16534 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

OFFICE OF MANAGEMENT AND

BUDGET

Office of Federal Procurement Policy

48 CFR Parts 9903, 9904

Cost Accounting Standards Board;

Cost Accounting Standards for

Composition, Measurement,

Adjustment, and Allocation of Pension

Costs

AGENCY: Cost Accounting Standards

Board, Office of Federal Procurement

Policy, OMB.

ACTION: Final rule.

SUMMARY: The Office of Federal

Procurement Policy, Cost Accounting

Standards Board (CASB), is revising the

Cost Accounting Standards relating to

accounting for pension costs under

negotiated government contracts.

Section 26(g)(1) of the Office of Federal

Procurement Policy Act, 41 U.S.C.

422(g)(1), requires that the Board, when

promulgating any new or revised Cost

Accounting Standard, publish a final

rule. This final rule addresses certain

problems that have emerged since the

original promulgation (in the 1970’s) of

the pension Standards: CAS 9904.412—

‘‘Cost Accounting Standard for

composition and measurement of

pension cost,’’ and CAS 9904.413,

‘‘Adjustment and allocation of pension

cost.’’ The changes address pension cost

recognition for qualified pension plans

subject to the tax-deductibility limits of

the Federal Tax Code, problems

associated with pension plans that are

not qualified plans under the Federal

Tax Code, and problems associated with

overfunded pension plans.

EFFECTIVE DATE: March 30, 1995.

FOR FURTHER INFORMATION CONTACT:

Richard C. Loeb, Executive Secretary,

Cost Accounting Standards Board

(telephone: 202–395–3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

The Cost Accounting Standards

Board’s rules and regulations are

codified at 48 CFR Chapter 99. Section

26(g)(1) of the Office of Federal

Procurement Policy Act, 41 U.S.C.

422(g)(1), requires that the Board, prior

to the establishment of any new or

revised Cost Accounting Standard,

complete a prescribed rulemaking

process. This process consists of the

following four steps:

1. Consult with interested persons

concerning the advantages,

disadvantages and improvements

anticipated in the pricing and

administration of government contracts

as a result of a proposed Standard.

2. Promulgate an Advance Notice of

Proposed Rulemaking.

3. Promulgate a Notice of Proposed

Rulemaking.

4. Promulgate a final rule.

This final rule is step four in the four

step process.

B. Background

Prior Promulgations: The previous

CASB published CAS 9904.412—‘‘Cost

Accounting Standard for Composition

and Measurement of Pension Cost’’ on

September 24, 1975 and CAS

9904.413—‘‘Adjustment and Allocation

of Pension Cost’’ on July 20, 1977. The

effective dates of these Standards were

January 1, 1976 and March 10, 1978,

respectively. These Standards were

developed in the early years of the

applicability of the Employee

Retirement Income Security Act

(ERISA). At that time, the problems on

which this final rule focuses were not

significant. Adequate or minimum,

rather than excess funding, concerned

pension managers of that era. Over the

intervening years, government

contractors’ pension plans have become

more adequately funded. At the same

time, limits on the maximum amount of

benefits that can be provided by a

qualified pension plan have been

considerably constrained in real terms.

At the time the previous coverage was

promulgated, there was little or no

inconsistency between an orderly

method of accruing pension costs and a

contractor’s ability to concurrently fund

those accruals.

The Tax Reform Act of 1986 amended

the Federal Tax Code to impose an

excise tax on contributions in excess of

the maximum tax-deductible amount for

qualified pension plans. Immediately

thereafter, the Omnibus Budget

Reconciliation Act of 1987 (OBRA 87)

added a second, often more restrictive

full-funding limitation on the

determination of the tax-deductible

amount. To avoid the incurrence of an

unallowable excise tax, government

contractors generally did not fund any

accrued pension cost in excess of the

maximum tax-deductible pension

contribution. However, portions of

accrued pension costs that were not

funded were not allowable.

Furthermore, because the Standards

prohibited the reassignment of accrued

but unfunded pension costs, contractors

could not allocate such costs to

contracts when funded in future

periods. On April 8, 1991, the Board

issued a ‘‘Memorandum for Agency

Senior Procurement Executives’’ which

granted temporary authority to reassign

to future periods pension costs that

were not funded in the year of accrual

because they lacked tax-deductibility.

An overwhelming majority of

respondents to the Board’s November

1990 solicitation of agenda items gave a

high priority to the problems associated

with fully-funded qualified plans and

those connected with the growing

universe of nonqualified pension plans.

The Board sought public comments

with a set of Staff Discussion Papers. A

Paper addressing the ‘‘pay-as-you-go’’ or

unfunded plan issue was published by

the Board on June 17, 1991. See 56 FR

27780. A Paper seeking views on the

‘‘full funding’’ problem was published

on August 19, 1991. See 56 FR 41151.

On January 26, 1993, after consideration

of the public comments received on

these Staff Discussion Papers, the CASB

published an Advance Notice of

Proposed Rulemaking (ANPRM) in the

Federal Register, 58 FR 6103. The

ANPRM set forth proposed amendments

to deal with both the unfunded pension

plan issue related to nonqualified

pension plans and the ‘‘full-funding’’

problem of qualified plans.

In the public comments to the

ANPRM, the Board found two areas of

concern particularly persuasive. These

dealt with the ANPRM lacking any fullfunding limitation, and the complexities

and problems introduced by drastic

revisions to the amortization period for

actuarial gains and losses.

The ANPRM was premised on the

idea that, by reducing such amortization

periods, there would be only a relatively

short time lag between cost/price

recognition and the eventual funding.

This premise, as pointed out by the

commenters, was unsound. Because the

ANPRM lacked any full-funding

limitation, it could result in recognition

of pension costs in years in which

surplus assets existed. This is of

particular concern to the Board because

of the number of contractors that now

have overfunded plans.

The Board also determined that

changing amortization periods, in order

to improve cost predictability, was

unnecessary. Most commenters believed

that a satisfactory degree of

predictability could be achieved under

the existing Standards’ amortization

rules.

On November 5, 1993, after

consideration of the public comments

received on the ANPRM, the CASB

published a Notice of Proposed

Rulemaking (NPRM), 58 FR 58999. The

NPRM set forth proposed amendments

to resolve the regulatory conflict for

qualified pension plans by

incorporating into the Standards the

ERISA full-funding limitation, while
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16535

maintaining the current amortization

rules. To address questions concerning

overfunded pension plans, the Board

added coverage to CAS 9904.413

defining what constitutes a segment

closing and providing greater specificity

regarding accounting for pension costs

when segments are closed or pension

plans are terminated. The NPRM

retained the accounting approach for

nonqualified pension plans included in

the ANPRM.

The public comments received in

response to the NPRM raised some new

issues. In the final rule, the Board

addresses these issues focusing on three

areas in particular. These deal with the

restriction of accrual accounting by an

outside limit, incomplete and unclear

coverage for segment closings and

pension plan terminations, and the lack

of accounting for differences between

accrued and funded pension costs. A

majority of public comments expressed

strong opinions, which were divided

between support for accrual accounting

and support for funding as the basis for

determining allocable contract costs. In

addition, numerous public comments

were submitted concerning specific

actuarial and technical issues.

The final rule reflects these and other

concerns expressed by commenters to

the NPRM. In addition, certain pension

actuaries and the Pension Committee of

the American Academy of Actuaries

submitted suggestions to address the

actuarial soundness of the final rule.

Termination of Temporary Waiver

Authority

The final rule removes the regulatory

conflict between the funding limits of

ERISA and the period assignment

provisions of CAS 9904.412–40(c).

Therefore, the Board terminates the

temporary waiver authority granted in

the ‘‘Memorandum for Agency Senior

Procurement Executives’’ issued on

April 8, 1991.

Summary of Proposed Amendments

The Board’s final rule provides for

accrual accounting to initially compute

the pension cost for a cost accounting

period. The Board also recognizes that

funding of such cost serves to

substantiate the cost and adds to the

verifiability of the measurement of cost.

For assignment purposes, the computed

cost is subject to a corridor with zero as

the floor and the maximum taxdeductible amount, where applicable, as

the ceiling. The computed cost is also

subject to an assignable cost limitation

so that cost will not be assigned to an

overfunded pension plan. The cost

assigned to the period must be funded

as specified in the Standard to be

allocable to final cost objectives. This

four-step process of computing,

assigning, funding, and allocating

pension cost applies to both qualified

and nonqualified defined-benefit

pension plans.

This final rule affirms the

complementary funding approach for

nonqualified plans that takes into

account Federal income tax

deductibility. The Board views the

complementary funding approach as a

reasonable compromise addressing the

Government’s concern that claimed cost

be substantiated by funding while

providing contractors with relief from

adverse cash flow consequences of

funding a cost that is not tax-deductible.

The Board decided that tax-exempt

entities do not experience such cash

flow disadvantages, and therefore, they

are required to fund all pension cost

that is assigned to the period.

For nonqualified defined-benefit

plans that do not meet the

communication, nonforfeiture, or

funding criteria, or for which the

contractor chooses to use the pay-asyou-go method, the assigned cost is

equal to the amount of benefits paid in

that period. To promote consistency

between periods, this final rule requires

that any lump sum settlements or

annuity purchases be amortized.

For qualified defined-benefit pension

plans, the conflict between the

Standards and ERISA is removed. The

cost assigned to a period is limited to

the accrued cost that can be funded

without penalizing a contractor. A $0

floor was added to the corridor to

eliminate any inequity between a

requirement to credit negative costs to

contracts and the contractor’s inability

to make withdrawal from the funding

agency.

By not requiring the assignment of

negative pension cost, the Board has

deferred the Government’s recovery of

excess assets in overfunded plans. This

delay is appropriate for on-going

pension plans when no assets have

reverted or inured to the contractor. The

effect of this delay has been mitigated

by clarifying and strengthening the

Government’s rights or obligations for a

cost adjustment when there is a segment

closing, plan termination, or freezing of

benefits.

Portions of pension costs computed

for a period that fall outside of the

assignable cost corridor ($0 floor and a

ceiling based on tax-deductibility) are

reassigned to future periods, together

with an interest adjustment, as portions

of unfunded actuarial liability and are

identified as assignable cost deficits or

assignable cost credits, respectively.

Unfunded portions of assigned cost

continue to be separately identified and

eliminated from future cost

computations.

For nonqualified plans, a clarification

in the final rule is made by the addition

of the concept of ‘‘permitted unfunded

accruals’’; the portion of the computed

and assigned cost of a nonqualified plan

exempted from current funding based

on the tax rate offset. These amounts are

updated and described as the

accumulated value of permitted

unfunded accruals. All such previously

assigned and allocated costs, adjusted

for earnings, expenses, and benefit

payments, are treated as plan assets

retained by the contractor for purposes

of assessing the funding status of the

plan.

The fundamental requirement for

assignment of pension cost has been

expanded to include a ‘‘CAS balance

test’’ modeled after the Internal Revenue

Service ‘‘equation of balance’’. The CAS

balance test requires that the entire

actuarial accrued liability be accounted

for by the assets or the portions of

unfunded actuarial liability identified

under subparagraphs 9904.412–50(a) (1)

and (2). For the CAS balance test to

function, the definition of unfunded

actuarial liability is revised to clarify

that an actuarial surplus exists

whenever the actuarial value of assets

exceeds the actuarial accrued liability.

The accumulated value of prepayment

credits, that is, funds that have yet to be

applied to assigned costs, is excluded

from the assets.

Technical corrections have been made

to enhance the actuarial completeness of

the final rule. Consistent with recent

changes in ERISA and Generally

Accepted Accounting Principles, as

embodied in Statement 87 of the

Financial Accounting Standards Board,

and reflecting the sophistication of

modern actuarial valuations, this final

rule requires the use of explicit actuarial

assumptions that are individually

reasonable. Revisions have been made

to distinguish the actuarial value of

assets used for computations of on-going

pension costs from the market value of

assets used for current period

adjustments. In addition, Generally

Accepted Actuarial Principles and

Practices as promulgated by the

Actuarial Standards Board were

considered in the drafting of this final

rule.

Finally, this rule implements an

amendment to the CAS applicability

and exemption requirements contained

in Section 9903.201–1(b)(11). This

amendment is made necessary due to

recent statutory changes contained in

the Federal Acquisition Streamlining

Act, Public Law 103–355.
16536 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

Transition

The Board is aware that contracting

officers and contractors have negotiated

many pragmatic agreements while

awaiting the promulgation of this final

rule. The transition methods and

illustrations of 9904.412–64 and

9904.413–64 are presented as model

solutions. The Board expects that

modifications of these methods and

alternate approaches may be necessary

to ensure equity for both the

Government and contractors. Cognizant

Federal officials are encouraged to ratify

existing agreements that comport with

the concepts of this final rule. For prior

agreements or interim solutions based

on a ‘‘fresh-start’’ amortization of the

unfunded actuarial liability of qualified

defined-benefit pension plans, the

cognizant Federal official should verify

that no portion of unfunded actuarial

liability for prior unfunded costs that

could have been funded, or, for other

previously disallowed costs, have in fact

been inadvertently included in pension

costs.

The transition rules are constructed

on a few basic concepts. Prior assigned

costs of qualified plans, which were

neither funded nor allocated to

contracts because they lacked taxdeductibility, may be assigned, with

interest, to periods beginning on or after

the effective date of this rule.

Conversely, unfunded accrued costs of

nonqualified plans allocated to

contracts should be treated as assets,

updated for earnings and benefit

payments, and applied against either the

actuarial accrued liability used to

compute cost accruals or the benefits

paid under the pay-as-you-go method.

C. Paperwork Reduction Act

The Paperwork Reduction Act, Public

Law 96–511, does not apply to this final

rule, because this rule imposes no

paperwork burden on offerors, affected

contractors and subcontractors, or

members of the public which requires

the approval of OMB under 44 U.S.C.

3501, et seq.

D. Executive Order 12866 and the

Regulatory Flexibility Act

The economic impact of this final rule

on contractors and subcontractors is

expected to be minor. As a result, the

Board has determined that this final rule

does not result in the promulgation of

a ‘‘major rule’’ under the provisions of

Executive Order 12866, and that a

regulatory impact analysis will not be

required. Furthermore, this final rule

does not have a significant effect on a

substantial number of small entities

because small businesses are exempt

from the application of the Cost

Accounting Standards. Therefore, this

rule does not require a regulatory

flexibility analysis under the Regulatory

Flexibility Act of 1980.

E. Public Comments

Public Comments: This final rule is

based upon the Board’s Notice of

Proposed Rulemaking made available

for public comment on November 5,

1993, 58 FR 58999. Thirty sets of public

comments were received from

contractors, Government agencies,

professional associations, actuarial

firms, law firms, public accounting

firms, and individuals. The comments

received and the Board’s actions taken

in response thereto are summarized

below:

Comment: Twelve commenters

expressed concern that the introduction

of a funding limit on accrual accounting

was a significant departure from the full

accrual accounting approach of the

ANPRM. Some commenters were also

concerned with the complexity inherent

in any rule governing pension costs. For

these reasons the commenters supported

the promulgation of a second NPRM.

Response: The Staff Discussion

Papers, the ANPRM, and the NPRM

each addressed the role of accrual

accounting and the role of funding. The

Staff Discussion Paper on fully-funded

defined-benefit pension plans requested

comments on the relative weights the

Board should assign to accrual

accounting, funding, and predictability

as a basis for cost determination. The

Staff Discussion Paper on unfunded

nonqualified defined-benefit pension

plans balanced its avoidance of a

funding requirement with a very

constrained method of accrual

accounting for so-called ‘‘accruable’’

plans.

In response to the comments on the

Staff Discussion Papers, the ANPRM

adopted accrual accounting for both

qualified plans and accruable

nonqualified plans, which permitted

certain portions of computed pension

costs to be unfunded. Because the Board

supported the need to substantiate the

accrual with funding, the ANPRM

required that the accrued costs for

qualified plans be funded as soon as

practicable. The ANPRM presumed

there would not be a lengthy delay

between accrual and funding, and so it

did not link the period assignment of

the accrual to current period funding.

For nonqualified plans, the assignment

of accrued costs was tied to funding, but

the ANPRM introduced an exception for

the effect of taxes on contractor

cashflows. As with the Staff Discussion

Paper, non-accruable plans, and

accruable plans that so elect, were

limited to the pay-as-you-go method.

The NPRM kept the same accounting

approach for nonqualified plans as the

ANPRM. Comments from the

Government and contractors persuaded

the Board that the conflict between full

accrual accounting and ERISA funding,

not predictability, was the significant

problem. Finding that there could be

indefinitely extended delays in the

funding of the accruals of overfunded

plans, the Board determined that it was

necessary to link the period assignment

of costs to current period funding in

order to assure the verifiability of the

accrued amounts. To resolve the conflict

with ERISA’s funding limits, the ERISA

full-funding limitation was incorporated

into the NPRM. Furthermore, aware of

the need to address overfunded plans,

the Board added clarity and specificity

to the current period adjustment

required when a segment closes. The

Board explicitly included an adjustment

for plan terminations because there has

been some uncertainty as to the prior

Board’s intent.

With this final rule, the Board affirms

the accounting approaches of the

NPRM. Throughout the four-step

promulgation process, accrual

accounting consistently has been the

starting point for the recognition of

pension costs. The period assignment

rule is tied to ERISA’s tax-deductible

maximum to prevent conflict with any

of ERISA’s funding limits. This final

rule retains the complementary funding

rule for nonqualified plans. The Board

adopted many technical corrections

suggested in public comments from

actuaries and other professionals. To

ensure that the technical corrections did

not alter the conceptual approach of the

NPRM, the Board sought and received

input from certain pension actuaries

and the American Academy of

Actuaries.

Besides continuing support for either

unrestricted accrual accounting or cost

recognition based solely on funding, the

public comments on the NPRM

generally addressed details of the

coverage requiring clarification or

correction. This final rule does not

deviate from the conceptual construct of

the NPRM. As intended by the four-step

promulgation process, this rule has

evolved and the Board has found an

informed balance between the

advantages of accrual accounting and

funding. Further public exposure would

not alter the conceptual approach

exposed in the NPRM and expressed in

this final rule.

Comment: Thirteen commenters

expressed their opposition to the

adoption of the ERISA full-funding
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16537

limitation. These commenters supported

full accrual accounting as the only

method that provides true matching of

the incurrence of pension costs with the

periods during which benefits were

earned. They contend that tax law is not

good accrual accounting and that the

Board should make accounting rules

independently of the concerns of

taxability.

Response: The Board continues to

recognize that one of the primary

benefits of accrual accounting, and one

of the stated goals of the Board, is the

proper matching of benefiting contracts

with the incurrence of expense. The

Board also continues to support accrual

accounting as the most effective means

to promote consistency between cost

accounting periods.

This final rule is based on the use of

accrual accounting to initially compute

the pension cost for a period. The

assignable cost is then determined by

comparing the computed pension cost

accrual to a minimum of $0 and to the

maximum tax-deductible amount. The

Board has determined that funding is

needed to substantiate the cost

allocation because of the magnitude of

the liability and the extended delay

between the accrual of the cost and the

settlement of the liability. This final rule

has not adopted ERISA as an accounting

method, but has modified accrual

accounting to fit within the confines of

practicable funding.

Comment: Eleven other commenters

supported the imposition of the fullfunding limit. Two commenters

recommended that the cost accrual be

subject to a $0 minimum because

contractors are prohibited from

withdrawing funds from a qualified

trust.

Response: In this final rule, the Board

refines the NPRM concept of a fullfunding limitation. The full-funding

limitation of the final rule is

implemented through the definition and

operation of the ‘‘assignable cost

limitation’’ which defines the point

when the plan is overfunded for cost

recognition purposes. When a pension

plan is overfunded, the Government

would be violating its fiduciary duty to

the taxpayers by advancing any further

reimbursements to the contractor. The

assignable cost limitation is similar to

ERISA’s pre-OBRA 87 full funding

limitation, but uniquely defined to

avoid confusion with ERISA

terminology. As with the NPRM,

whenever a plan is determined to be

overfunded, that is, the actuarial value

of assets exceeds the liability, all

existing amortization bases are deemed

fully amortized and eliminated.

The Board concurs that there should

be a $0 floor imposed on the assignable

pension cost for the period. The

Standard requires the funding agency to

be established for the ‘‘exclusive

benefit’’ of the participants so that

withdrawals by the contractor are

prohibited, absent a plan termination.

To be internally consistent, this final

rule eliminates the assignment of

negative costs to a period and the

allocation of such credit to contracts,

except when either assets revert or inure

to the contractor or the segment is no

longer continuing.

However, when a contractor makes a

voluntary investment decision to not

fund the assigned cost of its qualified

pension plan, which is otherwise

allocable to and payable as cost or price

under Government contracts, the

contractor has knowingly accepted the

consequences of its decision. In this

case, because there is no conflict

between ERISA and the Standards, there

is no reason to alter the cost

computation and assignment for the

period. Permitting arbitrary

reassignment of the cost to other periods

would be contrary to the Board’s stated

goal of enhancing the consistency of

costs between periods and could create

a potential for gaming.

Comment: A major concern of thirteen

commenters was that the full-funding

limitation is difficult to predict. Some

commenters opined that the emphasis

on funding made the rule unnecessarily

complex.

Response: In this final rule, fullfunding, which is measured by the

assignable cost limitation based on the

actuarial value of assets and the

actuarial accrued liability, is reasonably

predictable. Through the smoothing

techniques of an asset valuation

method, large swings in assets values

are dampened. In a relatively stable

population, the actuarial accrued

liability can be fairly well predicted

using actuarial projection techniques for

forward pricing purposes. Other events

that dramatically affect the liability are

addressed in the provisions on cost

method changes, segmentation, segment

closings, plan terminations, and frozen

plans. Finally, contractors have some

flexibility in determining the timing of

certain other events, such as assumption

changes or plan amendments, that affect

the size of the actuarial accrued

liability.

When pension plan assets and

liabilities are sufficiently different in

amount, the impact of the taxdeductible limits of ERISA can be

forecast with a fair degree of certainty.

The tax-deductible limit, computed

without regard to the full-funding

limitation, is generally based on the

normal cost and 10 year amortization of

the unfunded actuarial liability and is

also relatively predictable.

A predictability problem does arise

when a plan is near the threshold of

ERISA’s full-funding limitations. The

impact of these limits is sensitive to

small changes in the market value of

assets, the actuarial accrued liability,

and prevailing Treasury rates. The

Board believes that the ‘‘all or nothing’’

nature and the magnitude of the impact

are beyond the normal assumption of

risk inherent in firm fixed-priced

contracting. However, the Board

believes that this is a forward-pricing

problem that may be addressed by the

contracting officer through the

negotiation of an advance agreement

reflecting the contractor’s unique facts,

circumstances, and expected level and

mix of Government contracting. Such

advance agreements could provide a

method for achieving equity in the

forecasting of pension costs for

contractors whose pension plans are

close to entering or emerging from the

funding limits of ERISA.

While the special problems of

forward-pricing will continue to require

attention by the contracting officer, this

final rule does not add more

complication. The concepts of

assignable cost limitation, assignable

cost deficit, and assignable cost credit

contained in this final rule are simply

the accounting and actuarial

mechanisms necessary to assign

computed costs that fall outside of the

funding corridor to future periods.

Comment: Twelve commenters noted

that, despite the full-funding limitation,

the cost assigned under the NPRM could

still be greater than the tax-deductible

maximum. Seven commenters remarked

that ERISA requires amortizations to

continue, and a new base be established,

when the contribution is affected by the

OBRA 87 full-funding limitation only.

Seven commenters recommended that

subparagraph 9904.412–50(b)(1) be

clarified.

Response: This has been corrected in

the final rule by using the maximum

tax-deductible amount, however

determined, as the limit on assignable

cost for qualified plans. The accrued

pension cost not assigned to the current

period is reassigned to future periods as

an assignable cost deficit. This final rule

also specifies that any negative accrued

cost be reassigned to future periods as

an assignable cost credit.

This final rule specifies that all

existing amortization bases are deemed

fully amortized when the accrued cost

is affected by the assignable cost

limitation. This rule provides that any
16538 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

unfunded actuarial liability, including

an actuarial surplus, existing in the next

accounting period is deemed to be an

actuarial gain or loss unless it is

attributable to a change in assumptions,

plan amendment, or separately

identified portions of unfunded

actuarial liability attributable to

unfunded and/or disallowed pension

costs.

Comment: Fifteen commenters stated

that funding would not be needed to

validate the liability of nonqualified

defined-benefit plans if the Board

retained the existing requirement that

the benefits be ‘‘compelled’’.

Response: The Board believes it is

reasonable for the Government to

require that pension cost of both

qualified and nonqualified pension

plans allocated to contracts, which the

Government pays for through cost or

price, be subject to funding. This final

rule ensures that any unfunded portion

of assigned cost is isolated from the

computation of future cost accruals. To

prevent windfall gains or losses and to

minimize the need for advance

agreements discussed above, costs

allocated to fixed-priced contracts must

be funded to the extent possible.

The Board notes that the excess

funding, which occurs when a

contractor funds more than the assigned

pension cost for the period, is carried

forward to future periods with interest.

This final rule retains the premature

funding provisions of the original

Standard through the definition and

operation of prepayment credits.

Comment: Five commenters stated

that current period funding of assigned

costs for nonqualified pension plans is

necessary to enhance the verifiability of

all costs allocated to contracts and to

reduce the risk that the promised

benefits might never be paid.

Response: As already discussed, the

Board is persuaded that funding of the

assigned cost is necessary to

substantiate the liability. The Board is

also persuaded that requiring a taxable

contractor to fund 100% of the pension

cost could impose a cash flow penalty

to the extent the amount funded may

not be tax-deductible. The Board has

modified the funding requirement

accordingly. However, the Board does

not wish to provide a cash flow

advantage to tax-exempt contractors for

whom no such cash flow penalty exists.

Accordingly, the complementary

funding rule is restricted to taxable

entities only.

This final rule addresses the risk that

unfunded costs will not be verified by

providing for an accounting of all

assigned costs. Funded costs are

captured and accounted for within the

assets of the funding agency. Amounts

exempted from funding based on the

tax-rate are retained in the general assets

of the contractor and accounted for

within the accumulated value of

permitted unfunded accruals. Portions

of assigned cost not substantiated by

complementary funding must be

separately identified and accounted for

pursuant to 9904.412–50(a)(2). This

final rule ensures that all portions of

assigned cost and allocated cost are

tracked and accounted for, and thereby

removes much of the risk.

Comment: Eight commenters were

concerned that a ‘‘Rabbi’’ trust would

not satisfy the ‘‘exclusive benefit’’

requirement in the definition of a

funding agency since creditors might

have superior rights to those of the plan

participants. Other commenters asked if

other nonqualified trust arrangements

could qualify as a funding agency under

the Standard.

Response: The Board’s intention

when revising the definition of a

funding agency was to prohibit the use

of bookkeeping reserves, escrow

accounts, or any other arrangement

under which the rights of the plan

participants were not clearly superior to

those of the plan sponsor. The basic test

of ‘‘exclusive benefit’’ is whether the

contractor has relinquished all rights to

the funds and that, except for the

extraordinary event of bankruptcy, the

participants have primary rights to the

funds. The solvency of a contractor is

always a concern to the Government

that is not restricted merely to pension

costs.

The Board does not intend that a

‘‘Rabbi trust’’ be the only funding

arrangement that satisfies the funding

agency definition. Other arrangements

such as so-called secular trusts can be

satisfactory. The Board expects that as

tax law changes and as qualified plan

benefit limits possibly become more or

less restrictive, other funding

arrangements may become more

effective and more widely adopted.

The Board does not intend for the

‘‘exclusive benefit’’ clause to prohibit

asset reversions where, after settling all

benefit obligations to plan participants,

the residual assets of the trust revert or

inure to a contractor. The funding

agency coverage in the pension

Standards is intended to be consistent

with the coverage for funded insurance

reserves found at 9904.416–

50(a)(1)(v)(B), which permits a reversion

of assets only after all benefit

obligations have been satisfied through

insurance.

Comment: Nine commenters were

concerned that taxes and administrative

costs associated with Rabbi trusts will

increase pension costs. Five

commenters believe that the NPRM (and

prior ANPRM) complementary funding

rule for nonqualified plans creates an

administrative burden.

Response: The Board recognizes that

there will be some additional expenses

associated with the use of

complementary funding and the use of

nonqualified trust funds. The specificity

of the final rule gives contractors clear

rules under which they can choose to

compute, assign, and allocate the costs

of a nonqualified plan. The benefits of

an accurate accounting of all assigned

costs will offset any increased

administrative expense to the

Government and contractors.

There will be an increase in the cost

of such plans for the taxes on the

earnings of the nonqualified trust fund

that are directly paid by or reimbursed

from the fund. These taxes are a valid

expense of the pension plan incurred in

response to the final rule’s requirement

that a portion of the assigned cost be

funded. The Board notes that, in fact,

such increased costs are being returned

to the Government through the payment

of the tax.

The rule specifies that income taxes

on the earnings of a nonqualified trust

are treated as administrative expenses

and not as decrements to the assumed

investment earning rate. This technical

correction clarifies that the interest

assumption used to compute actuarial

values is not reduced to reflect taxes on

fund earnings. This rule is not intended

to prevent contractors from expressing

the actuarial assumption for

administrative expenses as a percentage

of the earnings.

Comment: Two commenters suggested

that the final rule address how ERISA’s

funding limits are allocated to segments.

Response: Only the maximum taxdeductible amount and the contribution

to the funding agency are determined

for the pension plan in its entirety.

Under segmented accounting, all other

aspects of period cost; i.e., normal cost,

unfunded actuarial liability, assignable

cost limitation, are measured at the

segment level. This final rule requires

that the tax-deductible maximum,

determined for the plan as a whole,

must be apportioned to segments using

a basis that considers the assignable

costs or the funding levels of the

segments. Illustrations of how planwide values are apportioned to

segments have been added.

In addition, to ease the funding of

costs attributable to Government

contracts, this final rule allows

contractors with predominantly

commercial business to apportion

contributions for qualified defined-
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16539

benefit plans to their Government

segments first, but only if the contractor

uses segmented accounting. Unfunded

assigned costs, whether attributable to

Government contracts or commercial

business, will be separately identified

under 9904.412–50(a)(2) and thereby

isolated from future cost computations

and future allocation. This provision

allows the contractor to determine when

to fund costs of its qualified definedbenefit plan for segments that are

associated solely with commercial

business.

Although the assets of a pension plan

are subject to the claims of all plan

participants, the Board believes the

funding requirements and protections of

ERISA will prevent any untenable

differences in funding levels of

segments from arising. Because

nonqualified plans lack the funding

requirement protection of ERISA, the

funding of such plans must be

apportioned across all segments.

Comment: Four commenters

suggested that the definition of a

segment closing should be clarified.

Concerns were raised that an internal

reorganization would require a current

period adjustment for a segment closing

even though neither the segment’s nor

the contractor’s relationship to the

Government had changed.

Response: The definition has been

revised to delineate three conditions

requiring a current period adjustment.

The first condition occurs when there is

a change in ownership of the segment,

not just a simple reorganization within

the contractor’s internal structure. The

second event is the one addressed in the

NPRM; that is, when the contractual

relationship ends because the segment

operationally ceases to exist. The third

case addresses the end of the

contractual relationship with the

Government, whether the segment

continues in operation or not.

Comment: Two commenters opposed

using the accrued benefit cost method

(ABCM) to determine the actuarial

liability for a segment closing or plan

termination adjustment. These

commenters believe the ABCM

understates the liability. Four

commenters supported limiting the

actuarial assumptions used to determine

the segment closing and plan

termination adjustment. These

commenters also supported a phase-in

of benefit improvements adopted within

5 years of a segment closing or plan

termination.

Response: In this final rule, the

actuarial accrued liability, used for

determining the adjustment for a

segment closing or curtailment of

benefits, is determined using the

accrued benefit cost method. For a

curtailment of benefits or for plan

participants who are terminated from

employment in a segment closing, the

accrued benefit is the appropriate

measure of the ultimate benefit that will

be paid under the plan. If plan

participants remain employed by the

contractor, whether in the same or

another segment, the Board believes the

responsibility for future salary

increases, which are attributable to

future productivity, merit, and inflation,

belongs to the future customers that

benefit from the participants’ continued

employment. The Board notes that the

ABCM does recognize the cost of vesting

earned by the participants’ future

service.

The Board also believes that when

there is an immediate period liquidation

of the liability through the payment of

lump sum settlements or the purchase

of annuities, the cost of such settlements

and annuities is an exact measure of the

liability, although the Government does

have a right to share in any future

dividends or refunds. This final rule has

been revised accordingly.

Consistent with the requirement that

actuarial assumptions be individual

best-estimates of future long-term

economic and demographic trends, this

final rule requires that the assumptions

used to determine the actuarial liability

be consistent with the assumptions that

have been in use. This is consistent with

the fact that the pension plan is

continuing even though the segment has

closed or the earning of future benefits

has been curtailed. The Board does not

intend this rule to prevent contractors

from using assumptions that have been

revised based on a persuasive actuarial

experience study or a change in a plan’s

investment policy.

This final rule does include a sixtymonth phase-in of voluntary benefit

improvements to forestall an increase in

the liability in contemplation of a

segment closing or plan termination.

Improvements mandated by law or

granted though collective bargaining

negotiations are not considered

voluntary. A plan termination or

curtailment of benefits is viewed as

negating the intent of any recent

voluntary benefit improvements.

Under the revised definition of a

segment closing, some employees may

remain in a segment performing nonGovernment work while other

employees may be transferred to other

segments. For consistency, the

provisions for transfers of either active

or retired participants specify that the

assets transferred must equal the

actuarial accrued liability determined

under the accrued benefit cost method.

Comment: One commenter asked if a

contractor must determine whether a

termination of plan gain or loss has

occurred before an adjustment is

required. Another commenter asked if a

termination of plan gain or loss occurs

when a pension plan is ‘‘frozen.’’

Response: The definition has been

changed to refer to an event; that is, the

termination of a pension plan. Any

resultant gain or loss for Government

contracting purposes is determined by

the 9904.413–50(c)(12) adjustment. The

‘‘freezing’’ of a pension plan is

addressed by the addition of a definition

for a ‘‘Curtailment of Benefits.’’

Comment: Two commenters

supported the amortization of any

segment closing adjustment, rather than

an immediate period adjustment.

Response: Under this final rule, the

9904.413–50(c)(12) adjustment is

determined as a current period

adjustment, whether or not assets

actually revert from the trust. The Board

believes a current period adjustment is

appropriate when there is a disruption

of the contracting relationship, a

discontinuance of the operational

segment, or a discontinuance of the

pension plan. When such events occur,

pension costs can no longer be

computed and adjusted on an on-going

basis since there are either no future

accounting periods in which credits or

charges can be allocated to contracts or

no future periods in which benefits will

be earned.

If a contractor will continue to have

a contracting relationship with the

Government, the final rule does permit

the cognizant Federal official and the

contractor to negotiate an amortization

schedule. This provision will allow a

contractor to allocate an adjustment

credit to future years during which it

can recover the amount of credited

assets either through decreased pension

costs or through prices charged to other

customers benefiting from the future

work performed by plan participants.

Comment: Eleven commenters

requested that the Board clarify that the

9904.413–50(c)(12) adjustment could

result in a charge to final cost objectives

if the liabilities exceeded the assets.

Response: The final rule refers to the

‘‘difference’’ between assets and

liabilities without prejudice towards

either adjustment credits or adjustment

charges. An illustration of the

adjustment when liabilities exceed

assets has been added.

Comment: Four commenters asked the

Board to clarify how the Government’s

share of the adjustment was to be

determined. Five commenters opposed

the inclusion of fixed-price contracts in
16540 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

any formula used to determine the

Government’s share.

Response: The asset value used to

determine the adjustment amount is the

market value of the assets, including

permitted unfunded accruals, plus

portions of unfunded liability identified

pursuant to 9904.412–50(a)(2), i.e., plan

assets retained by the contractor due to

allocated but unfunded costs. The asset

value is reduced for the accumulated

value of any prepayment credits since

such assets have never been assigned to

past periods nor allocated to

Government contracts. Because this

asset value represents the current value

of assigned costs of prior periods, the

sum of previously assigned pension

costs is the denominator of the fraction.

The portion of these assets attributable

to the Government’s participation in the

funding of the pension plan through

cost or price is measured by the sum of

costs allocated to Government contracts.

The fraction is determined based on

data from years that are representative

of the Government’s participation,

which is a factual determination best

made by the contracting officer.

Costs allocated to fixed-price

contracts subject to CAS 9904.412 and

9904.413 are included since the

Government has participated in the

funding of the plan through the

payment of the estimated pension cost

considered in the pricing of the

contract. A risk/reward of a fixed-price

contract is the deviation of actual costs

from the estimated cost considered in

the price. If a single period event, e.g.,

segment closing, plan termination, or

benefit curtailment, alters the on-going

nature of the pension plan or segment,

the effect on fixed-price contracts

should be similar to that of an

accounting practice change.

Comment: Four commenters

supported amending the NPRM

coverage to explicitly state that the

9904.413–50(c)(12) adjustment is

determined net of the excise tax on

pension plan asset reversions.

Response: The Board agrees. Before

applying the fraction that determines

the Government’s share, subdivision

9904.413–50(c)(12)(vi) reduces the

adjustment amount for any excise taxes

assessed on assets that revert to the

contractor as part of a pension plan

termination. The excise tax is intended

to discourage plan sponsors from

terminating their qualified pension

plans, and under this final rule,

Government contractors are subject to

the same termination penalty as their

commercial counterparts. Since the

excise tax is returned to the

Government, albeit the Internal Revenue

Service, the Board believes equity

warrants determining the Government’s

share based on the net adjustment

amount.

While the Board believes the

Government’s allocable share of any

adjustment should be net of any

reversion excise tax, the allowability of

such excise taxes continues to be

determined by the applicable cost

principles. Income taxes, which are paid

to the Internal Revenue Service as an

offset against prior tax deductions,

continue not to be allocable.

Comment: Six commenters suggested

that a segment closing adjustment is not

necessary if the assets and liabilities of

the segment were transferred to the

successor contractor.

Response: The Board agrees. The

appropriate coverage and illustrations

have been added.

List of Subjects in 48 CFR Parts 9903

and 9904

Cost accounting standards,

Government procurement.

Richard C. Loeb,

Executive Secretary, Cost Accounting

Standards Board.

PART 9903—CONTRACT COVERAGE

1. The authority citations for Parts

9903 and 9904 continue to read as

follows:

Authority: Public Law 100–679, 102 Stat

4056, 41 U.S.C. 422.

9903.201 [Amended]

2. Subsection 9903.201–1 is amended

by removing and reserving paragraph

(b)(11).

PART 9904—COST ACCOUNTING

STANDARDS

3. Subsection 9904.412–30 is

amended by revising paragraph (a) to

read as follows:

9904.412–30 Definitions.

(a) The following are definitions of

terms which are prominent in this

Standard. Other terms defined

elsewhere in this chapter 99 shall have

the meanings ascribed to them in those

definitions unless paragraph (b) of this

subsection requires otherwise.

(1) Accrued benefit cost method

means an actuarial cost method under

which units of benefits are assigned to

each cost accounting period and are

valued as they accrue; that is, based on

the services performed by each

employee in the period involved. The

measure of normal cost under this

method for each cost accounting period

is the present value of the units of

benefit deemed to be credited to

employees for service in that period.

The measure of the actuarial accrued

liability at a plan’s inception date is the

present value of the units of benefit

credited to employees for service prior

to that date. (This method is also known

as the Unit Credit cost method without

salary projection.)

(2) Actuarial accrued liability means

pension cost attributable, under the

actuarial cost method in use, to years

prior to the current period considered

by a particular actuarial valuation. As of

such date, the actuarial accrued liability

represents the excess of the present

value of future benefits and

administrative expenses over the

present value of future normal costs for

all plan participants and beneficiaries.

The excess of the actuarial accrued

liability over the actuarial value of the

assets of a pension plan is the Unfunded

Actuarial Liability. The excess of the

actuarial value of the assets of a pension

plan over the actuarial accrued liability

is an actuarial surplus and is treated as

a negative unfunded actuarial liability.

(3) Actuarial assumption means an

estimate of future conditions affecting

pension cost; for example, mortality

rate, employee turnover, compensation

levels, earnings on pension plan assets,

changes in values of pension plan

assets.

(4) Actuarial cost method means a

technique which uses actuarial

assumptions to measure the present

value of future pension benefits and

pension plan administrative expenses,

and which assigns the cost of such

benefits and expenses to cost accounting

periods. The actuarial cost method

includes the asset valuation method

used to determine the actuarial value of

the assets of a pension plan.

(5) Actuarial gain and loss means the

effect on pension cost resulting from

differences between actuarial

assumptions and actual experience.

(6) Actuarial valuation means the

determination, as of a specified date, of

the normal cost, actuarial accrued

liability, actuarial value of the assets of

a pension plan, and other relevant

values for the pension plan.

(7) Assignable cost credit means the

decrease in unfunded actuarial liability

that results when the pension cost

computed for a cost accounting period

is less than zero.

(8) Assignable cost deficit means the

increase in unfunded actuarial liability

that results when the pension cost

computed for a qualified defined-benefit

pension plan exceeds the maximum taxdeductible amount for the cost

accounting period determined in

accordance with the Employee

Retirement Income Security Act of 1974
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16541

(ERISA), 29 U.S.C. 1001 et seq., as

amended.

(9) Assignable cost limitation means

the excess, if any, of the actuarial

accrued liability plus the current normal

cost over the actuarial value of the

assets of the pension plan.

(10) Defined-benefit pension plan

means a pension plan in which the

benefits to be paid or the basis for

determining such benefits are

established in advance and the

contributions are intended to provide

the stated benefits.

(11) Defined-contribution pension

plan means a pension plan in which the

contributions are established in advance

and the benefits are determined thereby.

(12) Funded pension cost means the

portion of pension cost for a current or

prior cost accounting period that has

been paid to a funding agency.

(13) Funding agency means an

organization or individual which

provides facilities to receive and

accumulate assets to be used either for

the payment of benefits under a pension

plan, or for the purchase of such

benefits, provided such accumulated

assets form a part of a pension plan

established for the exclusive benefit of

the plan participants and their

beneficiaries. The fair market value of

the assets held by the funding agency as

of a specified date is the Funding

Agency Balance as of that date.

(14) Immediate-gain actuarial cost

method means any of the several cost

methods under which actuarial gains

and losses are included as part of the

unfunded actuarial liability of the

pension plan, rather than as part of the

normal cost of the plan.

(15) Market value of the assets means

the sum of the funding agency balance

plus the accumulated value of any

permitted unfunded accruals belonging

to a pension plan. The Actuarial Value

of the Assets means the value of cash,

investments, permitted unfunded

accruals, and other property belonging

to a pension plan, as used by the actuary

for the purpose of an actuarial

valuation.

(16) Multiemployer pension plan

means a plan to which more than one

employer contributes and which is

maintained pursuant to one or more

collective bargaining agreements

between an employee organization and

more than one employer.

(17) Nonforfeitable means a right to a

pension benefit, either immediate or

deferred, which arises from an

employee’s service, which is

unconditional, and which is legally

enforceable against the pension plan or

the contractor. Rights to benefits that do

not satisfy this definition are considered

forfeitable. A right to a pension benefit

is not forfeitable solely because it may

be affected by the employee’s or

beneficiary’s death, disability, or failure

to achieve vesting requirements. Nor is

a right considered forfeitable because it

can be affected by the unilateral actions

of the employee.

(18) Normal cost means the annual

cost attributable, under the actuarial

cost method in use, to current and

future years as of a particular valuation

date, excluding any payment in respect

of an unfunded actuarial liability.

(19) Pay-as-you-go cost method means

a method of recognizing pension cost

only when benefits are paid to retired

employees or their beneficiaries.

(20) Pension plan means a deferred

compensation plan established and

maintained by one or more employers to

provide systematically for the payment

of benefits to plan participants after

their retirement, provided that the

benefits are paid for life or are payable

for life at the option of the employees.

Additional benefits such as permanent

and total disability and death payments,

and survivorship payments to

beneficiaries of deceased employees

may be an integral part of a pension

plan.

(21) Pension plan participant means

any employee or former employee of an

employer, or any member or former

member of an employee organization,

who is or may become eligible to receive

a benefit from a pension plan which

covers employees of such employer or

members of such organization who have

satisfied the plan’s participation

requirements, or whose beneficiaries are

receiving or may be eligible to receive

any such benefit. A participant whose

employment status with the employer

has not been terminated is an active

participant of the employer’s pension

plan.

(22) Permitted unfunded accrual

means the amount of pension cost for

nonqualified defined-benefit pension

plans that is not required to be funded

under 9904.412–50(d)(2). The

Accumulated Value of Permitted

Unfunded Accruals means the value, as

of the measurement date, of the

permitted unfunded accruals adjusted

for imputed earnings and for benefits

paid by the contractor.

(23) Prepayment credit means the

amount funded in excess of the pension

cost assigned to a cost accounting

period that is carried forward for future

recognition. The Accumulated Value of

Prepayment Credits means the value, as

of the measurement date, of the

prepayment credits adjusted for interest

at the valuation rate and decreased for

amounts used to fund pension costs or

liabilities, whether assignable or not.

(24) Projected benefit cost method

means either (i) any of the several

actuarial cost methods which distribute

the estimated total cost of all of the

employees’ prospective benefits over a

period of years, usually their working

careers, or (ii) a modification of the

accrued benefit cost method that

considers projected compensation

levels.

(25) Qualified pension plan means a

pension plan comprising a definite

written program communicated to and

for the exclusive benefit of employees

which meets the criteria deemed

essential by the Internal Revenue

Service as set forth in the Internal

Revenue Code for preferential tax

treatment regarding contributions,

investments, and distributions. Any

other plan is a Nonqualified Pension

Plan.

(b) * * *

4. Subsection 9904.412–40 is revised

to read as follows:

9904.412–40 Fundamental requirement.

(a) Components of pension cost. (1)

For defined-benefit pension plans,

except for plans accounted for under the

pay-as-you-go cost method, the

components of pension cost for a cost

accounting period are (i) the normal cost

of the period, (ii) a part of any unfunded

actuarial liability, (iii) an interest

equivalent on the unamortized portion

of any unfunded actuarial liability, and

(iv) an adjustment for any actuarial

gains and losses.

(2) For defined-contribution pension

plans, the pension cost for a cost

accounting period is the net

contribution required to be made for

that period, after taking into account

dividends and other credits, where

applicable.

(3) For defined-benefit pension plans

accounted for under the pay-as-you-go

cost method, the components of pension

cost for a cost accounting period are:

(i) The net amount of periodic

benefits paid for that period, and

(ii) An amortization installment,

including an interest equivalent on the

unamortized settlement amount,

attributable to amounts paid to

irrevocably settle an obligation for

periodic benefits due in current and

future cost accounting periods.

(b) Measurement of pension cost. (1)

For defined-benefit pension plans other

than those accounted for under the payas-you-go cost method, the amount of

pension cost of a cost accounting period

shall be determined by use of an

immediate-gain actuarial cost method.
16542 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

(2) Each actuarial assumption used to

measure pension cost shall be separately

identified and shall represent the

contractor’s best estimates of anticipated

experience under the plan, taking into

account past experience and reasonable

expectations. The validity of each

assumption used shall be evaluated

solely with respect to that assumption.

Actuarial assumptions used in

calculating the amount of an unfunded

actuarial liability shall be the same as

those used for other components of

pension cost.

(c) Assignment of pension cost.

Except costs assigned to future periods

by 9904.412–50(c) (2) and (5), the

amount of pension cost computed for a

cost accounting period is assignable

only to that period. For defined-benefit

pension plans other than those

accounted for under the pay-as-you-go

cost method, the pension cost is

assignable only if the sum of (1) the

unamortized portions of assignable

unfunded actuarial liability developed

and amortized pursuant to 9904.412–

50(a) (1), and (2) the unassignable

portions of unfunded actuarial liability

separately identified and maintained

pursuant to 9904.412–50(a)(2) equals

the total unfunded actuarial liability.

(d) Allocation of pension cost.

Pension costs assigned to a cost

accounting period are allocable to

intermediate and final cost objectives

only if they meet the requirements for

allocation in 9904.412–50(d). Pension

costs not meeting these requirements

may not be reassigned to any future cost

accounting period.

5. Subsection 9904.412–50 is revised

to read as follows:

9904.412–50 Techniques for application.

(a) Components of pension cost. (1)

The following portions of unfunded

actuarial liability shall be included as a

separately identified part of the pension

cost of a cost accounting period and

shall be included in equal annual

installments. Each installment shall

consist of an amortized portion of the

unfunded actuarial liability plus an

interest equivalent on the unamortized

portion of such liability. The period of

amortization shall be established as

follows:

(i) If amortization of an unfunded

actuarial liability has begun prior to the

date this Standard first becomes

applicable to a contractor, no change in

the amortization period is required by

this Standard.

(ii) If amortization of an unfunded

actuarial liability has not begun prior to

the date this Standard first becomes

applicable to a contractor, the

amortization period shall begin with the

period in which the Standard becomes

applicable and shall be no more than 30

years nor less than 10 years. However,

if the plan was in existence as of

January 1, 1974, the amortization period

shall be no more than 40 years nor less

than 10 years.

(iii) Each increase or decrease in

unfunded actuarial liability resulting

from the institution of new pension

plans, from the adoption of

improvements, or other changes to

pension plans subsequent to the date

this Standard first becomes applicable

to a contractor shall be amortized over

no more than 30 years nor less than 10

years.

(iv) If any assumptions are changed

during an amortization period, the

resulting increase or decrease in

unfunded actuarial liability shall be

separately amortized over no more than

30 years nor less than 10 years.

(v) Actuarial gains and losses shall be

identified separately from unfunded

actuarial liabilities that are being

amortized pursuant to the provisions of

this Standard. The accounting treatment

to be afforded to such gains and losses

shall be in accordance with Cost

Accounting Standard 9904.413.

(vi) Each increase or decrease in

unfunded actuarial liability resulting

from an assignable cost deficit or credit,

respectively, shall be amortized over a

period of 10 years.

(vii) Each increase or decrease in

unfunded actuarial liability resulting

from a change in actuarial cost method,

including the asset valuation method,

shall be amortized over a period of 10

to 30 years. This provision shall not

affect the requirements of 9903.302 to

adjust previously priced contracts.

(2) Except as provided in 9904.412–

50(d)(2), any portion of unfunded

actuarial liability attributable to either

(i) pension costs applicable to prior

years that were specifically unallowable

in accordance with then existing

Government contractual provisions or

(ii) pension costs assigned to a cost

accounting period that were not funded

in that period, shall be separately

identified and eliminated from any

unfunded actuarial liability being

amortized pursuant to paragraph (a)(1)

of this subsection. Such portions of

unfunded actuarial liability shall be

adjusted for interest at the valuation rate

of interest. The contractor may elect to

fund, and thereby reduce, such portions

of unfunded actuarial liability and

future interest adjustments thereon.

Such funding shall not be recognized for

purposes of 9904.412–50(d).

(3) A contractor shall establish and

consistently follow a policy for selecting

specific amortization periods for

unfunded actuarial liabilities, if any,

that are developed under the actuarial

cost method in use. Such policy may

give consideration to factors such as the

size and nature of the unfunded

actuarial liabilities. Except as provided

in 9904.412–50(c)(2) or 9904.413–

50(c)(12), once the amortization period

for a portion of unfunded actuarial

liability is selected, the amortization

process shall continue to completion.

(4) Any amount funded in excess of

the pension cost assigned to a cost

accounting period shall be accounted

for as a prepayment credit. The

accumulated value of such prepayment

credits shall be adjusted for interest at

the valuation rate of interest until

applied towards pension cost in a future

accounting period. The accumulated

value of prepayment credits shall be

reduced for portions of the accumulated

value of prepayment credits used to

fund pension costs or to fund portions

of unfunded actuarial liability

separately identified and maintained in

accordance with 9904.412–50(a)(2). The

accumulated value of any prepayment

credits shall be excluded from the

actuarial value of the assets used to

compute pension costs for purposes of

this Standard and Cost Accounting

Standard 9904.413.

(5) An excise tax assessed pursuant to

a law or regulation because of excess,

inadequate, or delayed funding of a

pension plan is not a component of

pension cost. Income taxes paid from

the funding agency of a nonqualified

defined-benefit pension plan on

earnings or other asset appreciation of

such funding agency shall be treated as

an administrative expense of the fund

and not as a reduction to the earnings

assumption.

(6) For purposes of this Standard,

defined-benefit pension plans funded

exclusively by the purchase of

individual or group permanent

insurance or annuity contracts, and

thereby exempted from ERISA’s

minimum funding requirements, shall

be treated as defined-contribution

pension plans. However, all other

defined-benefit pension plans

administered wholly or in part through

insurance company contracts shall be

subject to the provisions of this

Standard relative to defined-benefit

pension plans.

(7) If a pension plan is supplemented

by a separately-funded plan which

provides retirement benefits to all of the

participants in the basic plan, the two

plans shall be considered as a single

plan for purposes of this Standard. If the

effect of the combined plans is to

provide defined-benefits for the plan

participants, the combined plans shall
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16543

be treated as a defined-benefit plan for

purposes of this Standard.

(8) A multiemployer pension plan

established pursuant to the terms of a

collective bargaining agreement shall be

considered to be a defined-contribution

pension plan for purposes of this

Standard.

(9) A pension plan applicable to a

Federally-funded Research and

Development Center (FFRDC) that is

part of a State pension plan shall be

considered to be a defined-contribution

pension plan for purposes of this

Standard.

(b) Measurement of pension cost. (1)

For defined-benefit pension plans other

than those accounted for under the payas-you-go cost method, the amount of

pension cost assignable to cost

accounting periods shall be measured

by an immediate-gain actuarial cost

method.

(2) Where the pension benefit is a

function of salaries and wages, the

normal cost shall be computed using a

projected benefit cost method. The

normal cost for the projected benefit

shall be expressed either as a percentage

of payroll or as an annual accrual based

on the service attribution of the benefit

formula. Where the pension benefit is

not a function of salaries and wages, the

normal cost shall be based on employee

service.

(3) For defined-benefit plans

accounted for under the pay-as-you-go

cost method, the amount of pension cost

assignable to a cost accounting period

shall be measured as the sum of:

(i) The net amount for any periodic

benefits paid for that period, and

(ii) The level annual installment

required to amortize over 15 years any

amounts paid to irrevocably settle an

obligation for periodic benefits due in

current or future cost accounting

periods.

(4) Actuarial assumptions shall reflect

long-term trends so as to avoid

distortions caused by short-term

fluctuations.

(5) Pension cost shall be based on

provisions of existing pension plans.

This shall not preclude contractors from

making salary projections for plans

whose benefits are based on salaries and

wages, or from considering improved

benefits for plans which provide that

such improved benefits must be made.

(6) If the evaluation of the validity of

actuarial assumptions shows that any

assumptions were not reasonable, the

contractor shall:

(i) Identify the major causes for the

resultant actuarial gains or losses, and

(ii) Provide information as to the basis

and rationale used for retaining or

revising such assumptions for use in the

ensuing cost accounting period(s).

(c) Assignment of pension cost. (1)

Amounts funded in excess of the

pension cost computed for a cost

accounting period pursuant to the

provisions of this Standard shall be

accounted for as a prepayment credit

and carried forward to future accounting

periods.

(2) For qualified defined-benefit

pension plans, the pension cost

computed for a cost accounting period

is assigned to that period subject to the

following adjustments, in order of

application:

(i) Any amount of computed pension

cost that is less than zero shall be

assigned to future accounting periods as

an assignable cost credit. The amount of

pension cost assigned to the period shall

be zero.

(ii) When the pension cost equals or

exceeds the assignable cost limitation:

(A) The amount of computed pension

cost, adjusted pursuant to paragraph

(c)(2)(i) of this subsection, shall not

exceed the assignable cost limitation,

(B) All amounts described in

9904.412–50(a)(1) and 9904.413–50(a),

which are required to be amortized,

shall be considered fully amortized, and

(C) Except for portions of unfunded

actuarial liability separately identified

and maintained in accordance with

9904.413–50(a)(2), any portion of

unfunded actuarial liability, which

occurs in the first cost accounting

period after the pension cost has been

limited by the assignable cost limitation,

shall be considered an actuarial gain or

loss for purposes of this Standard. Such

actuarial gain or loss shall exclude any

increase or decrease in unfunded

actuarial liability resulting from a plan

amendment, change in actuarial

assumptions, or change in actuarial cost

method effected after the pension cost

has been limited by the assignable cost

limitation.

(iii) Any amount of computed pension

cost of a qualified pension plan,

adjusted pursuant to paragraphs (c)(2)

(i) and (ii) of this subsection that

exceeds the sum of (A) the maximum

tax-deductible amount, determined in

accordance with ERISA, and (B) the

accumulated value of prepayment

credits shall be assigned to future

accounting periods as an assignable cost

deficit. The amount of pension cost

assigned to the current period shall not

exceed the sum of the maximum taxdeductible amount plus the

accumulated value of prepayment

credits.

(3) The cost of nonqualified definedbenefit pension plans shall be assigned

to cost accounting periods in the same

manner as qualified plans (with the

exception of paragraph (c)(2)(iii) of this

subsection) under the following

conditions:

(i) The contractor, in disclosing or

establishing his cost accounting

practices, elects to have a plan so

accounted for;

(ii) The plan is funded through the

use of a funding agency; and,

(iii) The right to a pension benefit is

nonforfeitable and is communicated to

the participants.

(4) The costs of nonqualified definedbenefit pension plans that do not meet

all of the requirements in 9904.412–

50(c)(3) shall be assigned to cost

accounting periods using the pay-asyou-go cost method.

(5) Any portion of pension cost

computed for a cost accounting period

that exceeds the amount required to be

funded pursuant to a waiver granted

under the provisions of ERISA shall not

be assigned to the current period.

Rather, such excess shall be treated as

an assignable cost deficit, except that it

shall be assigned to future cost

accounting periods using the same

amortization period as used for ERISA

purposes.

(d) Allocation of pension costs. The

amount of pension cost assigned to a

cost accounting period allocated to

intermediate and final cost objectives

shall be limited according to the

following criteria:

(1) Except for nonqualified definedbenefit plans, the costs of a pension

plan assigned to a cost accounting

period are allocable to the extent that

they are funded.

(2) For nonqualified defined-benefit

pension plans that meet the criteria set

forth at 9904.412–50(c)(3), pension costs

assigned to a cost accounting period are

fully allocable if they are funded at a

level at least equal to the percentage of

the complement (i.e., 100%-tax rate %

= percentage of assigned cost to be

funded) of the highest published

Federal corporate income tax rate in

effect on the first day of the cost

accounting period. If the contractor is

not subject to Federal income tax, the

assigned costs are allocable to the extent

such costs are funded. Funding at other

levels and benefit payments of such

plans are subject to the following:

(i) Funding at less than the foregoing

levels shall result in proportional

reductions of the amount of assigned

cost that can be allocated within the

cost accounting period.

(ii) (A) Payments to retirees or

beneficiaries shall contain an amount

drawn from sources other than the

funding agency of the pension plan that

is, at least, proportionately equal to the
16544 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

accumulated value of permitted

unfunded accruals divided by an

amount that is the market value of the

assets of the pension plan excluding any

accumulated value of prepayment

credits.

(B) The amount of assigned cost of a

cost accounting period that can be

allocated shall be reduced to the extent

that such payments are drawn in a

higher ratio from the funding agency.

(iii) The permitted unfunded accruals

shall be identified and accounted for

year to year, adjusted for benefit

payments directly paid by the contractor

and for interest at the actual annual

earnings rate on the funding agency

balance.

(3) For nonqualified defined-benefit

pension plans accounted for under the

pay-as-you-go method, pension costs

assigned to a cost accounting period are

allocable in that period.

(4) Funding of pension cost shall be

considered to have taken place within

the cost accounting period if it is

accomplished by the corporate tax filing

date for such period including any

permissible extensions thereto.

6. Subsection 9904.412–60 is revised

to read as follows:

9904.412–60 Illustrations.

(a) Components of pension cost. (1)

Contractor A has insured pension plans

for each of two small groups of

employees. One plan is exclusively

funded through a group permanent life

insurance contract and is exempt from

the minimum funding requirements of

ERISA. The other plan is funded

through a deposit administration

contract, which is a form of group

deferred annuity contract that is not

exempt from ERISA’s minimum funding

requirements. Both plans provide for

defined benefits. Pursuant to 9904.412–

50(a)(6), for purposes of this Standard

the plan financed through a group

permanent insurance contract shall be

considered to be a defined-contribution

pension plan; the net premium required

to be paid for a cost accounting period

(after deducting dividends and any

credits) shall be the pension cost for that

period. However, the deposit

administration contract plan is subject

to the provisions of this Standard that

are applicable to defined-benefit plans.

(2) Contractor B provides pension

benefits for certain hourly employees

through a multiemployer definedbenefit plan. Under the collective

bargaining agreement, the contractor

pays six cents into the fund for each

hour worked by the covered employees.

Pursuant to 9904.412–50(a)(8), the plan

shall be considered to be a definedcontribution pension plan. The

payments required to be made for a cost

accounting period shall constitute the

assignable pension cost for that period.

(3) Contractor C provides pension

benefits for certain employees through a

defined-contribution pension plan.

However, the contractor has a separate

fund that is used to supplement pension

benefits for all of the participants in the

basic plan in order to provide a

minimum monthly retirement income to

each participant. Pursuant to 9904.412–

50(a)(7), the two plans shall be

considered as a single plan for purposes

of this Standard. Because the effect of

the supplemental plan is to provide

defined-benefits for the plan’s

participants, the provisions of this

Standard relative to defined-benefit

pension plans shall be applicable to the

combined plan.

(4) Contractor D provides

supplemental benefits to key

management employees through a

nonqualified defined-benefit pension

plan funded by a so-called ‘‘Rabbi

Trust.’’ The trust agreement provides

that Federal income taxes levied on the

earnings of the Rabbi trust may be paid

from the trust. The contractor’s actuarial

cost method recognizes the

administrative expenses of the plan and

trust, such as broker and attorney fees,

by adding the prior year’s expenses to

the current year’s normal cost. The

income taxes paid by the trust on trust

earnings shall be accorded the same

treatment as any other administrative

expense in accordance with 9904.412–

50(a)(5).

(5) (i) Contractor E has been using the

entry age normal actuarial cost method

to compute pension costs. The

contractor has three years remaining

under a firm fixed price contract subject

to this Standard. The contract was

priced using the unfunded actuarial

liability, normal cost, and net

amortization installments developed

using the entry age normal method. The

contract was priced as follows:

ENTRY AGE NORMAL VALUES

Cost component Year 1 Year 2 Year 3

Normal cost .......................................................................................................................................................... $100,000 $105,000 $110,000

Amortization ......................................................................................................................................................... 50,000 50,000 50,000

Pension cost ..................................................................................................................................................... 150,000 155,000 160,000

(ii) The contractor, after notifying the

cognizant Federal official, switches to

the projected unit credit actuarial cost

method. The unfunded actuarial

liability and normal cost decreased

when redetermined under the projected

unit credit method. Pursuant to

9904.412–50(a)(1)(vii), the contractor

determines that an annual installment

credit of $20,000 will amortize the

decrease in unfunded actuarial liability

(UAL) over ten years. The following

pension costs are determined under the

projected unit credit method:

PROJECTED UNIT CREDIT VALUES

Cost component Year 1 Year 2 Year 3

Normal cost .......................................................................................................................................................... $80,000 $85,000 $90,000

Amortization:

Prior method ..................................................................................................................................................... 50,000 50,000 50,000

UAL decrease ................................................................................................................................................... (20,000) (20,000) (20,000)

Pension cost ......................................................................................................................................................... 110,000 115,000 120,000
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16545

(iii) The change in cost method is a

change in accounting method that

decreased previously priced pension

costs by $40,000 per year. In accordance

with 9903.302, Contractor E shall adjust

the cost of the firm fixed-price contract

for the remaining three years by

$120,000 ($40,000×3 years).

(6) Contractor F has a defined-benefit

pension plan for its employees. Prior to

being subject to this Standard the

contractor’s policy was to compute and

fund as annual pension cost normal cost

plus only interest on the unfunded

actuarial liability. Pursuant to

9904.412–40(a)(1), the components of

pension cost for a cost accounting

period must now include not only the

normal cost for the period and interest

on the unfunded actuarial liability, but

also an amortized portion of the

unfunded actuarial liability. The

amortization of the liability and the

interest equivalent on the unamortized

portion of the liability must be

computed in equal annual installments.

(b) Measurement of pension cost. (1)

Contractor G has a pension plan whose

costs are assigned to cost accounting

periods by use of an actuarial cost

method that does not separately identify

actuarial gains and losses or the effect

on pension cost resulting from changed

actuarial assumptions. Contractor G’s

method is not an immediate-gain cost

method and does not comply with the

provisions of 9904.412–50(b)(1).

(2) For several years Contractor H has

had an unfunded nonqualified pension

plan which provides for payments of

$200 a month to employees after

retirement. The contractor is currently

making such payments to several retired

employees and recognizes those

payments as its pension cost. The

contractor paid monthly annuity

benefits totaling $24,000 during the

current year. During the prior year,

Contractor H made lump sum payments

to irrevocably settle the benefit liability

of several participants with small

benefits. The annual installment to

amortize these lump sum payments over

fifteen years at the valuation interest

rate assumption is $5,000. Since the

plan does not meet the criteria set forth

in 9904.412–50(c)(3)(ii), pension cost

must be accounted for using the pay-asyou-go cost method. Pursuant to

9904.412–50(b)(3), the amount of

assignable cost allocable to cost

objectives of that period is $29,000,

which is the sum of the amount of

benefits actually paid in that period

($24,000) plus the second annual

installment to amortize the prior year’s

lump sum settlements ($5,000).

(3) Contractor I has two qualified

defined-benefit pension plans that

provide for fixed dollar payments to

hourly employees. Under the first plan,

the contractor’s actuary believes that the

contractor will be required to increase

the level of benefits by specified

percentages over the next several years.

In calculating pension costs, the

contractor may not assume future

benefits greater than that currently

required by the plan. With regard to the

second plan, a collective bargaining

agreement negotiated with the

employees’ labor union provides that

pension benefits will increase by

specified percentages over the next

several years. Because the improved

benefits are required to be made, the

contractor can consider such increased

benefits in computing pension costs for

the current cost accounting period in

accordance with 9904.412–50(b)(5).

(4) In addition to the facts of

9904.412–60(b)(3), assume that

Contractor I was required to contribute

at a higher level for ERISA purposes

because the plan was underfunded. To

compute pension costs that are closer to

the funding requirements of ERISA,

Contractor I decides to ‘‘fresh start’’ the

unfunded actuarial liability being

amortized pursuant to 9904.412–

50(a)(1); i.e., treat the entire amount as

a newly established portion of unfunded

actuarial liability, which is amortized

over 10 years in accordance with

9904.412–50(a)(1)(ii). Because the

contractor has changed the periods for

amortizing the unfunded actuarial

liability established pursuant to

9904.412–50(a)(3), the contractor has

made a change in accounting practice

subject to the provisions of Cost

Accounting Standard 9903.302.

(c) Assignment of pension cost. (1)

Contractor J maintains a qualified

defined-benefit pension plan. The

actuarial value of the assets of $18

million is subtracted from the actuarial

accrued liability of $20 million to

determine the total unfunded actuarial

liability of $2 million. Pursuant to

9904.412–50(a)(1), Contractor J has

identified and is amortizing twelve

separate portions of unfunded actuarial

liabilities. The sum of the unamortized

balances for the twelve separately

maintained portions of unfunded

actuarial liability equals $1.8 million. In

accordance with 9904.412–50(a)(2), the

contractor has separately identified, and

eliminated from the computation of

pension cost, $200,000 attributable to a

pension cost assigned to a prior period

that was not funded. The sum of the

twelve amortization bases maintained

pursuant to 9904.412–50(a)(1) and the

amount separately identified under

9904.412–50(a)(2) equals $2 million

($1,800,000+200,000). Because the sum

of all identified portions of unfunded

actuarial liability equals the total

unfunded actuarial liability, the plan is

in actuarial balance and Contractor J can

assign pension cost to the current cost

accounting period in accordance with

9904.412–40(c).

(2) Contractor K’s pension cost

computed for 1996, the current year, is

$1.5 million. This computed cost is

based on the components of pension

cost described in 9904.412–40(a) and

9904.412–50(a) and is measured in

accordance with 9904.412–40(b) and

9904.412–50(b). The assignable cost

limitation, which is defined at

9904.412–30(a)(9), is $1.3 million. In

accordance with the provisions of

9904.412–50(c)(2)(ii)(A), Contractor K’s

assignable pension cost for 1996 is

limited to $1.3 million. In addition, all

amounts that were previously being

amortized pursuant to 9904.412–50(a)(1)

and 9904.413–50(a) are considered fully

amortized in accordance with 9904.412–

50(c)(2)(ii)(B). The following year, 1997,

Contractor K computes an unfunded

actuarial liability of $4 million.

Contractor K has not changed his

actuarial assumptions nor amended the

provisions of his pension plan.

Contractor K has not had any pension

costs disallowed or unfunded in prior

periods. Contractor K must treat the

entire $4 million of unfunded actuarial

liability as an actuarial loss to be

amortized over fifteen years beginning

in 1997 in accordance with 9904.412–

50(c)(2)(ii)(C).

(3) Assume the same facts shown in

illustration 9904.412–60(c)(2), except

that in 1995, the prior year, Contractor

K’s assignable pension cost was

$800,000, but Contractor K only funded

and allocated $600,000. Pursuant to

9904.412–50(a)(2), the $200,000 of

unfunded assignable pension cost was

separately identified and eliminated

from other portions of unfunded

actuarial liability. This portion of

unfunded actuarial liability was

adjusted for 8% interest, which is the

interest assumption for 1995 and 1996,

and was brought forward to 1996 in

accordance with 9904.412–50(a)(2).

Therefore, $216,000 ($200,000×1.08) is

excluded from the amount considered

fully amortized in 1996. The next year,

1997, Contractor K must eliminate

$233,280 ($216,000×1.08) from the $4

million so that only $3,766,720 is

treated as an actuarial loss in

accordance with 9904.412–

50(c)(2)(ii)(C).

(4) Assume, as in 9904.412–60(c)(2),

the 1996 pension cost computed for

Contractor K’s qualified defined-benefit

pension plan is $1.5 million and the

assignable cost limitation is $1.7
16546 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

million. However, because of the ERISA

limitation on tax-deductible

contributions, Contractor K cannot fund

more than $1 million without incurring

an excise tax, which 9904.412–50(a)(5)

does not permit to be a component of

pension cost. In accordance with the

provisions of 9904.412–50(c)(2)(iii),

Contractor K’s assignable pension cost

for the period is limited to $1 million.

The $500,000 ($1.5 million¥$1 million)

of pension cost not funded is reassigned

to the next ten cost accounting periods

beginning in 1997 as an assignable cost

deficit in accordance with 9904.412–

50(a)(1)(vi).

(5) Assume the same facts for

Contractor K in 9904.412–60(c)(4),

except that the accumulated value of

prepayment credits equals $700,000.

Therefore, in addition to the $1 million,

Contractor K can apply $500,000 of the

accumulated value of prepayment

credits towards the pension cost

computed for the period. In accordance

with the provisions of 9904.412–

50(c)(2)(iii), Contractor K’s assignable

pension cost for the period is the full

$1.5 million ($1 million+$500,000)

computed for the period. The $200,000

of remaining accumulated value of

prepayment credits

($700,000¥$500,000) is adjusted for

interest at the valuation rate and carried

forward until needed in future

accounting periods in accordance with

9904.412–50(a)(4).

(6) Assume the same facts for

Contractor K in 9904.412–60(c)(4),

except that the 1996 assignable cost

limitation is $1.3 million. Pension cost

of $1.5 million is computed for the cost

accounting period, but the assignable

cost is limited to $1.3 million in

accordance with 9904.412–

50(c)(2)(ii)(A). Pursuant to 9904.412–

50(c)(2)(ii)(B), all existing amortization

bases maintained in accordance with

subparagraph 9904.412–50(a)(1) are

considered fully amortized. The

assignable cost of $1.3 million is then

compared to the maximum taxdeductible amount of $1 million.

Pursuant to 9904.412–50(c)(2)(iii),

Contractor K’s assignable pension cost

for the period is limited to $1 million.

The $300,000 ($1.3 million¥$1 million)

excess of the assignable cost limitation

over the tax-deductible maximum is

assigned to future periods as an

assignable cost deficit.

(7) Contractor L is currently

amortizing a large decrease in unfunded

actuarial liability over a period of ten

years. A similarly large increase in

unfunded actuarial liability is being

amortized over 30 years. The absolute

value of the resultant net amortization

credit is greater than the normal cost so

that the pension cost computed for the

period is a negative $200,000.

Contractor L first applies the provisions

of 9904.412–50(c)(2)(i) and determines

the assignable pension cost is $0. The

negative pension cost of $200,000 is

assigned to the next ten cost accounting

periods as an assignable cost credit in

accordance with 9904.412–50(a)(1)(vi).

However, when Contractor L applies the

provisions of 9904.412–50(c)(2)(ii), the

assignable cost limitation is also $0.

Because the assignable cost of $0

determined under 9904.412–50(c)(2)(i)

is equal to the assignable cost limitation,

the assignable cost credit of $200,000 is

considered fully amortized along with

all other portions of unfunded actuarial

liability being amortized pursuant to

9904.412–50(a)(1). Conversely, if the

assignable cost limitation had been

greater than zero, the assignable cost

credit of $200,000 would have carriedforward and amortized in future

periods.

(8) Contractor M has a qualified

defined-benefit pension plan which is

funded through a funding agency. It

computes $1 million of pension cost for

a cost accounting period. However,

pursuant to a waiver granted under the

provisions of ERISA, Contractor M is

required to fund only $800,000. Under

the provisions of 9904.412–50(c)(5), the

remaining $200,000 shall be accounted

for as an assignable cost deficit and

assigned to the next five cost accounting

periods in accordance with the terms of

the waiver.

(9) Contractor N has a company-wide

defined-benefit pension plan, wherein

benefits are calculated on one

consistently applied formula. That part

of the formula defining benefits within

ERISA limits is administered and

reported as a qualified plan and funded

through a funding agency. The

remainder of the benefits are considered

to be a supplemental or excess plan

which, while it meets the criteria at

9904.412–50(c)(3)(iii) as to

nonforfeitability and communication, is

not funded. The costs of the qualified

portion of the plan shall be comprised

of those elements of costs delineated at

9904.412–40(a)(1), while the

supplemental or excess portion of the

plan shall be accounted for and assigned

to cost accounting periods under the

pay-as-you-go cost method provided at

9904.412–40(a)(3) and 9904.412–

50(c)(4).

(10) Assuming the same facts as in

9904.412–60(c)(9), except that

Contractor N funds its supplemental or

excess plan using a so-called ‘‘Rabbi

Trust’’ vehicle. Because the

nonqualified plan is funded, the plan

meets the criteria set forth at 9904.412–

50(c)(3)(ii). Contractor N may account

for the supplemental or excess plan in

the same manner as its qualified plan,

if it elects to do so pursuant to

9904.412–50(c)(3)(i).

(11) Assuming the same facts as in

9904.412–60(c)(10), except that under

the nonqualified portion of the pension

plan a former employee will forfeit his

pension benefit if the employee goes to

work for a competitor within three years

of terminating employment. Since the

right to a benefit cannot be affected by

the unilateral action of the contractor,

the right to a benefit is considered to be

nonforfeitable for purposes of 9904.412–

30(a)(17). The nonqualified plan still

meets the criteria set forth at 9904.412–

50(c)(3)(iii), and Contractor N may

account for the supplemental or excess

plan in the same manner as its qualified

plan, if it elects to do so.

(12) Assume the same facts as in

9904.412–60(c)(11), except that

Contractor N, while maintaining a

‘‘Rabbi Trust’’ funding vehicle elects to

have the plan accounted for under the

pay-as-you-go cost method so as to have

greater latitude in annual funding

decisions. It may so elect pursuant to

9904.412–50(c)(3)(i).

(13) The assignable pension cost for

Contractor O’s qualified defined-benefit

plan is $600,000. For the same period

Contractor O contributes $700,000,

which is the minimum funding

requirement under ERISA. In addition,

there exists $75,000 of unfunded

actuarial liability that has been

separately identified pursuant to

9904.412–50(a)(2). Contractor O may

use $75,000 of the contribution in

excess of the assignable pension cost to

fund this separately identified unfunded

actuarial liability, if he so chooses. The

effect of the funding is to eliminate the

unassignable $75,000 portion of

unfunded actuarial liability that had

been separately identified and thereby

eliminated from the computation of

pension costs. Contractor O shall then

account for the remaining $25,000 of

excess contribution as a prepayment

credit in accordance with 9904.412–

50(a)(4).

(d) Allocation of pension cost. (1)

Assume the same set of facts for

Contractor M in 9904.412–60(c)(8)

except there was no ERISA waiver; i.e.,

only $800,000 was funded against $1

million of assigned pension cost for the

period. Under the provisions of

9904.412–50(d)(1), only $800,000 may

be allocated to Contractor M’s

intermediate and final cost objectives.

The remaining $200,000 of assigned

cost, which has not been funded, shall

be separately identified and maintained

in accordance with 9904.412–50(a)(2) so
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16547

that it will not be reassigned to any

future accounting periods.

(2) Contractor P has a nonqualified

defined-benefit pension plan which

covers benefits in excess of the ERISA

limits. Contractor P has elected to

account for this plan in the same

manner as its qualified plan and,

therefore, has established a ‘‘Rabbi

Trust’’ as the funding agency. For the

current cost accounting period, the

contractor computes and assigns

$100,000 as pension cost. The

contractor funds $65,000, which is

equivalent to a funding level equal to

the complement of the highest

published Federal corporate income tax

rate of 35%. Under the provisions of

9904.412–50(d)(2), the entire $100,000

is allocable to cost objectives of the

period.

(3) Assume the set of facts in

9904.412–60(d)(2), except that

Contractor P’s contribution to the Trust

is $59,800. In that event, the provisions

of 9904.412–50(d)(2)(i) would limit the

amount of assigned cost allocable

within the cost accounting period to the

percentage of cost funded (i.e., $59,800/

$65,000 = 92%). This results in

allocable cost of $92,000 (92% of

$100,000) for the cost accounting

period. Under the provisions of

9904.412–40(c) and 9904.412–

50(d)(2)(i), respectively, the unallocable

$8,000 may not be assigned to any

future cost accounting period. In

addition, in accordance with 9904.412–

50(a)(2), the $8,000 must be separately

identified and no amount of interest on

such separately identified $8,000 shall

be a component of pension cost in any

future cost accounting period.

(4) Again, assume the set of facts in

9904.412–60(d)(2) except that,

Contractor P’s contribution to the Trust

is $105,000 based on a valuation interest

assumption of 8%. Under the provisions

of 9904.412–50(d)(2) the entire $100,000

is allocable to cost objectives of the

period. In accordance with the

provisions of 9904.412–50(c)(1)

Contractor P has funded $5,000

($105,000—$100,000) in excess of the

assigned pension cost for the period.

The $5,000 shall be accounted for as a

prepayment credit. Pursuant to

9904.412–50(a)(4), the $5,000 shall be

adjusted for interest at the 8% valuation

rate of interest and excluded from the

actuarial value of assets used to

compute the next year’s pension cost

computations. The accumulated value

of prepayment credits of $5,400 (5,000

× 1.08) may be used to fund the next

year’s assigned pension cost, if needed.

(5) Contractor Q maintains a

nonqualified defined-benefit pension

plan which satisfies the requirements of

9904.412–50(c)(3). As of the valuation

date, the reported funding agency

balance is $3.4 million excluding any

accumulated value of prepayment

credits. When the adjusted funding

agency balance is added to the

accumulated value of permitted

unfunded accruals of $1.6 million, the

market value of assets equals $5.0

million ($3.4 million + $1.6 million) in

accordance with 9904.412–30(a)(13).

During the plan year, retirees receive

monthly benefits totalling $350,000.

Pursuant to 9904.412–50(d)(2)(ii)(A), at

least 32% ($1.6 million divided by $5

million) of these benefit payments shall

be made from sources other than the

funding agency. Contractor Q, therefore,

draws $238,000 from the funding

agency assets and pays the remaining

$112,000 using general corporate funds.

(6) Assume the same facts as

9904.412–60(d)(5), except that by the

time Contractor Q receives its actuarial

valuation it has paid retirement benefits

equalling $288,000 from funding agency

assets. The contractor has made deposits

to the funding agency equal to the tax

complement of the $500,000 assignable

pension cost for the period. Pursuant to

9904.412–50(d)(2)(ii)(B), the assignable

$500,000 shall be reduced by the

$50,000 ($288,000—$238,000) of

benefits paid from the funding agency in

excess of the permitted $238,000, unless

the contractor makes a deposit to

replace the $50,000 inadvertently drawn

from the funding agency. If this

corrective action is not taken within the

time permitted by 9904.412–50(d)(4),

Contractor Q shall allocate only

$450,000 ($500,000–$50,000) to final

cost objectives. Furthermore, the

$50,000, which was thereby attributed

to benefit payments instead of funding,

must be separately identified and

maintained in accordance with

9904.412–50(a)(2).

(7) Contractor R has a nonqualified

defined-benefit plan that meets the

criteria of 9904.412–50(c)(3). For 1996,

the funding agency balance was

$1,250,000 and the accumulated value

of permitted unfunded accruals was

$600,000. During 1996 the earnings and

appreciation on the assets of the funding

agency equalled $125,000, benefit

payments to participants totalled

$300,000, and administrative expenses

were $60,000. All transactions occurred

on the first day of the period. In

accordance with 9904.412–

50(d)(2)(ii)(A), $200,000 of benefits were

paid from the funding agency and

$100,000 were paid directly from

corporate assets. Pension cost of

$400,000 was assigned to 1996. Based

on the current corporate tax rate of 35%,

$260,000 ($400,000 × (1–35%)) was

deposited into the funding agency at the

beginning of 1996. For 1997 the funding

agency balance is $1,375,000

($1,250,000 + $260,000 + $125,000—

$200,000—$60,000). The actual annual

earnings rate of the funding agency was

10% for 1996. Pursuant to 9904.412–

50(d)(2)(iii), the accumulated value of

permitted unfunded accruals is updated

from 1996 to 1997 by: (i) adding

$140,000 (35% × $400,000), which is

the unfunded portion of the assigned

cost; (ii) subtracting the $100,000 of

benefits paid directly by the contractor;

and (iii) increasing the value of the

assets by $64,000 for imputed earnings

at 10% (10% × ($600,000 + $140,000—

$100,000)). The accumulated value of

permitted unfunded accruals for 1997 is

$704,000 ($600,000 + $140,000—

$100,000 + $64,000).

7. Subsection 9904.412–63 is revised

to read as follows:

9904.412–63 Effective date.

(a) This Standard is effective as of

March 30, 1995.

(b) This Standard shall be followed by

each contractor on or after the start of

its next cost accounting period

beginning after the receipt of a contract

or subcontract to which this Standard is

applicable.

(c) Contractors with prior CAScovered contracts with full coverage

shall continue to follow the Standard in

9904.412 in effect prior to March 30,

1995, until this Standard, effective

March 30, 1995, becomes applicable

following receipt of a contract or

subcontract to which this Standard

applies.

8. A new subsection 9904.412–64 is

added to read as follows:

9904.412–64 Transition method.

To be acceptable, any method of

transition from compliance with

Standard 9904.412 in effect prior to

March 30, 1995, to compliance with the

Standard effective March 30, 1995, must

follow the equitable principle that costs,

which have been previously provided

for, shall not be redundantly provided

for under revised methods. Conversely,

costs that have not previously been

provided for must be provided for under

the revised method. This transition

subsection is not intended to qualify for

purposes of assignment or allocation,

pension costs which have previously

been disallowed for reasons other than

ERISA tax-deductibility limitations. The

sum of all portions of unfunded

actuarial liability identified pursuant to

Standard 9904.412, effective March 30,

1995, including such portions of

unfunded actuarial liability determined

for transition purposes, is subject to the
16548 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

provisions of 9904.412–40(c) on

requirements for assignment. The

method, or methods, employed to

achieve an equitable transition shall be

consistent with the provisions of

Standard 9904.412, effective March 30,

1995, and shall be approved by the

contracting officer. Examples and

illustrations of such transition methods

include, but are not limited to, the

following:

(a) Reassignment of certain prior

unfunded accruals.

(1) Any portion of pension cost for a

qualified defined-benefit pension plan,

assigned to a cost accounting period

prior to [insert date of publication in the

Federal Register], which was not

funded because such cost exceeded the

maximum tax-deductible amount,

determined in accordance with ERISA,

shall be assigned to subsequent

accounting periods, including an

adjustment for interest, as an assignable

cost deficit. However, such costs shall

be assigned to periods on or after March

30, 1995, only to the extent that such

costs have not previously been allocated

as cost or price to contracts subject to

this Standard.

(2) Alternatively, the transition

method described in paragraph (d) of

this subsection may be applied

separately to costs subject to paragraph

(a)(1) of this subsection.

(b) Reassignment of certain prior

unallocated credits.

(1) Any portion of pension cost for a

defined-benefit pension plan, assigned

to a cost accounting period prior to

March 30, 1995, which was not

allocated as a cost or price credit to

contracts subject to this Standard

because such cost was less than zero,

shall be assigned to subsequent

accounting periods, including an

adjustment for interest, as an assignable

cost credit.

(2) Alternatively, the transition

method described in paragraph (d) of

this subsection may be applied

separately to costs subject to paragraph

(b)(1) of this subsection.

(c) Accounting for certain prior

allocated unfunded accruals. Any

portion of unfunded pension cost for a

nonqualified defined-benefit pension

plan, assigned to a cost accounting

period prior to March 30, 1995, that was

allocated as cost or price to contracts

subject to this Standard, shall be

recognized in subsequent accounting

periods, including adjustments for

imputed interest and benefit payments,

as an accumulated value of permitted

unfunded accruals.

(d) ‘‘Fresh start’’ alternative transition

method. The transition methods of

paragraphs (a)(1), (b)(1), and (c) of this

subsection may be implemented using

the so-called ‘‘fresh start’’ method

whereby a portion of the unfunded

actuarial liability of a defined-benefit

pension plan, which occurs in the first

cost accounting period after March 30,

1995, shall be treated in the same

manner as an actuarial gain or loss.

Such portion of unfunded actuarial

liability shall exclude any portion of

unfunded actuarial liability that must

continue to be separately identified and

maintained in accordance with

9904.412–50(a)(2), including interest

adjustments. If the contracting officer

already has approved a different

amortization period for the fresh start

amortization, then such amortization

period shall continue.

(e) Change to pay-as-you-go method.

A change in accounting method subject

to 9903.302 will have occurred

whenever costs of a nonqualified

defined-benefit pension plan have been

accounted for on an accrual basis prior

to March 30, 1995, and the contractor

must change to the pay-as-you-go cost

method because the plan does not meet

the requirement of 9904.412–50(c)(3),

either by election or otherwise. In such

case, any portion of unfunded pension

cost, assigned to a cost accounting

period prior to March 30, 1995 that was

allocated as cost or price to contracts

subject to this Standard, shall be

assigned to future accounting periods,

including adjustments for imputed

interest and benefit payments, as an

accumulated value of permitted

unfunded accruals. Costs computed

under the pay-as-you-go cost method

shall be charged against such

accumulated value of permitted

unfunded accruals before such costs

may be allocated to contracts.

(f) Actuarial assumptions. The

actuarial assumptions used to calculate

assignable cost deficits, assignable cost

credits, or accumulated values of

permitted unfunded accruals for

transition purposes shall be consistent

with the long term assumptions used for

valuation purposes for such prior

periods unless the contracting officer

has previously approved the use of

other reasonable assumptions.

(g) Transition illustrations. Unless

otherwise noted, paragraphs (g) (1)

through (9) of this subsection address

pension costs and transition amounts

determined for the first cost accounting

period beginning on or after the date

this revised Standard becomes

applicable to a contractor. For purposes

of these illustrations an interest

assumption of 7% is presumed to be in

effect for all periods.

(1) For the cost accounting period

immediately preceding the date this

revised Standard was applicable to a

contractor, Contractor S computed and

assigned pension cost of $1 million for

a qualified defined-benefit pension

plan. The contractor made a

contribution equal to the maximum taxdeductible amount of $800,000 for the

period leaving $200,000 of assigned cost

unfunded for the period. Except for this

$200,000, no other assigned pension

costs have ever been unfunded or

otherwise disallowed. Using the

transition method of paragraph (a)(1) of

this subsection, the contractor shall

establish an assignable cost deficit equal

to $214,000 ($200,000 × 1.07), which is

the prior unfunded assigned cost plus

interest. If this assignable cost deficit

amount, plus all other portions of

unfunded actuarial liability identified in

accordance with 9904.412–50(a) (1) and

(2), equal the total unfunded actuarial

liability, pension cost may be assigned

to the current period.

(2) Assume that Contractor S in

9904.412–64(g)(1) priced the entire $1

million into firm fixed-price contracts.

In this case, no assignable cost deficit

amount may be established. In addition,

the $214,000 ($200,000 × 1.07) shall be

separately identified and maintained in

accordance with 9904.412–50(a)(2). If

all portions of unfunded actuarial

liability identified in accordance with

9904.412–50(a) (1) and (2), equal the

total unfunded actuarial liability,

pension cost may be assigned to the

period.

(3) Assume the same facts as in

9904.412–64(g)(1), except Contractor S

only funded and allocated $500,000.

The $300,000 of assigned cost that was

not funded, but could have been funded

without exceeding the tax-deductible

maximum, may not be recognized as an

assignable cost deficit. Instead, the

$300,000 must be separately identified

and maintained in accordance with

9904.412–50(a)(2). If the $321,000

($300,000 × 1.07) plus the $214,000

already identified as an assignable cost

deficit plus all other portions of

unfunded actuarial liability identified in

accordance with 9904.412–50(a) (1) and

(2), equal the total unfunded actuarial

liability, pension cost may be assigned

to the period.

(4) Assume that, for Contractor S in

9904.412–64(g)(3), the only portion of

unfunded actuarial liability that must be

identified under 9904.412–50(a)(2) is

the $321,000. If Contractor S chooses to

use the ‘‘fresh start’’ transition method,

the $321,000 of unfunded assigned cost

must be subtracted from the total

unfunded actuarial liability in

accordance with 9904.412–63(d). The

net amount of unfunded actuarial

liability shall then be amortized over a
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16549

period of fifteen years as an actuarial

loss in accordance with 9904.412–

50(a)(1)(v) and Cost Accounting

Standard 9904.413.

(5) For the cost accounting period

immediately preceding the date this

revised Standard becomes applicable to

a contractor, Contractor T computed and

assigned pension cost of negative

$400,000 for a qualified defined-benefit

plan. Because the contractor could not

withdraw assets from the trust fund, the

contracting officer agreed that instead of

allocating a current period credit to

contracts, the negative costs would be

carried forward, with interest, and offset

against future pension costs allocated to

the contract. Using the transition

method of paragraph (b)(1) of this

subsection, the contractor shall establish

an assignable cost credit equal to

$428,000 ($400,000 × 1.07). If this

assignable cost credit amount, plus all

other portions of unfunded actuarial

liability identified in accordance with

9904.412–50(a) (1) and (2), equals the

total unfunded actuarial liability,

pension cost may be assigned to the

period.

(6) Assume that in 9904.412–64(g)(5),

following guidance issued by the

contracting agency the contracting

officer had deemed the cost for the prior

period to be $0. In order to satisfy the

requirements of 9904.412–40(c) and

assign pension cost to the current

period, Contractor S must account for

the prior period negative accruals that

have not been specifically identified.

Following the transition method of

paragraph (b)(1) of this subsection, the

contractor shall identify $428,000 as an

assignable cost credit.

(7) Assume the facts of 9904.412–

64(g)(5), except Contractor S uses the

‘‘fresh start’’ transition method. In

addition, for the current period the plan

is overfunded since the actuarial value

of the assets is greater than the actuarial

accrued liability. In this case, an

actuarial gain equal to the negative

unfunded actuarial liability; i.e.,

actuarial surplus, is recognized since

there are no portions of unfunded

actuarial liability that must be identified

under 9904.412–50(a)(2).

(8) Since March 28, 1989 Contractor U

has computed, assigned, and allocated

pension costs for a nonqualified

defined-benefit plan on an accrual basis.

The value of these past accruals,

increased for imputed interest at 7%

and decreased for benefits paid by the

contractor, is equal to $2 million as of

the beginning of the current period.

Contractor U elects to establish a ‘‘Rabbi

trust’’ and the plan meets the other

criteria at 9904.412–50(c)(3). Using the

transition method of paragraph (c) of

this subsection, Contractor U shall

recognize the $2 million as the

accumulated value of permitted

unfunded accruals, which will then be

included in the market value and

actuarial value of the assets. Because the

accumulated value of permitted

unfunded accruals is exactly equal to

the current period market value of the

assets, 100% of benefits for the current

period must be paid from sources other

than the funding agency in accordance

with 9904.412–50(d)(2)(ii).

(9) Assume that Contractor U in

9904.412–64(g)(8) establishes a funding

agency, but elects to use the pay-as-yougo method for current and future

pension costs. Furthermore, plan

participants receive $500,000 in benefits

on the last day of the current period.

Using the transition method of

paragraph (e) of this subsection to

ensure prior costs are not redundantly

provided for, the contractor shall

establish assets; i.e., an accumulated

value of permitted unfunded accruals,

of $2 million. Since these assets are

sufficient to provide for the current

benefit payments, no pension costs can

be allocated in this period. Furthermore,

previously priced contracts subject to

this Standard shall be adjusted in

accordance with 9903.302. The

accumulated value of permitted

unfunded accruals shall be carried

forward to the next period by adding

$140,000 (7% x $2 million) of imputed

interest, and subtracting the $500,000 of

benefit payments made by the

contractor. The accumulated value of

permitted unfunded accruals for the

next period equals $1,640,000 ($2

million + $140,000—$500,000).

9904.413 [Amended]

9. Subsection 9904.413–30 is

amended by revising paragraph (a) to

read as follows:

9904.413–30 Definitions.

(a) The following are definitions of

terms which are prominent in this

Standard. Other terms defined

elsewhere in this chapter 99 shall have

the meaning ascribed to them in those

definitions unless paragraph (b) of this

subsection requires otherwise.

(1) Accrued benefit cost method

means an actuarial cost method under

which units of benefits are assigned to

each cost accounting period and are

valued as they accrue; that is, based on

the services performed by each

employee in the period involved. The

measure of normal cost under this

method for each cost accounting period

is the present value of the units of

benefit deemed to be credited to

employees for service in that period.

The measure of the actuarial accrued

liability at a plan’s inception date is the

present value of the units of benefit

credited to employees for service prior

to that date. (This method is also known

as the Unit Credit cost method without

salary projection.)

(2) Actuarial accrued liability means

pension cost attributable, under the

actuarial cost method in use, to years

prior to the current period considered

by a particular actuarial valuation. As of

such date, the actuarial accrued liability

represents the excess of the present

value of future benefits and

administrative expenses over the

present value of future normal costs for

all plan participants and beneficiaries.

The excess of the actuarial accrued

liability over the actuarial value of the

assets of a pension plan is the Unfunded

Actuarial Liability. The excess of the

actuarial value of the assets of a pension

plan over the actuarial accrued liability

is an actuarial surplus and is treated as

a negative unfunded actuarial liability.

(3) Actuarial assumption means an

estimate of future conditions affecting

pension cost; for example, mortality

rate, employee turnover, compensation

levels, earnings on pension plan assets,

changes in values of pension plan

assets.

(4) Actuarial cost method means a

technique which uses actuarial

assumptions to measure the present

value of future pension benefits and

pension plan administrative expenses,

and which assigns the cost of such

benefits and expenses to cost accounting

periods. The actuarial cost method

includes the asset valuation method

used to determine the actuarial value of

the assets of a pension plan.

(5) Actuarial gain and loss means the

effect on pension cost resulting from

differences between actuarial

assumptions and actual experience.

(6) Actuarial valuation means the

determination, as of a specified date, of

the normal cost, actuarial accrued

liability, actuarial value of the assets of

a pension plan, and other relevant

values for the pension plan.

(7) Curtailment of benefits means an

event; e.g., a plan amendment, in which

the pension plan is frozen and no

further material benefits accrue. Future

service may be the basis for vesting of

nonvested benefits existing at the time

of the curtailment. The plan may hold

assets, pay benefits already accrued, and

receive additional contributions for

unfunded benefits. Employees may or

may not continue working for the

contractor.

(8) Funding agency means an

organization or individual which

provides facilities to receive and
16550 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

accumulate assets to be used either for

the payment of benefits under a pension

plan, or for the purchase of such

benefits, provided such accumulated

assets form a part of a pension plan

established for the exclusive benefit of

the plan participants and their

beneficiaries. The fair market value of

the assets held by the funding agency as

of a specified date is the Funding

Agency Balance as of that date.

(9) Immediate-gain actuarial cost

method means any of the several cost

methods under which actuarial gains

and losses are included as part of the

unfunded actuarial liability of the

pension plan, rather than as part of the

normal cost of the plan.

(10) Market value of the assets means

the sum of the funding agency balance

plus the accumulated value of any

permitted unfunded accruals belonging

to a pension plan. The Actuarial Value

of the Assets means the value of cash,

investments, permitted unfunded

accruals, and other property belonging

to a pension plan, as used by the actuary

for the purpose of an actuarial

valuation.

(11) Normal cost means the annual

cost attributable, under the actuarial

cost method in use, to current and

future years as of a particular valuation

date, excluding any payment in respect

of an unfunded actuarial liability.

(12) Pension plan means a deferred

compensation plan established and

maintained by one or more employers to

provide systematically for the payment

of benefits to plan participants after

their retirement, provided that the

benefits are paid for life or are payable

for life at the option of the employees.

Additional benefits such as permanent

and total disability and death payments,

and survivorship payments to

beneficiaries of deceased employees

may be an integral part of a pension

plan.

(13) Pension plan participant means

any employee or former employee of an

employer, or any member or former

member of an employee organization,

who is or may become eligible to receive

a benefit from a pension plan which

covers employees of such employer or

members of such organization who have

satisfied the plan’s participation

requirements, or whose beneficiaries are

receiving or may be eligible to receive

any such benefit. A participant whose

employment status with the employer

has not been terminated is an active

participant of the employer’s pension

plan.

(14) Pension plan termination means

an event; i.e., plan amendment, in

which either the pension plan ceases to

exist and all benefits are settled by

purchase of annuities or other means, or

the trusteeship of the plan is assumed

by the Pension Benefit Guarantee

Corporation or other conservator. The

plan may or may not be replaced by

another plan.

(15) Permitted unfunded accruals

means the amount of pension cost for

nonqualified defined-benefit pension

plans that is not required to be funded

under 9904.412–50(d)(2). The

Accumulated Value of Permitted

Unfunded Accruals means the value, as

of the measurement date, of the

permitted unfunded accruals adjusted

for imputed earnings and for benefits

paid by the contractor.

(16) Prepayment credit means the

amount funded in excess of the pension

cost assigned to a cost accounting

period that is carried forward for future

recognition. The Accumulated Value of

Prepayment Credits means the value, as

of the measurement date, of the

prepayment credits adjusted for interest

at the valuation rate and decreased for

amounts used to fund pension costs or

liabilities, whether assignable or not.

(17) Projected benefit cost method

means either (i) any of the several

actuarial cost methods which distribute

the estimated total cost of all of the

employees’ prospective benefits over a

period of years, usually their working

careers, or (ii) a modification of the

accrued benefit cost method that

considers projected compensation

levels.

(18) Qualified pension plan means a

pension plan comprising a definite

written program communicated to and

for the exclusive benefit of employees

which meets the criteria deemed

essential by the Internal Revenue

Service as set forth in the Internal

Revenue Code for preferential tax

treatment regarding contributions,

investments, and distributions. Any

other plan is a nonqualified pension

plan.

(19) Segment means one of two or

more divisions, product departments,

plants, or other subdivisions of an

organization reporting directly to a

home office, usually identified with

responsibility for profit and/or

producing a product or service. The

term includes Government-owned

contractor-operated (GOCO) facilities,

and joint ventures and subsidiaries

(domestic and foreign) in which the

organization has a majority ownership.

The term also includes those joint

ventures and subsidiaries (domestic and

foreign) in which the organization has

less than a majority ownership, but over

which it exercises control.

(20) Segment closing means that a

segment has (i) been sold or ownership

has been otherwise transferred, (ii)

discontinued operations, or (iii)

discontinued doing or actively seeking

Government business under contracts

subject to this Standard.

(21) Termination of employment gain

or loss means an actuarial gain or loss

resulting from the difference between

the assumed and actual rates at which

plan participants separate from

employment for reasons other than

retirement, disability, or death.

(b) * * *

10. Subsection 9904.413–40 is

amended by revising paragraphs (b) and

(c) to read as follows:

9904.413–40 Fundamental requirement.

(a) * * *

(b) Valuation of the assets of a

pension plan. The actuarial value of the

assets of a pension plan shall be

determined under an asset valuation

method which takes into account

unrealized appreciation and

depreciation of the market value of the

assets of the pension plan, including the

accumulated value of permitted

unfunded accruals, and shall be used in

measuring the components of pension

costs.

(c) Allocation of pension cost to

segments. Contractors shall allocate

pension costs to each segment having

participants in a pension plan. A

separate calculation of pension costs for

a segment is required when the

conditions set forth in 9904.413–50(c)(2)

or (3) are present. When these

conditions are not present, allocations

may be made by calculating a composite

pension cost for two or more segments

and allocating this cost to these

segments by means of an allocation

base. When pension costs are separately

computed for a segment or segments,

the provisions of Cost Accounting

Standard 9904.412 regarding the

assignable cost limitation shall be based

on the assets and liabilities for the

segment or segments for purposes of

such computations. In addition, the

amount of pension cost assignable to a

segment or segments shall not exceed

the maximum tax-deductible amount

computed for the plan as a whole and

apportioned among the segment(s).

11. Subsection 9904.413–50 is revised

to read as follows:

9904.413–50 Techniques for application.

(a) Assignment of actuarial gains and

losses. (1) In accordance with the

provisions of Cost Accounting Standard

9904.412, actuarial gains and losses

shall be identified separately from other

unfunded actuarial liabilities.

(2) Actuarial gains and losses

determined under a pension plan whose
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16551

costs are measured by an immediategain actuarial cost method shall be

amortized over a 15 year period in equal

annual installments, beginning with the

date as of which the actuarial valuation

is made. The installment for a cost

accounting period shall consist of an

element for amortization of the gain or

loss plus an element for interest on the

unamortized balance at the beginning of

the period. If the actuarial gain or loss

determined for a cost accounting period

is not material, the entire gain or loss

may be included as a component of the

current or ensuing year’s pension cost.

(3) Pension plan terminations and

curtailments of benefits shall be subject

to adjustment in accordance with

9904.413–50(c)(12).

(b) Valuation of the assets of a

pension plan. (1) The actuarial value of

the assets of a pension plan shall be

used:

(i) In measuring actuarial gains and

losses, and

(ii) For purposes of measuring other

components of pension cost.

(2) The actuarial value of the assets of

a pension plan may be determined by

the use of any recognized asset

valuation method which provides

equivalent recognition of appreciation

and depreciation of the market value of

the assets of the pension plan. However,

the actuarial value of the assets

produced by the method used shall fall

within a corridor from 80 to 120 percent

of the market value of the assets,

determined as of the valuation date. If

the method produces a value that falls

outside the corridor, the actuarial value

of the assets shall be adjusted to equal

the nearest boundary of the corridor.

(3) The method selected for valuing

pension plan assets shall be consistently

applied from year to year within each

plan.

(4) The provisions of paragraphs (b)

(1) through (3) of this subsection are not

applicable to plans that are treated as

defined-contribution plans in

accordance with 9904.412–50(a)(6).

(5) The market and actuarial values of

the assets of a pension plan shall not be

adjusted for any fee, reserve charge, or

other investment charge for withdrawals

from or termination of an investment

contract, trust agreement, or other

funding arrangement, unless such fee is

determined in an arm’s length

transaction, and actually incurred and

paid.

(c) Allocation of pension cost to

segments. (1) For contractors who

compute a composite pension cost

covering plan participants in two or

more segments, the base to be used for

allocating such costs shall be

representative of the factors on which

the pension benefits are based. For

example, a base consisting of salaries

and wages shall be used for pension

costs that are calculated as a percentage

of salaries and wages; a base consisting

of the number of participants shall be

used for pension costs that are

calculated as an amount per participant.

If pension costs are separately

calculated for one or more segments, the

contractor shall make a distribution

among the segments for the maximum

tax-deductible amount and the

contribution to the funding agency as

follows:

(i) When apportioning the maximum

tax-deductible amount, which is

determined for a qualified definedbenefit pension plan as a whole

pursuant to the Employee Retirement

Income Security Act of 1974 (ERISA), 29

U.S.C. 1001 et seq., as amended, to

segments, the contractor shall use a base

that considers the otherwise assignable

pension costs or the funding levels of

the individual segments.

(ii) When apportioning amounts

deposited to a funding agency to

segments, contractors shall use a base

that is representative of the assignable

pension costs, determined in

accordance with 9904.412–50(c) for the

individual segments. However, for

qualified defined-benefit pension plans,

the contractor may first apportion

amounts funded to the segment or

segments subject to this Standard.

(2) Separate pension cost for a

segment shall be calculated whenever

any of the following conditions exist for

that segment, provided that such

condition(s) materially affect the

amount of pension cost allocated to the

segment:

(i) There is a material termination of

employment gain or loss attributable to

the segment,

(ii) The level of benefits, eligibility for

benefits, or age distribution is materially

different for the segment than for the

average of all segments, or

(iii) The appropriate actuarial

assumptions are, in the aggregate,

materially different for the segment than

for the average of all segments.

Calculations of termination of

employment gains and losses shall give

consideration to factors such as

unexpected early retirements, benefits

becoming fully vested, and

reinstatements or transfers without loss

of benefits. An amount may be

estimated for future reemployments.

(3) Pension cost shall also be

separately calculated for a segment

under circumstances where—

(i) The pension plan for that segment

becomes merged with that of another

segment, or the pension plan is divided

into two or more pension plans, and in

either case,

(ii) The ratios of market value of the

assets to actuarial accrued liabilities for

each of the merged or separated plans

are materially different from one

another after applying the benefits in

effect after the pension plan merger or

pension plan division.

(4) For a segment whose pension costs

are required to be calculated separately

pursuant to paragraphs (c) (2) or (3) of

this subsection, such calculations shall

be prospective only; pension costs need

not be redetermined for prior years.

(5) For a segment whose pension costs

are either required to be calculated

separately pursuant to paragraph (c)(2)

or (c)(3) of this subsection or calculated

separately at the election of the

contractor, there shall be an initial

allocation of a share in the undivided

market value of the assets of the pension

plan to that segment, as follows:

(i) If the necessary data are readily

determinable, the funding agency

balance to be allocated to the segment

shall be the amount contributed by, or

on behalf of, the segment, increased by

income received on such assets, and

decreased by benefits and expenses paid

from such assets. Likewise, the

accumulated value of permitted

unfunded accruals to be allocated to the

segment shall be the amount of

permitted unfunded accruals assigned

to the segment, increased by interest

imputed to such assets, and decreased

by benefits paid from sources other than

the funding agency; or

(ii) If the data specified in paragraph

(c)(5)(i) of this subsection are not readily

determinable for certain prior periods,

the market value of the assets of the

pension plan shall be allocated to the

segment as of the earliest date such data

are available. Such allocation shall be

based on the ratio of the actuarial

accrued liability of the segment to the

plan as a whole, determined in a

manner consistent with the immediate

gain actuarial cost method or methods

used to compute pension cost. Such

assets shall be brought forward as

described in paragraph (c)(7) of this

subsection.

(iii) The actuarial value of the assets

of the pension plan shall be allocated to

the segment in the same proportion as

the market value of the assets.

(6) If, prior to the time a contractor is

required to use this Standard, it has

been calculating pension cost separately

for individual segments, the amount of

assets previously allocated to those

segments need not be changed.

(7) After the initial allocation of

assets, the contractor shall maintain a

record of the portion of subsequent
16552 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

contributions, permitted unfunded

accruals, income, benefit payments, and

expenses attributable to the segment and

paid from the assets of the pension plan:

Income and expenses shall include a

portion of any investment gains and

losses attributable to the assets of the

pension plan. Income and expenses of

the pension plan assets shall be

allocated to the segment in the same

proportion that the average value of

assets allocated to the segment bears to

the average value of total pension plan

assets for the period for which income

and expenses are being allocated.

(8) If plan participants transfer among

segments, contractors need not transfer

assets or actuarial accrued liabilities

unless a transfer is sufficiently large to

distort the segment’s ratio of pension

plan assets to actuarial accrued

liabilities determined using the accrued

benefit cost method. If assets and

liabilities are transferred, the amount of

assets transferred shall be equal to the

actuarial accrued liabilities, determined

using the accrued benefit cost method,

transferred.

(9) Contractors who separately

calculate the pension cost of one or

more segments may calculate such cost

either for all pension plan participants

assignable to the segment(s) or for only

the active participants of the segment(s).

If costs are calculated only for active

participants, a separate segment shall be

created for all of the inactive

participants of the pension plan and the

cost thereof shall be calculated. When a

contractor makes such an election,

assets shall be allocated to the segment

for inactive participants in accordance

with paragraphs (c) (5), (6), and (7) of

this subsection. When an employee of a

segment becomes inactive, assets shall

be transferred from that segment to the

segment established to accumulate the

assets and actuarial liabilities for the

inactive plan participants. The amount

of assets transferred shall be equal to the

actuarial accrued liabilities, determined

under the accrued benefit cost method,

for these inactive plan participants. If

inactive participants become active,

assets and liabilities shall similarly be

transferred to the segments to which the

participants are assigned. Such transfers

need be made only as of the last day of

a cost accounting period. The total

annual pension cost for a segment

having active employees shall be the

amount calculated for the segment plus

an allocated portion of the pension cost

calculated for the inactive participants.

Such an allocation shall be on the same

basis as that set forth in paragraph (c)(1)

of this subsection.

(10) Where pension cost is separately

calculated for one or more segments, the

actuarial cost method used for a plan

shall be the same for all segments.

Unless a separate calculation of pension

cost for a segment is made because of a

condition set forth in paragraph

(c)(2)(iii) of this subsection, the same

actuarial assumptions may be used for

all segments covered by a plan.

(11) If a pension plan has participants

in the home office of a company, the

home office shall be treated as a

segment for purposes of allocating the

cost of the pension plan. Pension cost

allocated to a home office shall be a part

of the costs to be allocated in

accordance with the appropriate

requirements of Cost Accounting

Standard 9904.403.

(12) If a segment is closed, if there is

a pension plan termination, or if there

is a curtailment of benefits, the

contractor shall determine the

difference between the actuarial accrued

liability for the segment and the market

value of the assets allocated to the

segment, irrespective of whether or not

the pension plan is terminated. The

difference between the market value of

the assets and the actuarial accrued

liability for the segment represents an

adjustment of previously-determined

pension costs.

(i) The determination of the actuarial

accrued liability shall be made using the

accrued benefit cost method. The

actuarial assumptions employed shall

be consistent with the current and prior

long term assumptions used in the

measurement of pension costs. If there

is a pension plan termination, the

actuarial accrued liability shall be

measured as the amount paid to

irrevocably settle all benefit obligations

or paid to the Pension Benefit Guarantee

Corporation.

(ii) In computing the market value of

assets for the segment, if the contractor

has not already allocated assets to the

segment, such an allocation shall be

made in accordance with the

requirements of paragraphs (c)(5) (i) and

(ii) of this subsection. The market value

of the assets shall be reduced by the

accumulated value of prepayment

credits, if any. Conversely, the market

value of the assets shall be increased by

the current value of any unfunded

actuarial liability separately identified

and maintained in accordance with

9904.412–50(a)(2).

(iii) The calculation of the difference

between the market value of the assets

and the actuarial accrued liability shall

be made as of the date of the event (e.g.,

contract termination, plan amendment,

plant closure) that caused the closing of

the segment, pension plan termination,

or curtailment of benefits. If such a date

is not readily determinable, or if its use

can result in an inequitable calculation,

the contracting parties shall agree on an

appropriate date.

(iv) Pension plan improvements

adopted within 60 months of the date of

the event which increase the actuarial

accrued liability shall be recognized on

a prorata basis using the number of

months the date of adoption preceded

the event date. Plan improvements

mandated by law or collective

bargaining agreement are not subject to

this phase-in.

(v) If a segment is closed due to a sale

or other transfer of ownership to a

successor in interest in the contracts of

the segment and all of the pension plan

assets and actuarial accrued liabilities

pertaining to the closed segment are

transferred to the successor segment,

then no adjustment amount pursuant to

this paragraph (c)(12) is required. If only

some of the pension plan assets and

actuarial accrued liabilities of the closed

segment are transferred, then the

adjustment amount required under this

paragraph (c)(12) shall be determined

based on the pension plan assets and

actuarial accrued liabilities remaining

with the contractor. In either case, the

effect of the transferred assets and

liabilities is carried forward and

recognized in the accounting for

pension cost at the successor contractor.

(vi) The Government’s share of the

adjustment amount determined for a

segment shall be the product of the

adjustment amount and a fraction. The

adjustment amount shall be reduced for

any excise tax imposed upon assets

withdrawn from the funding agency of

a qualified pension plan. The numerator

of such fraction shall be the sum of the

pension plan costs allocated to all

contracts and subcontracts (including

Foreign Military Sales) subject to this

Standard during a period of years

representative of the Government’s

participation in the pension plan. The

denominator of such fraction shall be

the total pension costs assigned to cost

accounting periods during those same

years. This amount shall represent an

adjustment of contract prices or cost

allowance as appropriate. The

adjustment may be recognized by

modifying a single contract, several but

not all contracts, or all contracts, or by

use of any other suitable technique.

(vii) The full amount of the

Government’s share of an adjustment is

allocable, without limit, as a credit or

charge during the cost accounting

period in which the event occurred and

contract prices/costs will be adjusted

accordingly. However, if the contractor

continues to perform Government

contracts, the contracting parties may

negotiate an amortization schedule,
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16553

including interest adjustments. Any

amortization agreement shall consider

the magnitude of the adjustment credit

or charge, and the size and nature of the

continuing contracts.

12. Subsection 9904.413–60 is revised

to read as follows:

9904.413–60 Illustrations.

(a) Assignment of actuarial gains and

losses. Contractor A has a definedbenefit pension plan whose costs are

measured under an immediate-gain

actuarial cost method. The contractor

makes actuarial valuations every other

year. In the past, at each valuation date,

the contractor has calculated the

actuarial gains and losses that have

occurred since the previous valuation

date and has merged such gains and

losses with the unfunded actuarial

liabilities that are being amortized.

Pursuant to 9904.413–40(a), the

contractor must make an actuarial

valuation annually. Any actuarial gains

or losses measured must be separately

amortized over a 15-year period

beginning with the period for which the

actuarial valuation is made in

accordance with 9904.413–50(a) (1) and

(2).

(b)(1) Valuation of the assets of a

pension plan. Contractor B has a

qualified defined-benefit pension plan,

the assets of which are invested in

equity securities, debt securities, and

real property. The contractor, whose

cost accounting period is the calendar

year, has an annual actuarial valuation

of the pension plan assets in June of

each year; the effective date of the

valuation is the beginning of that year.

The contractor’s method for valuing the

assets of the pension plan is as follows:

debt securities expected to be held to

maturity are valued on an amortized

basis running from initial cost at

purchase to par value at maturity; land

and buildings are valued at cost less

depreciation taken to date; all equity

securities and debt securities not

expected to be held to maturity are

valued on the basis of a five-year

moving average of market values. In

making an actuarial valuation, the

contractor must compare the values

reached under the asset valuation

method used with the market value of

all the assets as required by 9904.413–

40(b). In this case, the assets are valued

as of January 1 of that year. The

contractor established the following

values as of the valuation date.

Asset

valuation

method

Market

Cash .................. $100,000 100,000

Equity securities 6,000,000 7,800,000

Asset

valuation

method

Market

Debt securities,

expected to be

held to maturity .................. 550,000 600,000

Other debt securities ............... 600,000 750,000

Land and Buildings, net of

depreciation ... 400,000 750,000

Total ....... 7,650,000 10,000,000

(2) Section 9904.413–50(b)(2) requires

that the actuarial value of the assets of

the pension plan fall within a corridor

from 80 to 120 percent of market. The

corridor for the plan’s assets as of

January 1 is from $12 million to $8

million. Because the asset value reached

by the contractor, $7,650,000, falls

outside that corridor, the value reached

must be adjusted to equal the nearest

boundary of the corridor: $8 million. In

subsequent years the contractor must

continue to use the same method for

valuing assets in accordance with

9904.413–50(b)(3). If the value produced

falls inside the corridor, such value

shall be used in measuring pension

costs.

(c) Allocation of pension costs to

segments. (1) Contractor C has a

defined-benefit pension plan covering

employees at five segments. Pension

cost is computed by use of an

immediate-gain actuarial cost method.

One segment (X) is devoted primarily to

performing work for the Government.

During the current cost accounting

period, Segment X had a large and

unforeseeable reduction of employees

because of a contract termination at the

convenience of the Government and

because the contractor did not receive

an anticipated follow-on contract to one

that was completed during the period.

The segment does continue to perform

work under several other Government

contracts. As a consequence of this

termination of employment gain, a

separate calculation of the pension cost

for Segment X would result in

materially different allocation of costs to

the segment than would a composite

calculation and allocation by means of

a base. Accordingly, pursuant to

9904.413–50(c)(2), the contractor must

calculate a separate pension cost for

Segment X. In doing so, the entire

termination of employment gain must

be assigned to Segment X and amortized

over fifteen years. If the actuarial

assumptions for Segment X continue to

be substantially the same as for the

other segments, the termination of

employment gain may be separately

amortized and allocated only to

Segment X; all other Segment X

computations may be included as part

of the composite calculation. After the

termination of employment gain is

amortized, the contractor is no longer

required to separately calculate the costs

for Segment X unless subsequent events

require each separate calculation.

(2) Contractor D has a defined-benefit

pension plan covering employees at ten

segments, all of which have some

contracts subject to this Standard. The

contractor’s calculation of normal cost is

based on a percentage of payroll for all

employees covered by the plan. One of

the segments (Segment Y) is entirely

devoted to Government work. The

contractor’s policy is to place junior

employees in this segment. The salary

scale assumption for employees of the

segment is so different from that of the

other segments that the pension cost for

Segment Y would be materially different

if computed separately. Pursuant to

9904.413–50(c)(2)(iii), the contractor

must compute the pension cost for

Segment Y as if it were a separate

pension plan. Therefore, the contractor

must allocate a portion of the market

value of pension plan’s assets to

Segment Y in accordance with

9904.413–50(c)(5). Memorandum

records may be used in making the

allocation. However, because the

necessary records only exist for the last

five years, 9904.413–50(c)(5)(ii) permits

an initial allocation to be made as of the

earliest date such records are available.

The initial allocation must be made on

the basis of the immediate gain actuarial

cost method or methods used to

calculate prior years’ pension cost for

the plan. Once the assets have been

allocated, they shall be brought forward

to the current period as described in

9904.413–50(c)(7). A portion of the

undivided actuarial value of assets shall

then be allocated to the segment based

on the segment’s proportion of the

market value of assets in accordance

with 9904.413–50(c)(5)(iii). In future

cost accounting periods, the contractor

shall make separate pension cost

calculations for Segment Y based on the

appropriate salary scale assumption.

Because the factors comprising pension

cost for the other nine segments are

relatively equal, the contractor may

compute pension cost for these nine

segments by using composite factors. As

required by 9904.413–50(c)(1), the base

to be used for allocating such costs shall

be representative of the factors on which

the pension benefits are based.

(3) Contractor E has a defined-benefit

pension plan which covers employees at

twelve segments. The contractor uses

composite actuarial assumptions to
16554 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

develop a pension cost for all segments.

Three of these segments primarily

perform Government work; the work at

the other nine segments is primarily

commercial. Employee turnover at the

segments performing commercial work

is relatively stable. However,

employment experience at the

Government segments has been very

volatile; there have been large

fluctuations in employment levels and

the contractor assumes that this pattern

of employment will continue to occur.

It is evident that separate termination of

employment assumptions for the

Government segments and the

commercial segments will result in

materially different pension costs for the

Government segments. Therefore, the

cost for these segments must be

separately calculated, using the

appropriate termination of employment

assumptions for these segments in

accordance with 9904.413–50(c)(2)(iii).

(4) Contractor F has a defined-benefit

pension plan covering employees at 25

segments. Twelve of these segments

primarily perform Government work;

the remaining segments perform

primarily commercial work. The

contractor’s records show that the

termination of employment experience

and projections for the twelve segments

are so different from that of the average

of all of the segments that separate

pension cost calculations are required

for these segments pursuant to

9904.413–50(c)(2). However, because

the termination of employment

experience and projections are about the

same for all twelve segments, Contractor

F may calculate a composite pension

cost for the twelve segments and

allocate the cost to these segments by

use of an appropriate allocation base in

accordance with 9904.413–50(c)(1).

(5) After this Standard becomes

applicable to Contractor G, it acquires

Contractor H and makes it Segment H.

Prior to the merger, each contractor had

its own defined-benefit pension plan.

Under the terms of the merger,

Contractor H’s pension plan and plan

assets were merged with those of

Contractor G. The actuarial

assumptions, current salary scale, and

other plan characteristics are about the

same for Segment H and Contractor G’s

other segments. However, based on the

same benefits at the time of the merger,

the plan of Contractor H had a

disproportionately larger unfunded

actuarial liability than did Contractor

G’s plan. Any combining of the assets

and actuarial liabilities of both plans

would result in materially different

pension cost allocation to Contractor G’s

segments than if pension cost were

computed for Segment H on the basis

that it had a separate pension plan.

Accordingly, pursuant to 9904.413–

50(c)(3), Contractor G must allocate to

Segment H a portion of the assets of the

combined plan. The amount to be

allocated shall be the market value of

Segment H’s pension plan assets at the

date of the merger determined in

accordance with 9904.413–50(c)(5), and

shall be adjusted for subsequent receipts

and expenditures applicable to the

segment in accordance with 9904.413–

50(c)(7). Pursuant to 9904.413–40(b)(1)

and 9904.413–50(c)(5)(iii), Contractor G

must use these amounts of assets as the

basis for determining the actuarial value

of assets used for calculating the annual

pension cost applicable to Segment H.

(6) Contractor I has a defined-benefit

pension plan covering employees at

seven segments. The contractor has been

making a composite pension cost

calculation for all of the segments.

However, the contractor determines

that, pursuant to this Standard, separate

pension costs must be calculated for one

of the segments. In accordance with

9904.413–50(c)(9), the contractor elects

to allocate pension plan assets only for

the active participants of that segment.

The contractor must then create a

segment to accumulate the assets and

actuarial accrued liabilities for the

plan’s inactive participants. When

active participants of a segment become

inactive, the contractor must transfer

assets to the segment for inactive

participants equal to the actuarial

accrued liabilities for the participants

that become inactive.

(7) Contractor J has a defined-benefit

pension plan covering employees at ten

segments. The contractor makes a

composite pension cost calculation for

all segments. The contractor’s records

show that the termination of

employment experience for one

segment, which is performing primarily

Government work, has been

significantly different from the average

termination of employment experience

of the other segments. Moreover, the

contractor assumes that such different

experience will continue. Because of

this fact, and because the application of

a different termination of employment

assumption would result in significantly

different costs being charged the

Government, the contractor must

develop separate pension cost for that

segment. In accordance with 9904.413–

50(c)(2)(ii), the amount of pension cost

must be based on an acceptable

termination of employment assumption

for that segment; however, as provided

in 9904.413–50(c)(10), all other

assumptions for that segment may be

the same as those for the remaining

segments.

(8) Contractor K has a five-year

contract to operate a Governmentowned facility. The employees of that

facility are covered by the contractor’s

overall qualified defined-benefit

pension plan which covers salaried and

hourly employees at other locations. At

the conclusion of the five-year period,

the Government decides not to renew

the contract. Although some employees

are hired by the successor contractor,

because Contractor K no longer operates

the facility, it meets the 9904.413–

30(a)(20)(i) definition of a segment

closing. Contractor K must compute the

actuarial accrued liability for the

pension plan for that facility using the

accrued benefit cost method as of the

date the contract expired in accordance

with 9904.413–50(c)(12)(i). Because

many of Contractor K’s employees are

terminated from the pension plan, the

Internal Revenue Service considers it to

be a partial plan termination, and thus

requires that the terminated employees

become fully vested in their accrued

benefits to the extent such benefits are

funded. Taking this mandated benefit

improvement into consideration in

accordance with 9904.413–50(c)(12)(iv),

the actuary calculates the actuarial

accrued liability to be $12.5 million.

The contractor must then determine the

market value of the pension plan assets

allocable to the facility, in accordance

with 9904.413–50(c)(5), as of the date

agreed to by the contracting parties

pursuant to 9904.413–50(c)(12)(iii), the

date the contract expired. In making this

determination, the contractor is able to

do a full historical reconstruction of the

market value of the assets allocated to

the segment. In this case, the market

value of the segment’s assets amounted

to $13.8 million. Thus, for this facility

the value of pension plan assets

exceeded the actuarial accrued liability

by $1.3 million. Pursuant to 9904.413–

50(c)(12)(vi), this amount indicates the

extent to which the Government overcontributed to the pension plan for the

segment and, accordingly, is the amount

of the adjustment due to the

Government.

(9) Contractor L operated a segment

over the last five years during which

80% of its work was performed under

Government CAS-covered contracts.

The Government work was equally

divided each year between fixed-price

and cost-type contracts. The employees

of the facility are covered by a funded

nonqualified defined-benefit pension

plan accounted for in accordance with

9904.412–50(c)(3). For each of the last

five years the highest Federal corporate

income tax rate has been 30%. Pension

costs of $1 million per year were
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16555

computed using a projected benefit cost

method. Contractor L funded at the

complement of the tax rate ($700,000

per year). The pension plan assets held

by the funding agency earned 8% each

year. At the end of the five-year period,

the funding agency balance; i.e., the

market value of invested assets, was

$4.4 million. As of that date, the

accumulated value of permitted

unfunded accruals; i.e., the current

value of the $300,000 not funded each

year, is $1.9 million. As defined by

9904.413–30(a)(20)(i), a segment closing

occurs when Contractor L sells the

segment at the end of the fifth year.

Thus, for this segment, the market value

of the assets of the pension plan

determined in accordance with

9904.413–30(a)(10) is $6.3 million,

which is, the sum of the funding

account balance ($4.4 million) and the

accumulated value of permitted

unfunded accruals ($1.9 million).

Pursuant to 9904.413–50(c)(12)(i), the

contractor uses the accrued benefit cost

method to calculate an actuarial accrued

liability of $5 million as of that date.

There is no transfer of plan assets or

liabilities to the buyer. The difference

between the market value of the assets

and the actuarial accrued liability for

the segment is $1.3 million ($6.3

million—$5 million). Pursuant to

9904.413–50(c)(12)(vi), the adjustment

due the Government for its 80% share

of previously-determined pension costs

for CAS-covered contracts is $1.04

million (80% times $1.3 million).

Because contractor L has no other

Government contracts the $1.04 million

is a credit due to the Government.

(10) Assume the same facts as in

9904.413–60(c)(9), except that

Contractor L continues to perform

substantial Government contract work

through other segments. After

considering the amount of the

adjustment and the current level of

contracts, the contracting officer and the

contractor establish an amortization

schedule so that the $1.04 million is

recognized as credits against ongoing

contracts in five level annual

installments, including an interest

adjustment based on the interest

assumption used to compute pension

costs for the continuing contracts. This

amortization schedule satisfies the

requirements of 9904.413–

50(c)(12))(vii).

(11) Assume the same facts as in

9904.413–60(c)(9). As part of the

transfer of ownership, Contractor L also

transfers all pension liabilities and

assets of the segment to the buyer.

Pursuant to 9904.413–50(c)(12)(v), the

segment closing adjustment amount for

the current period is transferred to the

buyer and is subsumed in the future

pension cost accounting of the buyer. If

the transferred liabilities and assets of

the segment are merged into the buyer’s

pension plan which has a different ratio

of market value of pension plan assets

to actuarial accrued liabilities, then

pension costs must be separately

computed in accordance with 9904.413–

50(c)(3).

(12) Contractor M sells its only

government segment. Through a

contract novation, the buyer assumes

responsibility for performance of the

segment’s government contracts. Just

prior to the sale, the actuarial accrued

liability under the actuarial cost method

in use is $18 million and the market

value of assets allocated to the segment

of $22 million. In accordance with the

sales agreement, Contractor M is

required to transfer $20 million of assets

to the new plan. In determining the

segment closing adjustment under

9904.413–12(c)(12) the actuarial accrued

liability and the market value of assets

are reduced by the amounts transferred

to the buyer by the sale. The adjustment

amount, which is the difference

between the remaining assets ($2

million) and the remaining actuarial

liability ($0), is $2 million.

(13) Contractor N has three segments

that perform primarily government work

and has been separately calculating

pension costs for each segment. As part

of a corporate reorganization, the

contractor closes the production facility

for Segment A and transfers all of that

segment’s contracts and employees to

Segments B and C, the two remaining

government segments. The pension

assets from Segment A are allocated to

the remaining segments based on the

actuarial accrued liability of the

transferred employees. Because Segment

A has discontinued operations, a

segment closing has occurred pursuant

to 9904.413–30(a)(20)(ii). However,

because all pension assets and liabilities

have been transferred to segments that

are the successors in interest of the

contracts of Segment A, an immediate

period adjustment is not required if

Contractor N and the cognizant Federal

official negotiate an amortization

schedule pursuant to 9904.413–

50(c)(12)(vii).

(14) Contractor O does not renew its

government contract and decides to not

seek additional government contracts

for the affected segment. The contractor

reduces the work force of the segment

that had been dedicated to the

government contract and converts the

segment’s operations to purely

commercial work. In accordance with

9904.413–30(a)(20)(iii), the segment has

closed. Immediately prior to the end of

the contract the market value of the

segment’s assets was $20 million and

the actuarial accrued liability

determined under the actuarial cost

method in use was $22 million. An

actuarial accrued liability of $16 million

is determined using the accrued benefit

cost method as required by 9904.413–

50(c)(12)(i). The segment closing

adjustment is $4 million ($20 million—

$16 million).

(15) Contractor P terminated its

underfunded defined-benefit pension

plan for hourly employees. The market

value of the assets for the pension plan

is $100 million. Although the actuarial

accrued liability exceeds the $100

million of assets, the termination

liability for benefits guaranteed by the

Pension Benefit Guarantee Corporation

(PBGC) is only $85 million. Therefore,

the $15 million of assets in excess of the

liability for guaranteed benefits are

allocated to plan participants in

accordance with PBGC regulations. The

PBGC does not impose an assessment

for unfunded guaranteed benefits

against the contractor. The adjustment

amount determined under 9904.413–

50(c)(12) is zero.

(16) Assume the same facts as

9904.413–60(c)(17), except that the

termination liability for benefits

guaranteed by the Pension Benefit

Guarantee Corporation (PBGC) is $120

million. The PBGC imposes a $20

million ($120 million—$100 Million)

assessment against Contractor P for the

unfunded guaranteed benefits. The

contractor then determines the

Government’s share of the pension plan

termination adjustment charge of $20

million in accordance with 9904.413–

50(c)(12)(vi). In accordance with

9904.413–50(c)(12)(vii), the cognizant

Federal official may negotiate an

amortization schedule based on the

contractor’s schedule of payments to the

PBGC.

(17) Assume the same facts as in

9904.413–60(c)(16), except that

pursuant to 9904.412–50(a)(2)

Contractor P has an unassignable

portion of unfunded actuarial liability

for prior unfunded pension costs which

equals $8 million. The $8 million

represents the value of assets that would

have been available had all assignable

costs been funded and, therefore, must

be added to the assets used to determine

the pension plan termination

adjustment in accordance with

9904.413–50(c)(12)(ii). In this case, the

adjustment charge is determined to be

$12 million ($20 million¥$8 million).

(18) Contractor Q terminates its

qualified defined-benefit pension plan

without establishing a replacement

plan. At termination, the market value
16556 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations

of assets are $85 million. All obligations

for benefits are irrevocably transferred

to an insurance company by the

purchase of annuity contracts at a cost

of $55 million, which thereby

determines the actuarial liability in

accordance with 9904.413–50(c)(12)(i).

The contractor receives a reversion of

$30 million ($85 million¥$55 million).

The adjustment is equal to the reversion

amount, which is the excess of the

market value of assets over the actuarial

liability. However, ERISA imposes a

50% excise tax of $15 million (50% of

$30 million) on the reversion amount. In

accordance with 9904.413–50(c)(12)(vi),

the $30 million adjustment amount is

reduced by the $15 million excise tax.

Pursuant to 9904.413–50(c)(12)(vi), a

share of the $15 million net adjustment

($30 million—$15 million) shall be

allocated, without limitation, as a credit

to CAS-covered contracts.

(19) Assume that, in addition to the

facts of 9904.413–60(c)(18), Contractor

Q has an accumulated value of

prepayment credits of $10 million.

Contractor Q has $3 million of

unfunded actuarial liability separately

identified and maintained pursuant to

9904.412–50(a)(2). The assets used to

determine the adjustment amount equal

$78 million. This amount is determined

as the market value of assets ($85

million) minus the accumulated value

of prepayment credits ($10 million) plus

the portion of unfunded actuarial

liability maintained pursuant to

9904.412–50(a)(2) ($3 million).

Therefore, the difference between the

assets and the actuarial liability is $23

million ($78 million¥$55 million). In

accordance with 9904.413–50(c)(12)(vi),

the $23 million adjustment is reduced

by the $15 million excise tax to equal

$8 million. The contracting officer

determines that the pension cost data of

the most recent eight years reasonably

reflects the government’s participation

in the pension plan. The sum of costs

allocated to fixed-price and cost-type

contracts subject to this Standard over

the eight-year period is $21 million. The

sum of costs assigned to cost accounting

periods during the last eight years

equals $42 million. Therefore, the

government’s share of the net

adjustment is 50% ($21 million divided

by $42 million) of the $8 million and

equals $4 million.

(20) Contractor R maintains a

qualified defined-benefit pension plan.

Contractor R amends the pension plan

to eliminate the earning of any future

benefits; however the participants do

continue to earn vesting service.

Pursuant to 9904.413–30(a)(7), a

curtailment of benefits has occurred. An

actuarial accrued liability of $78 million

is determined under the accrued benefit

cost method using the interest

assumption used for the last four

actuarial valuations. The market value

of assets, determined in accordance

with 9904.413–50(c)(12)(ii), is $90

million. Contractor R shall determine

the Government’s share of the

adjustment in accordance with

9904.413–50(c)(12)(vi). The contractor

then shall allocate that share of the $12

million adjustment ($90 million¥$78

million) determined under 9904.413–

50(c)(12) to CAS-covered contracts. The

full amount of adjustment shall be made

without limitation in the current cost

accounting period unless arrangements

to amortize the adjustment are

permitted and negotiated pursuant to

9904.413–50(c)(12)(vii).

(21) Contractor S amends its qualified

defined-benefit pension plan to ‘‘freeze’’

all accrued benefits at their current

level. Although not required by law, the

amendment also provides that all

accrued benefits are fully vested.

Contractor S must determine the

adjustment for the curtailment of

benefits. Fifteen months prior to the

date of the plan amendment freezing

benefits, Contractor S voluntarily

amended the plan to increase benefits.

This voluntary amendment resulted in

an overall increase of over 10%. All

actuarial accrued liabilities are

computed using the accrued benefit cost

method. The actuarial accrued liability

for all accrued benefits is $1.8 million.

The actuarial accrued liability for vested

benefits immediately prior to the

current plan amendment is $1.6 million.

The actuarial accrued liability

determined for vested benefits based on

the plan provisions before the voluntary

amendment is $1.4 million. The $1.4

million actuarial liability is based on

benefit provisions that have been in

effect for six years and is fully

recognized. However, the $200,000

increase in liability due to the voluntary

benefit improvement adopted 15

months ago must be phased-in on a

prorata basis over 60 months. Therefore,

only 25% (15 months divided by 60

months) of the $200,000 increase, or

$50,000, can be included in the

curtailment liability. The current

amendment voluntarily increasing

vesting was just adopted and, therefore,

none of the associated increase in

actuarial accrued liability can be

included. Accordingly, in accordance

with 9904.413–50(c)(12)(iv), Contractor

S determines the adjustment for the

curtailment of benefits using an

actuarial accrued liability of $1.45

million ($1.4 million plus $50,000).

(22) Contractor T has maintained

separate qualified defined-benefit plans

for Segments A and B and has

separately computed pension costs for

each segment. Both segments perform

work under contracts subject to this

Standard. On the first day of the current

cost accounting period, Contractor T

merges the two pension plans so that

segments A and B are now covered by

a single pension plan. Because the ratio

of assets to liabilities for each plan is

materially different from that of the

merged plan, the contractor continues

the separate computation of pension

costs for each segment pursuant to

9904.413–50(c)(3). After considering the

assignable cost limitations for each

segment, Contractor T determines the

potentially assignable pension cost is

$12,000 for Segment A and $24,000 for

Segment B. The maximum taxdeductible amount for the merged plan

is $30,000, which is $6,000 less than the

sum of the otherwise assignable costs

for the segments ($36,000). To

determine the portion of the total

maximum tax-deductible amount

applicable to each segment on a

reasonable basis, the contractor prorates

the $30,000 by the pension cost

determined for each segment after

considering the assignable cost

limitations for each segment. Therefore,

in accordance with 9904.413–50(c)(1)(i),

the assignable pension cost is $10,000

for Segment A ($30,000 times $12,000

divided by $36,000) and $20,000 for

Segment B ($30,000 times $24,000

divided by $36,000). Contractor T funds

the full $30,000 and allocates the

assignable pension cost for each

segment to final cost objectives.

(23) Assume the same facts as in

9904.413–60(c)(22), except that the taxdeductible maximum is $40,000 and the

ERISA minimum funding requirement is

$18,000. Since funding of the accrued

pension cost is not constrained by taxdeductibility, Contractor T determines

the assignable pension cost to be

$12,000 for Segment A and $24,000 for

Segment B. If the contractor funds

$36,000, the full assigned pension cost

of each segment can be allocated to final

cost objectives. However, because the

contractor funds only the ERISA

minimum of $18,000, the contractor

must apportion the $18,000 contribution

to each segment on a basis that reflects

the assignable pension cost of each

segment in accordance with 9904.413–

50(c)(1)(ii). To measure the funding

level of each segment, Contractor T uses

an ERISA minimum funding

requirement separately determined for

each segment, as if the segment were a

separate plan. On this basis, the

allocable pension cost is determined to

be $8,000 for Segment A and $10,000 for
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Rules and Regulations 16557

Segment B. In accordance with

9904.412–50(a)(2), Contractor T must

separately identify, and eliminate from

future cost computations, $4,000

($12,000¥$8,000) for Segment A and

$14,000 ($24,000¥$10,000) for Segment

B.

(24) Assume the same facts as in

9904.413–60(c)(23), except that Segment

B performs only commercial work. As

permitted by 9904.413–50(c)(1)(ii), the

contractor first applies $12,000 of the

contribution amount to Segment A,

which is performing work under

Government contracts, for purposes of

9904.412–50(d)(i). The remaining

$6,000 is applied to Segment B. The full

assigned pension cost of $12,000 for

Segment A is funded and such amount

is allocable to CAS-covered contracts.

Pursuant to 9904.412–50(a)(2), the

contractor separately identifies, and

eliminates from future pension costs,

the $18,000 ($24,000¥$6,000) of

unfunded assigned cost for Segment B.

(25) Contractor U has a qualified

defined-benefit pension plan covering

employees at two segments that perform

work on contracts subject to this

Standard. The ratio of the actuarial

value of assets to actuarial accrued

liabilities is significantly different

between the two segments. Therefore,

Contractor U is required to compute

pension cost separately for each

segment. The actuarial value of assets

allocated to Segment A exceeds the

actuarial accrued liability by $50,000.

Segment B has an unfunded actuarial

liability of $20,000. Thus, the pension

plan as a whole has an actuarial surplus

of $30,000. Pension cost of $5,000 is

computed for Segment B and is less

than Segment B’s assignable cost

limitation of $9,000. The tax-deductible

maximum is $0 for the plan as whole

and, therefore, $0 for each segment.

Contractor U will deem all existing

amortization bases maintained for

Segment A to be fully amortized in

accordance with 9904.412–50(c)(2)(ii).

For Segment B, the amortization of

existing portions of unfunded actuarial

liability continues unabated.

Furthermore, pursuant to 9904.412–

50(c)(2)(iii), the contractor establishes

an additional amortization base for

Segment B for the assignable cost deficit

of $5,000.

13. Subsection 9904.413–63 is revised

to read as follows:

9904.413–63 Effective date.

(a) This Standard is effective as of

March 30, 1995.

(b) This Standard shall be followed by

each contractor on or after the start of

its next cost accounting period

beginning after the receipt of a contract

or subcontract to which this Standard is

applicable.

(c) Contractors with prior CAScovered contracts with full coverage

shall continue to follow Standard

9904.413 in effect prior to March 30,

1995, until this Standard, effective

March 30, 1995, becomes applicable

following receipt of a contract or

subcontract to which this revised

Standard applies.

14. A new subsection 9904.413–64 is

added to read as follows:

9904.413–64 Transition method.

(a) To be acceptable, any method of

transition from compliance with

Standard 9904.413 in effect prior to

March 30, 1995, to compliance with

Standard 9904.413 in effect as of March

30, 1995, must follow the equitable

principle that costs, which have been

previously provided for, shall not be

redundantly provided for under revised

methods. Conversely, costs that have

not previously been provided for must

be provided for under the revised

method. This transition subsection is

not intended to qualify for purposes of

assignment or allocation, pension costs

which have previously been disallowed

for reasons other than ERISA funding

limitations.

(b) The sum of all portions of

unfunded actuarial liability identified

pursuant to Standard 9904.413, effective

March 30, 1995, including such portions

of unfunded actuarial liability

determined for transition purposes, is

subject to the requirements for

assignment of 9904.412–40(c).

(c) Furthermore, this Standard,

effective March 30, 1995, clarifies, but is

not intended to create, rights of the

contracting parties, and specifies

techniques for determining adjustments

pursuant to 9904.413–50(c)(12). These

rights and techniques should be used to

resolve outstanding issues that will

affect pension costs of contracts subject

to this Standard.

(d) The method, or methods,

employed to achieve an equitable

transition shall be consistent with the

provisions of this Standard and shall be

approved by the contracting officer.

(e) All adjustments shall be

prospective only. However, costs/prices

of prior and existing contracts not

subject to price adjustment may be

considered in determining the

appropriate transition method or

adjustment amount for the computation

of costs/prices of contracts subject to

this Standard.

[FR Doc. 95–7555 Filed 3–29–95; 8:45 am]

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