[Federal Register: December 10, 2009 (Volume 74, Number 236)]
[Rules and Regulations]
[Page 65608-65612]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10de09-24]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-38; FAR Case 2006-021; Item V; Docket 2009-0043, Sequence 1]
RIN 9000-AK84
Federal Acquisition Regulation; FAR Case 2006-021, Postretirement
Benefits (PRB), FAS 106
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
[[Page 65609]]
Acquisition Regulations Council (Councils) are issuing a final rule
amending the Federal Acquisition Regulation (FAR) to permit the
contractor to measure accrued PRB costs using either the criteria in
Internal Revenue Code (IRC) 419 or the criteria in Financial Accounting
Standard (FAS) 106.
DATES: Effective Date: January 11, 2010.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Edward N. Chambers, Procurement Analyst, at (202) 501-3221. For
information pertaining to status or publication schedules, contact the
Regulatory Secretariat at (202) 501-4755. Please cite FAC 2005-38, FAR
case 2006-021.
SUPPLEMENTARY INFORMATION:
A. Background
FAR 31.205-6(o) allows contractors to choose among three different
accounting methods for PRB costs; pay-as-you-go (cash basis), terminal
funding, and accrual basis.
When the accrual basis is used, the FAR currently requires that
costs must be measured based on the requirements of Financial
Accounting Standard (FAS) 106.
However, the tax-deductible amount that is contributed to the
retiree benefit trust, which is part of a welfare benefit plan, is
determined using Internal Revenue Code (IRC) (Title 26 of the United
States Code) sections 419 and 419A, which has different measurement
criteria than FAS 106. As a result, the FAS 106 amount can often exceed
the costs measured under IRC sections 419 and 419A, and contractors
that choose to accrue PRB costs for Government reimbursement face a
dilemma: whether to fund the entire FAS 106 amount to obtain Government
reimbursement of the costs, regardless of tax implications; or fund
only the tax deductible amount and not be reimbursed for the entire FAS
106 amount under their Government contracts.
Consequently, DoD, GSA, and NASA published a proposed rule in the
Federal Register at 72 FR 64185, November 15, 2007 to address this
matter.
The Councils are amending FAR 31.205-6(o) to alleviate this
dilemma. This amendment would provide the contractor an option of
measuring accrued PRB costs using criteria based on IRC sections 419
and 419A rather than FAS 106, thereby permitting the contractor to fund
the entire tax deductible amount without having a portion potentially
disallowed because it did not meet the FAR's current measurement
criteria. The Councils note that this amendment will not change the
total measured PRB costs, i.e., the total measured PRB costs over the
life of the PRB plan would be the same whether the contractor chose to
apply the criteria in FAS 106 or IRC sections 419 and 419A.
The Councils note that in this final rule the Government will not
pay higher PRB costs, since the resulting difference from contractors
previously funding the lower IRC amount rather than the full FAS amount
will continue to be an unallowable cost. This final rule does permit
contractors to electively switch to the IRC 419 accrual basis and avoid
any current or future disallowances.
B. Public Comments
Public comments were received from two industry associations and
one contractor.
The commenters made specific remarks but generally agreed with the
purpose of the proposed rule.
One commenter wrote that they:
``generally agree with the concept of revising FAR 31.205-6(o) to
better align FAR allowability provisions for Postretirement Benefit
(PRB) Plans accounted for on an accrual basis with payments made to
benefit trusts for tax purposes. We see this as a positive step toward
allowing appropriate flexibility and equity in measuring, assigning and
allocating allowable PRB costs.''
Another commented:
``We support the Councils' proposal to amend the Federal
Acquisition Regulation 31.205-6(o) (``FAR'') to permit contractors to
measure postretirement benefit (``PRB'') costs using either the
criteria in Internal Revenue Code section 419 (``IRC'') or the criteria
in the Statement of Financial Accounting Standards No. 106 (``FAS'').''
Specific Comments:
Comment 1: Two commenters objected to the 15 year minimum
amortization period for PRB costs, stating:
``The proposed rule specifying that assignment of PRB costs be
made over ``the working lives of employees or fifteen years, whichever
is longer'' may not be appropriate. In our opinion, the proposed FAR
requirement for costs measured in accordance with the deductibility
measurement under the Internal Revenue Code (IRC) Section 419/419A has
the potential for mismatching PRB costs with the underlying causal
activity, that is, the labor of active employees covered by PRB plans.
The IRC requires that the costs be assigned over the working lives of
the employees, whereas the proposed rule would require that the costs
be assigned over the working lives of employees or fifteen years,
whichever is longer. We are concerned about extending the assignment of
costs beyond the working lives of employees, as this would cause costs
to be charged to contracts that are not getting the benefit of those
employees' services.''
Response: The Councils believe the language in the proposed rule is
appropriate. Many PRB plans cover no or few active employees, as
contractors have closed their PRB plans to new entrants. FAS 106
requires that if a plan is comprised predominantly of inactive
participants, then the cost should be spread over the future life
expectancy of the inactive employees. FAR 31.205-6(o)(2)(ii) requires
that if terminal funding is used then the liability must be spread over
15 years. For contractors who elect to use the proposed alternative
accrual accounting method, the Councils believe that the FAS 106
requirement that plans predominantly comprised of inactive participants
be spread over future periods should be maintained. For consistency,
the proposed rule uses the same amortized recognition as required for
terminally funded plans. The proposed rule adopted a simple ``greater-
of'' rule to avoid any disputes concerning when a plan is predominantly
comprised of inactive employees.
However, if the plan population comprises only inactive
participants, the cost shall be spread over the average future life
expectancy of the participants. This ensures that the accruals do not
extend beyond the period when benefits are paid and the trust is
dissolved. Therefore, the final rule revises FAR 31.205-
6(o)(2)(iii)(A)(2)(ii) to state: ``However, if the plan is comprised of
inactive participants only, the cost shall be spread over the average
future life expectancy of the participants.''
Comment 2: The proposed rule does not address several issues of
assignment of credits to a period that can arise when the accrual is
based on FAS 106.
Two commenters remarked as follows regarding contract credits that
might arise:
``Measuring PRB costs in accordance with FAS 106 can result in
credits being assigned to cost accounting periods. FAS 106 dictates
these credits be immediately assigned to cost accounting periods.
However, contractors have no ability to extract irrevocably funded PRB
contributions from their trusts. * * *''
Commenters were also concerned that the proposed rule does not
address conflicts between the FAR and FAS 106
[[Page 65610]]
when there is a curtailment, settlement or payment of ``special
termination benefits.'' As a commenter noted:
``In the event of a curtailment, settlement or payment of
``special termination benefits'' (i.e., early retirement enhancements,
FAS 106 mandates immediate recognition. This assignment of income was
also one of the issues with FAS 106, which the failed promulgation of
CAS 419 sought to moderate.''
On the other hand, another commenter correctly noted that the
proposed rule permits a contractor to elect to account for its PRB
costs following the welfare benefit fund provisions of the IRC as an
alternative to the current rule that limits accrual accounting to the
provisions of FAS 106. The commenter discusses the advantages of having
a choice as follows:
``Under existing FAR rules, contractors under accrual basis of
accounting must use FAS 106 (so long as the transition obligation cost
is amortized) for measuring PRB costs and fund this FAR expense to the
PRB plan in order for the FAS expense to be considered an allowable
cost.
``We believe this amendment will promote simplification of the
funding of PRB plans by avoiding the dilemma of whether to fund the IRC
limit or the FAS expense when there is conflict with each other. The
contractor would not need to be worried about running afoul of tax
rules or under-billing the contract.
``In addition, one advantage of permitting the PRB cost to be
either FAS or IRC basis is that in the first year of a PRB funded plan,
the amendment gives the contractor the flexibility to fund the larger
of the two bases in order to lower PRB costs in the future as assets
grow with investment returns. Done consistently under the same
accounting basis, this approach would benefit the contract with lower
PRB costs in the long run rather than limiting funding due the current
dilemma of funding FAS or IRC.
``And finally, the amendment will promote an equitable measure of
allowable PRB costs during the life of the PRB plan. Whether choosing
FAS or IRC basis for funding, both methods would arrive at the same
aggregate allowable cost over the life of the PRB plan.''
Response: The Councils believe that the issues regarding credits,
curtailments, and settlements do not need to be addressed in the
proposed rule. No evidence has been presented that this issue has been
a problem. Furthermore, these issues are outside the scope of this
case. As noted in the background section of Federal Register notice:
``* * * This amendment would provide the contractor an option of
measuring accrued PRB costs using criteria based on IRC 419 rather than
FAS 106, thereby permitting the contractor to fund the entire tax
deductible amount without having a portion disallowed because it did
not meet the FAR's current measurement criteria. * * *''
The proposed rule provides an alternative for measuring PRB costs
on an accrual accounting basis. The proposed rule and Federal Register
notice do not address the existing provisions which, first published as
56 FR 29127 on June 25, 1991, adopted generally accepted accounting
principles (FAS 106). The original rule was amended by 56 FR 41738 on
August 22, 1991 to add a limitation only on the choice of recognizing
the transition obligation.
Comment 3: Commenters expressed a concern with the provision
allowing use of a healthcare inflation assumption as follows:
``The proposed rule's specific authorization of the use of a
healthcare inflation assumption for measurement of costs which would
otherwise be in accordance with IRC Sections 419/419A creates a
mismatch of FAR allowable costs and IRS deductibility limitations. If
the intent of the rule was to better align funding with FAR
requirements, we find this provision, while not detrimental, is
inconsistent with the stated purpose of the proposed rule, which is to
better align the FAR allowability rules with the IRC for those
contractors that choose to use IRC 419/419a.''
Response: The Councils believe that the proposed rule should be
revised to clarify the intent of this language. Generally accepted
accounting principles currently require the use of a healthcare
inflation assumption. For consistency, the intent of the proposed rule
was to require use of a health care assumption unless the IRC welfare
benefit fund rules prohibited it. The Councils are revising the wording
in the proposed rule to assure clarity on this issue. Thus, the final
rule revises FAR 31.205-6(o)(2)(iii)(A)(2)(i) to state that the costs
shall ``be measured using reasonable actuarial assumptions, which shall
include a healthcare inflation assumption unless prohibited by the
Internal Revenue Code provisions governing welfare benefit funds.''
Comment 4: Finally, two commenters opined that the requirement that
assets be restricted is unnecessary. One of the commenters wrote: ``Our
recommended changes to the proposed rule are shown in Attachment I. It
should be noted that we have also proposed the elimination of the last
sentence in 31.205-6(o)(2)(iii)(B). We do not believe that this asset
restriction language is necessary to protect the Government's
interests.''
Response: The Councils disagree with the commenter. The Councils
believe that the Government must assure there is adequate protection of
the assets. If the fund holding the PRB plan can be cancelled or
diverted to other purposes, then deposits to the fund can not be
recognized as incurred. Moreover, this language is consistent with the
FAS 106 definition of ``plan assets,'' and with the IRC 419/419A
criteria for tax-exempt funding.
The Councils note that even if an appropriately restricted fund is
used, once all obligations for benefits have been settled the remaining
assets may revert to the contractor or else inure to the contractor's
benefit if diverted to provide other employee benefits. However, the
Councils believe that the Government's interests are protected by
existing FAR 31.205-6(o)(5) which states:
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.
Comment 5: One commenter expressed its concern with how the
transition between accounting methods would be accomplished, writing:
``However, we are not certain if this proposal addresses changes
of accounting methods, particularly from FAS to IRC basis; whether such
resulting costs will be fully allowed immediately or transitioned over
a period of time. Under the concept that both methods should yield the
same aggregate cost over time, an immediate change of accounting method
may misalign this relationship, and thus, new transition rules may be
designed to preserve the equality. If this occurs, we believe it would
be advisable for the Councils to promulgate new transition rules--
preferably short-term ones in order to avoid prolonged complexity in
cost calculations for many years, and incorporate them in FAR Part
31.205-6(o).''
This commenter further explained:
``FAS 106 allows either the immediate expensing or the amortization
of the transition obligation. However, for Government contract costing
purposes,
[[Page 65611]]
the transition obligation must be capitalized and subsequently
amortized. The parenthetical clause ``so long as the transition
obligation cost is amortized'' could be more clearly stated as
``provided the transition obligation cost is amortized rather than
expensed.''''
The commenter also noted that actuaries and mathematicians have
stated that both accrual accounting methods would result in the same
aggregate costs over the life of the PRB plan when either method is
applied to a separate PRB plan as of ``day one.'' But they then
expressed their concern that changing the accounting method
``midstream'' might cause misalignment of costs due to differences of
timing arising from the two computational methodologies.
Finally they expanded their written comment by observing that the
rule will permit a change of accrual accounting method and that this
transition will result in a higher or lower amount of PRB costs in
subsequent years than would have resulted without a change in methods.
The commenter explained they were asking if there will be a ``phase-in
period'' when changing methods of accounting for PRB costs, i.e., would
the change of costs be recognized in a single accounting period or
amortized over future periods.
Response: The Councils agree that the language in the proposed rule
should be revised to address the transition issue.
The Councils believe that the existing FAR 31.205-6(o)(2)(iii)
provision regarding recognition of the FAS 106 Transition Obligation
clearly articulates that the transition obligation cost is amortized
rather than expensed.
The comment does raise two issues. First, a paraphrase of the
existing policy at FAR 31.205-6(o)(2)(iii)(A) follows:
Accrued PRB costs shall be measured and assigned in accordance with
generally accepted accounting principles, provided 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;
The cost impact of the change in cost accounting practice is
addressed by the Cost Accounting Standards, rather than the FAR, for
those contracts covered by the CAS. Under the CAS this would be a
unilateral change in cost accounting practice; as such, the Government
would not pay any increased costs resulting from this change unless the
contracting officer has determined it to be a desirable change. For
those contracts not covered by the CAS, the FAR does not provide for
price adjustments resulting from a change in cost accounting practice.
The Councils do not believe this change is so unique as to require an
alteration to this long-standing set of regulations regarding the
treatment of changes in cost accounting practice. Thus, the language in
the proposed rule has not been revised to address this issue.
The second issue regards the treatment of the change in actuarial
liability and normal cost and recognition of accruals assigned to prior
periods. Language has been added at FAR 31.205-6(o)(2)(iii)(G) to
require that the Government has an opportunity to review and approve
how the change in accounting method will be implemented. The new
provision at FAR 31.205-6(o)(2)(iii)(G) reads:
(G) Comply with the following when changing from one accrual
accounting method to another: the contractor shall--
(1) Treat the change in the unfunded actuarial liability (unfunded
accumulated postretirement benefit obligation) as a gain or loss; and
(2) Present an analysis demonstrating that all costs assigned to
prior periods have been accounted for in accordance with subparagraphs
(D), (E), and (F) to ensure that no duplicate recovery of costs exists.
Any duplicate recovery of costs due to the change from one method to
another is unallowable. The analysis and new accrual accounting method
may be a subject appropriate for an advance agreement in accordance
with 31.109.
It is clear that the final rule must address how the transition
from one cost method to another is accomplished. As one commenter
observed, at ``day one'' the cost of the PRB plan, on a present value
basis, will be the same under any of the methods permitted by FAR
31.205-6(o). However, after day one, this equivalence can only be
maintained if there is a full accounting for costs assigned to prior
periods, adjusted for interest, benefit payments, and administrative
expenses. Only if prior funding and unfunded accrued costs are fully
recognized will the costs assigned to future periods produce equivalent
results, on a present value basis, over the life of the PRB plan. And
to avoid any misunderstandings, the final rule at FAR 31.205-
6(o)(2)(iii)(D) makes it clear that any prior period unfunded accrual
becomes and remains unallowable under either accrual accounting method.
FAR 31.205-6(o)(2)(iii)(D) reads:
(D) Eliminate from costs of current and future periods the
accumulated value of any prior period costs that were unallowable in
accordance with paragraph (3), adjusted for interest under
paragraph(4).
The assets do fully account for prior accrued costs that were
funded and the accumulated value of unallowable costs fully account for
any prior unfunded accruals. To the extent that prior contract costs
were always based on accrual accounting, prior accruals can be
recognized in the current value of the plan assets plus the accumulated
value of prior unallowable costs, adjusted for interest cost due to
delayed funding.
And, finally, some contractors may have made deposits to voluntary
employee benefit associations or other trusts in prior periods but used
pay-as-you-go or terminal funding for contract costing purposes during
those prior periods. To the extent that assets are attributable to
costs that have never been recognized as Government contract cost, such
assets must be excluded from the assets that have been accumulated by
prior assigned costs. Otherwise, the contractor would be inequitably
prevented from claiming a cost that has not yet been reimbursed.
Therefore, to ensure that prior funded accrued costs are fully
recognized, paragraph FAR 31.205-6(o)(2)(iii)(E) has been added to the
final rule. This provision reads:
(E) Calculate the unfunded actuarial liability (unfunded
accumulated postretirement benefit obligation) using the market (fair)
value of assets that have been accumulated by funding costs assigned to
prior periods for contract accounting purposes.
Likewise, FAR 31.205-6(o)(2)(iii)(F) specifies that assets
accumulated by deposits that were not used to claim contract costs are
identified as prepayment credits and excluded from the plan assets used
to determine the unfunded actuarial liability. FAR 31.205-
6(o)(2)(iii)(F) reads:
(F) Recognize as a prepayment credit the market (fair) value of
assets that were accumulated by deposits or contributions that were not
used to fund costs assigned to previous periods for contract accounting
purposes.
C. Regulatory Planning and Review
This is a significant regulatory action and, therefore, was subject
to review under Section 6(b) of Executive Order 12866, Regulatory
Planning and Review, dated September 30, 1933. This rule is not a major
rule under 5 U.S.C. 804.
[[Page 65612]]
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 small entities do
not accrue PRB costs for Government contract costing purposes.
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.
chapter 35, et seq.
List of Subjects in 48 CFR Part 31
Government procurement.
Dated: November 30, 2009.
Al Matera,
Director, Acquisition Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
0
1. The authority citation for 48 CFR part 31 continues to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
0
2. Amend section 31.001 by adding, in alphabetical order, the
definition ``welfare benefit fund'' to read as follows:
31.001 Definitions.
* * * * *
Welfare benefit fund means a trust or organization which receives
and accumulates assets to be used either for the payment of
postretirement benefits, or for the purchase of such benefits, provided
such accumulated assets form a part of a postretirement benefit plan.
0
3. Amend section 31.205-6 by revising paragraph (o)(2)(iii) to read as
follows:
31.205-6 Compensation for personal services.
* * * * *
(o) * * *
(2) * * *
(iii) Accrual basis. PRB costs are accrued during the working lives
of employees. Accrued PRB costs shall comply with the following:
(A) Be measured and assigned in accordance with one of the
following two methods:
(1) Generally accepted accounting principles, provided 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; or
(2) Contributions to a welfare benefit fund determined in
accordance with applicable Internal Revenue Code. Allowable PRB costs
based on such contributions shall--
(i) Be measured using reasonable actuarial assumptions, which shall
include a healthcare inflation assumption unless prohibited by the
Internal Revenue Code provisions governing welfare benefit funds;
(ii) Be assigned to accounting periods on the basis of the average
working lives of active employees covered by the PRB plan or a 15 year
period, whichever period is longer. However, if the plan is comprised
of inactive participants only, the cost shall be spread over the
average future life expectancy of the participants; and
(iii) Exclude Federal income taxes, whether incurred by the fund or
the contractor (including any increase in PRB costs associated with
such taxes), unless the fund holding the plan assets is tax-exempt
under the provisions of 26 USC Sec. 501(c).
(B) Be paid to an insurer or trustee to establish and maintain a
fund or reserve for the sole purpose of providing PRB to retirees. The
assets shall be segregated in the trust, or otherwise effectively
restricted, so that they cannot be used by the employer for other
purposes.
(C) Be calculated in accordance with generally accepted actuarial
principles and practices as promulgated by the Actuarial Standards
Board.
(D) Eliminate from costs of current and future periods the
accumulated value of any prior period costs that were unallowable in
accordance with paragraph (o)(3) of this section, adjusted for interest
under paragraph (o)(4) of this section.
(E) Calculate the unfunded actuarial liability (unfunded
accumulated postretirement benefit obligation) using the market (fair)
value of assets that have been accumulated by funding costs assigned to
prior periods for contract accounting purposes.
(F) Recognize as a prepayment credit the market (fair) value of
assets that were accumulated by deposits or contributions that were not
used to fund costs assigned to previous periods for contract accounting
purposes.
(G) Comply with the following when changing from one accrual
accounting method to another: the contractor shall--
(1) Treat the change in the unfunded actuarial liability (unfunded
accumulated postretirement benefit obligation) as a gain or loss; and
(2) Present an analysis demonstrating that all costs assigned to
prior periods have been accounted for in accordance with paragraphs
(o)(2)(iii)(D), (E), and (F) of this section to ensure that no
duplicate recovery of costs exists. Any duplicate recovery of costs due
to the change from one method to another is unallowable. The analysis
and new accrual accounting method may be a subject appropriate for an
advance agreement in accordance with 31.109.
* * * * *
[FR Doc. E9-28934 Filed 12-9-09; 8:45 am]
BILLING CODE 6820-EP-S