance administration expenses in excess of the cost of
comparable purchased insurance plus associated insurance administration
expenses is unallowable.
(4) Self-insurance charges for risks of catastrophic losses are
unallowable (see 28.308(e)).
(d) Purchased insurance costs are allowable, subject to paragraph
(e) of this subsection and the following limitations:
(1) For contracts subject to full CAS coverage, the contractor
shall measure, assign, and allocate costs in accordance with 48 CFR
9904.416.
(2) For all contracts, premiums for insurance purchased from
fronting insurance companies (insurance companies not related to the
contractor but who reinsure with a captive insurer of the contractor)
are unallowable to the extent they exceed the sum of--
(i) The amount that would have been allowed had the contractor
insured directly with the captive insurer; and
(ii) Reasonable fronting company charges for services rendered.
(3) Actual losses are unallowable unless expressly provided for in
the contract, except--
(i) Losses incurred under the nominal deductible provisions of
purchased insurance, in keeping with sound business practice, are
allowable; and
(ii) Minor losses, such as spoilage, breakage, and disappearance of
small hand tools that occur in the ordinary course of business and that
are not covered by insurance, are allowable.
(e) Self-insurance and purchased insurance costs are subject to the
cost limitations in the following paragraphs:
(1) Costs of insurance required or approved pursuant to the
contract are allowable.
(2) Costs of insurance maintained by the contractor in connection
with the general conduct of its business are allowable subject to the
following limitations:
(i) Types and extent of coverage shall follow sound business
practice, and the rates and premiums shall be reasonable.
(ii) Costs allowed for business interruption or other similar
insurance shall be limited to exclude coverage of profit.
(iii) The cost of property insurance premiums for insurance
coverage in excess of the acquisition cost of the insured assets is
allowable only when the contractor has a formal written policy assuring
that in the event the insured property is involuntarily converted, the
new asset shall be valued at the book value of the replaced asset plus
or minus adjustments for differences between insurance proceeds and
actual replacement cost. If the
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contractor does not have such a formal written policy, the cost of
premiums for insurance coverage in excess of the acquisition cost of
the insured asset is unallowable.
(iv) Costs of insurance for the risk of loss of, or damage to,
Government property are allowable only to the extent that the
contractor is liable for such loss or damage and such insurance does
not cover loss or damage which results from willful misconduct or lack
of good faith on the part of any of the contractor's directors or
officers, or other equivalent representatives.
(v) Costs of insurance on the lives of officers, partners,
proprietors, or employees are allowable only to the extent that the
insurance represents additional compensation (see 31.205-6).
(3) The cost of insurance to protect the contractor against the
costs of correcting its own defects in materials and workmanship is
unallowable. However, insurance costs to cover fortuitous or casualty
losses resulting from defects in materials or workmanship are allowable
as a normal business expense.
(4) Premiums for retroactive or backdated insurance written to
cover losses that have occurred and are known are unallowable.
(5) The Government is obligated to indemnify the contractor only to
the extent authorized by law, as expressly provided for in the
contract, except as provided in paragraph (d)(3) of this subsection.
(6) Late premium payment charges related to employee deferred
compensation plan insurance incurred pursuant to section 4007 (29
U.S.C. 1307) or section 4023 (29 U.S.C. 1323) of the Employee
Retirement Income Security Act of 1974 are unallowable.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
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4. Amend section 52.215-15 by revising the date of the clause and
paragraph (b) to read as follows:
52.215-15 Pension Adjustments and Asset Reversions.
* * * * *
Pension Adjustments and Asset Reversions (Jan 2004)
* * * * *
(b) For segment closings, pension plan terminations, or
curtailment of benefits, the amount of the adjustment shall be--
(1) For contracts and subcontracts that are subject to full
coverage under the Cost Accounting Standards (CAS) Board rules and
regulations (48 CFR Chapter 99), the amount measured, assigned, and
allocated in accordance with 48 CFR 9904.413-50(c)(12); and
(2) For contracts and subcontracts that are not subject to full
coverage under the CAS, the amount measured, assigned, and allocated
in accordance with 48 CFR 9904.413-50(c)(12), except the numerator
of the fraction at 48 CFR 904.413-50(c)(12)(vi) shall be the sum of
the pension plan costs allocated to all non-CAS covered contracts
and subcontracts that are subject to Federal Acquisition Regulation
(FAR) Subpart 31.2 or for which cost or pricing data were submitted.
* * * * *
(End of clause)
[FR Doc. 03-30477 Filed 12-10-03; 8:45 am]