[Federal Register: June 8, 2005 (Volume 70, Number 109)]
[Rules and Regulations]
[Page 33671-33673]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn05-35]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 31 and 52
[FAC 2005-04; FAR Case 2001-031; Item VII]
RIN 9000-AJ67
Federal Acquisition Regulation; Deferred Compensation and
Postretirement Benefits Other Than Pensions
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
amending the Federal Acquisition Regulation (FAR) by revising the cost
principles for Deferred compensation other than pensions, and
Postretirement benefits other than pensions. The related contract
clause, Reversion or Adjustment of Plans for Postretirement Benefits
(PRB) Other Than Pensions, is also revised. The rule revises the cost
principle and contract clause 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
of the cost principles in the FAR.
DATES: Effective Date: July 8, 2005.
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. Jeremy Olson, Procurement
Analyst, at (202) 501-3221. Please cite FAC 2005-04, FAR case 2001-031.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 68 FR 33326, June 3, 2003, with request for public
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 in Section B, Comments 2, 5, 6, and
Changes for Clarity, below.
B. Public Comments
Deferred compensation--Subsequent period awards
1. Comment: Revise proposed FAR 31.205-6(k)(2). One respondent
commented that the word ``made'' could be misconstrued to mean ``paid''
versus when the award program is instituted. The sentence should be
changed to read: ``Deferred compensation awards are unallowable if the
award program is instituted in a period subsequent to the accounting
period when the work being remunerated was performed.''
Councils' response: Nonconcur. The Councils believe that the
proposed language (which is the same as the current language in the
last sentence of paragraph (k)(1) and has been unchanged for many
years) is clear. By definition, deferred compensation is an award
``made'' to compensate an employee in a future period, i.e., the award
is ``paid'' in the future. Therefore, the Councils do not believe it is
likely that the word ``made'' will be misconstrued as ``paid.'' In
addition, the respondent has provided no evidence that this language is
being misinterpreted.
Furthermore, the respondent's proposed language would change the
meaning of the provision and create an inappropriate result. Under that
proposed language, the contractor could ``institute'' an award program
in 1999, and award an employee in 2003 for work performed during 2000.
The purpose of the FAR provision is to preclude such retroactive
awards; the respondent's proposed revision would thwart this purpose.
Delayed recognition methodology for recognizing PRB past service
costs
2. Comment: Revise proposed FAR 31.205-6(o)(2)(iii)(A). The
respondent believes that the second sentence of the provision could be
misinterpreted to mean that the entire amount of PRB costs attributable
to the past service (transition obligation) is unallowable, not just
the portion of the PRB costs in excess of the amount assignable under
the delayed recognition methodology. The provision should be revised to
read as follows:
``However, the portion of PRB costs attributable to past service
(``transition obligation'') as defined in Financial Accounting
Standards Board Statement 106, paragraph 110, that is in excess of
the amount assignable under the delayed recognition methodology
described in paragraphs 112 and 113 of Statement 106 is
unallowable.''
Councils' response: Concur. The Councils agree that the language
was intended to disallow only the excess amount, not the total amount.
The Councils also agree that the respondent's proposed language, with
some additional wording, is appropriate. Therefore, the Councils have
revised the language to read as follows:
``However, the portion of PRB costs attributable to the
transition obligation assigned to the current year that is in excess
of the amount assignable under the delayed recognition methodology
described in paragraphs 112 and 113 of Financial Accounting
Standards Board Statement 106 is unallowable. The transition
obligation is defined in Statement 106, paragraph 110.''
Refund of Government share of PRB costs which revert or inure to
the contractor
3. Comment: Revise proposed FAR 31.205-6(o)(3). One respondent was
concerned that, under the proposed language, the Government may be
entitled to an equitable share of previously funded PRB costs when
benefits are reduced but total costs are not. In the present
environment, contractors may be required to reduce benefits to simply
keep retiree health costs from increasing at an unsustainable level.
The provision does not define what is meant by ``any amount of
previously funded PRB costs which revert or inure to the contractor.''
The respondent recommends that the provision explicitly state that the
Government is entitled to an equitable share of previously funded costs
only when the costs are ultimately reduced.
Councils' response: Nonconcur. The Councils believe the respondent
is misapplying the provision. Neither a reduction in PRB costs nor a
reduction in PRB benefits alone entitles the Government to an equitable
share of previously funded PRB costs under proposed FAR 31.205-6(o)(3)
(FAR 31.205-6(o)(5) of the final rule) or FAR 52.215-18. The Government
is entitled to an equitable share when previously funded PRB costs
revert or inure to the contractor, for whatever reason. ``Inure'' is
defined in Webster's College Dictionary as ``to come into use or
operation,'' while ``revert'' means ``to return or go back.'' Thus,
this language applies whenever assets return or go back to the
contractor, or come into use
[[Page 33672]]
or operation (i.e., are constructively received) by the contractor.
4. Comment: Revise proposed FAR 31.205-6(o)(3). Two respondents
asserted that the provision is one-sided by entitling the Government to
share in any proceeds resulting from over funding but shielding the
Government from liability in the event of under funding. The
respondents recommend that the provision require the Government to
receive a pro-rata share of the unfunded liability that exists at the
time of a segment closing, plan termination, or curtailment of
benefits. In addition, the rule should be amended so that PRB plan
closing adjustments operate the same way as pension plan closing
adjustments.
Councils' response: Nonconcur. The assertion that the provision is
one-sided is based on the assumption that this provision applies
whenever the PRB plan is over funded. The provision at FAR 31.205-
6(o)(3) of the proposed rule (FAR 31.205-6(o)(5) of the final rule)
does not apply simply because a PRB plan is over funded. The provision
applies only when the assets revert, inure, or are constructively
received by the contractor.
The Councils do not believe that FAR 31.205-6(o)(3) should be
revised to provide a segment closing adjustment for PRB costs. Unlike
pension benefits, contractors generally reserve the right to reduce or
eliminate PRB benefits. Therefore, the Councils do not believe an
adjustment similar to the pension segment closing adjustment is
appropriate for PRBs.
5. Comment: Revise proposed FAR 31.205-6(o)(3). Four respondents
believe that the last sentence of the provision (that specifies the
contractor shall credit the Government's share of previously funded PRB
costs to the Government, either as a cost reduction or by cash refund,
at the option of the Government) is inequitable and should be
eliminated because it ignores the interest of the contractor, it is
both unnecessary and undesirable, and it is unduly prescriptive. In
addition, the respondents believe that explicitly dictating the
required alternative methods of adjustment reduces the flexibility to
negotiate an equitable adjustment that considers the unique facts
relating to a particular situation. The provision should be revised to
read as follows:
``When determining or agreeing on the method for treating the
equitable share, the contracting parties should consider the
following methods: cost reduction, amortizing the cost over a number
of years, cash refund or some other agreed upon method.''
Councils' response: Partially concur. The Councils agree with the
concept that the parties should attempt to negotiate the method of
recovery for the Government's equitable share of PRB funds that inure
or revert to the contractor. However, the rule must also address those
instances where the parties fail to reach a settlement. While the
contractor and the Government should attempt to negotiate a settlement,
if the parties disagree, the Contracting Officer must designate the
method for recovery of the equitable share. Therefore, to address this
concern, the Councils deleted the last sentence of proposed 31.205-
6(o)(3) and added the following language to the related contract clause
at 52.215-18(b):
When determining or agreeing on the method for recovery of the
Government's equitable share, the contracting parties should consider
the following methods: cost reduction, amortizing the credit over a
number of years (with appropriate interest), cash refund, or some other
agreed upon method. Should the parties be unable to agree on the method
for recovery of the Government's equitable share, through good faith
negotiations, the Contracting Officer shall designate the method of
recovery.
Reduced benefits for a PRB plan
6. Comment: Revise proposed FAR 52.215-18. One respondent asserted
that the language in the first sentence of the contract clause,
regarding what is meant by ``reduced benefits'' in a PRB plan, is
ambiguous. A contractor might reduce benefits but, because of increased
costs in other areas, the allocable costs of the PRB plan might stay
steady or even increase. The respondent also believes that the language
should focus on allocable costs and not on the level of benefits in the
plan.
Councils' response: Partially concur. The Councils agree that the
phrase ``reduce a PRB plan'' is ambiguous and has revised it to read
``reduce the benefits of a PRB plan.''
The Councils do not agree that the language should be revised to
focus on allocable costs. The language requires the contractor to
notify the contracting officer when there is a PRB termination or a
reduction in benefits under the PRB plan. The purpose of this provision
is to assure that the Government is promptly notified so that timely
adjustments can be made for purposes of contract negotiations (forward
pricing rate adjustments) and billing (billing rate adjustments). The
purpose is also to assure that the Government receives its equitable
share of any previously funded PRB costs which inure or revert to the
contractor as a result of a plan termination or reduction in benefits,
or for any other reason. In those cases where there is a reduction in
benefits but it does not affect the amount of PRB costs allocable to
Government contracts, no adjustments would be made to the forward
pricing or billing rates. If no funds inure or revert to the contractor
as a result of the reduction in benefits, there would also be no refund
or credit due the Government under the provision. However, the
contractor must still notify the Contracting Officer so that the
Government has an opportunity to review any assertion that the
reduction in benefits does not impact allocable costs or result in a
refund or credit due the Government.
Changes for Clarity
For purposes of enhancing clarity and structure, the Councils have
revised the language at FAR 31.205-6(o)(2) and (3). In addition, upon
further review, the Councils have determined that the language at FAR
31.205-6(o)(3) applies to all of (o)(2), and not just (o)(2)(iii).
Therefore, the language that was moved to FAR 31.205-6(o)(2)(iii)(D) in
the proposed rule, has been moved back to FAR 31.205-6(o)(3) in the
final rule.
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.
B. 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.
C. 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.
[[Page 33673]]
Dated: May 27, 2005.
Julia B. Wise,
Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 31 and 52 as set forth
below:
0
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
0
2. Amend section 31.205-6 by revising paragraphs (k), (o)(2), (o)(3),
and (o)(5) to read as follows:
31.205-6 Compensation for personal services.
* * * * *
(k) Deferred compensation other than pensions. The costs of
deferred compensation awards are allowable subject to the following
limitations:
(1) The costs shall be measured, assigned, and allocated in
accordance with 48 CFR 9904.415, Accounting for the Cost of Deferred
Compensation.
(2) The costs of deferred compensation awards are unallowable if
the awards are made in periods subsequent to the period when the work
being remunerated was performed.
* * * * *
(o) Postretirement benefits other than pensions (PRB).
* * * * *
(2) To be allowable, PRB costs shall be incurred pursuant to law,
employer-employee agreement, or an established policy of the
contractor, and shall comply with paragraphs (o)(2)(i), (ii), or (iii)
of this subsection.
(i) Pay-as-you-go. PRB costs are not accrued during the working
lives of employees. Costs are assigned to the period in which--
(A) Benefits are actually provided; or
(B) The costs are paid to an insurer, provider, or other recipient
for current year benefits or premiums.
(ii) Terminal funding. PRB costs are not accrued during the working
lives of the employees.
(A) Terminal funding occurs when the entire PRB liability is paid
in a lump sum upon the termination of employees (or upon conversion to
such a terminal-funded plan) to an insurer or trustee to establish and
maintain a fund or reserve for the sole purpose of providing PRB to
retirees.
(B) Terminal funded costs shall be amortized over a period of 15
years.
(iii) Accrual basis. PRB costs are accrued during the working lives
of employees. Accrued PRB costs shall be--
(A) Measured and assigned in accordance with generally accepted
accounting principles. However, the portion of PRB costs attributable
to the transition obligation assigned to the current year that is in
excess of the amount assignable under the delayed recognition
methodology described in paragraphs 112 and 113 of Financial Accounting
Standards Board Statement 106 is unallowable. The transition obligation
is defined in Statement 106, paragraph 110;
(B) Paid to an insurer or trustee to establish and maintain a fund
or reserve for the sole purpose of providing PRB to retirees; and
(C) Calculated in accordance with generally accepted actuarial
principles and practices as promulgated by the Actuarial Standards
Board.
(3) To be allowable, PRB costs must be funded by the time set for
filing the Federal income tax return or any extension thereof, or paid
to an insurer, provider, or other recipient by the time set for filing
the Federal income tax return or extension thereof. PRB costs assigned
to the current year, but not funded, paid or otherwise liquidated by
the tax return due date as extended are not allowable in any subsequent
year.
* * * * *
(5) The Government shall receive an equitable share of any amount
of previously funded PRB costs which revert or inure to the contractor.
Such equitable share shall reflect the Government's previous
participation in PRB costs through those contracts for which cost or
pricing data were required or which were subject to Subpart 31.2.
* * * * *
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
3. Revise section 52.215-18 to read as follows:
52.215-18 Reversion or Adjustment of Plans for Postretirement Benefits
(PRB) Other Than Pensions.
As prescribed in 15.408(j), insert the following clause:
REVERSION OR ADJUSTMENT OF PLANS FOR POSTRETIREMENT BENEFITS
(PRB) OTHER THAN PENSIONS (JUL 2005)
(a) The Contractor shall promptly notify the Contracting Officer
in writing when the Contractor determines that it will terminate or
reduce the benefits of a PRB plan.
(b) If PRB fund assets revert or inure to the Contractor, or are
constructively received by it under a plan termination or otherwise,
the Contractor shall make a refund or give a credit to the
Government for its equitable share as required by 31.205-6(o)(5) of
the Federal Acquisition Regulation (FAR). When determining or
agreeing on the method for recovery of the Government's equitable
share, the contracting parties should consider the following
methods: cost reduction, amortizing the credit over a number of
years (with appropriate interest), cash refund, or some other agreed
upon method. Should the parties be unable to agree on the method for
recovery of the Government's equitable share, through good faith
negotiations, the Contracting Officer shall designate the method of
recovery.
(c) The Contractor shall insert the substance of this clause in
all subcontracts that meet the applicability requirements of FAR
15.408(j).
(End of clause)
[FR Doc. 05-11185 Filed 6-7-05; 8:45 am]