DOE relies on contractor organizations to manage, operate, maintain, and provide support to its environmental cleanup and science and energy research at government-owned facilities. Contractors at environmental cleanup sites direct remediation efforts for radioactive and hazardous waste contamination generated during former nuclear weapons research and production activities. The eventual completion of cleanup activities at individual contractor locations without the existence of other ongoing operations, called site completion or site closure, generally leads to transition into long-term stewardship activities such as monitoring and surveillance requiring significantly fewer resources. Contractors at research sites complete a variety of ongoing research and development activities at national laboratories and universities. Contractors at cleanup and research sites may sponsor and pay pension and postretirement health benefits, collectively called postretirement benefits, for employees providing service under DOE contracts in order to attract, motivate, and retain qualified individuals to assist the agency in carrying out its mission. Contractors administer postretirement benefits for these employees either by establishing separate benefit plans solely for these individuals or by arranging for their participation in existing corporate plans, where contractor employees at DOE sites and those contractor employees assigned to non-DOE work participate in the same benefit plans. DOE reimburses contractor payments for employee compensation, including postretirement benefits as authorized by applicable regulations and each contractor’s operating agreement. For example, the Federal Acquisition Regulation (FAR) establishes uniform policies and procedures for the acquisition of goods and services by executive agencies. The FAR cost principles include factors to be considered by an agency when determining whether a contractor-claimed cost is to be allowed and reimbursed by an agency. Generally, consideration of whether compensation costs incurred under a government contract with a commercial organization are allowable includes whether they are, among other things, reasonable, allocable, and compliant with other applicable standards and the terms of the contract. For fiscal year 2003, DOE reimbursed approximately $431 million in contractor postretirement benefit contributions at 39 different DOE contractor sites. Contractor employees qualify for retiree benefits in pension and postretirement health plans differently, resulting in different methodologies for the payment of the two types of benefits. Pension benefits are determined using a formula based on employee salary and years of service as specified by contractor plan provisions. Employees accrue, or earn, future pension benefits throughout their period of service and are generally required to work for a certain period, called a vesting period, before they have a right to receive any accrued retirement benefits. DOE contractors that offer defined benefit pension plans are subject to the minimum funding standards established by the Employee Retirement and Income Security Act of 1974 (ERISA).The ERISA requirements set minimum standards regarding how much contractors must set aside each year in order to provide for future defined benefit pension payments when they are due. In contrast to contributions for pension benefits, there are no legal requirements to fund postretirement health benefits in advance for payments to retirees. Therefore, DOE contractors generally pay for postretirement health plans on a pay-as-you-go basis. Retired contractor employees are usually entitled to participate in contractor health plans after they complete a period of service immediately prior to their retirement. However, unlike pension benefits, the future amount of postretirement health benefits earned by a contractor employee cannot be expressly defined at the employee’s retirement date. This is due, in part, to the potential for future contractor changes in benefit provisions, such as retiree contributions, copayments, and coverage limitations, or cancellation of postretirement health coverage. Figure 1 summarizes the previously discussed relationships between DOE, contractors, third-party administrators, and contractor employees in the payment, sponsorship, and delivery of postretirement benefits. Consistent with the long-term nature of DOE research and cleanup activities, it is DOE’s policy to provide for the continuation of postretirement benefit plans when there are changes in individual contractors due to contract competitions. Typically, these scenarios would not result in the need for the cancellation and re-creation of these benefit plans. Although future contractor employee benefits earned may change as a result of contract negotiations, DOE attempts to continue the existing benefit plan with the new contractor as the sponsor, or offer comparable benefits in a successor contractor benefit plan during changes in contractors. Under this scenario, prior contractor retirees continue receiving benefits from the new plan sponsor and current employees continue to accrue benefits according to existing plan provisions. It is also DOE’s policy to facilitate the continuation of postretirement benefits following the completion of activities at environmental cleanup sites. DOE officials stated that an agency review of contracts, benefit plan documents, and labor agreements determined that contractor postretirement plans set forth the terms of an exchange between the contractor and contractor employees. In exchange for current services, contractors provide benefits after retirement (i.e., monthly pension payments and payments toward postretirement health insurance premiums) as defined by the terms of the postretirement benefit plans. DOE officials also stated that the continuation of pension and postretirement health benefits is necessary to reward former contractor employees for prior service at cleanup sites and to attract and retain future contractors and contractor employees to work at remaining cleanup sites. The completion of all contractor activities at environmental cleanup sites generally results in either the termination of the prime contract or a significant reduction in the scope of the outstanding contract. These contract changes at site closure differ from a change in contractor at an ongoing site because retirees who earned postretirement benefits under the terms of prior contracts are left without an active contractor to administer future benefit payments. It is DOE’s policy in these situations that future postretirement benefits earned by contractor employees may be satisfied by the outgoing contractor in one of two ways. Under the first option, the contractor can request reimbursement from DOE for the immediate settlement of outstanding benefit obligations, such as through the purchase of insurance contracts. Under the second option, the contractor may facilitate the continuation of the current benefit program and seek DOE reimbursement as postretirement benefit payments are made to retirees. The outgoing contractor can achieve the latter option through continuing to sponsor current postretirement benefit plans or through the transfer of plan administration to another party. This report refers to those benefits due and paid after site closure as post-closure benefits. In 1996, DOE issued Order 350.1 to establish responsibilities, requirements, and further cost allowability criteria for the management and oversight of contractor compensation programs. The order provides that contracting officers are largely responsible for the review and approval of allowable contractor compensation costs. It also details procedures for the management and oversight of postretirement benefits, such as the approval of new postretirement benefit plans, the approval of changes made to existing plans, and required procedures during contract and postretirement benefit plan terminations. The department’s Contractor Human Resources Management Division (CHRM) is responsible for providing contracting officers with policies and procedures for managing contractor postretirement benefits costs under the provisions of DOE Order 350.1. DOE’s Office of Procurement Assistance Management (OPAM) establishes overall performance objectives for contractor compensation programs and approves changes to pension and postretirement health benefit plans in excess of contracting officer authorization limits. The National Nuclear Security Administration (NNSA) assumes these responsibilities at current naval reactor sites and assists in the review of contractor compensation programs at other NNSA-designated locations. DOE Order 350.1 requires contractors to complete a recurring evaluation of their employee benefit programs, including pension and postretirement health plans, against the benefit programs of labor competitors in the private sector or other professionally recognized measures. These provisions are completed to aid contracting officers in assessing contractor benefit costs against the reasonableness standards of the FAR. Specifically, DOE Order 350.1 states that contractors may use either the results from (1) a benefit value study or (2) the annual U.S. Chamber of Commerce Employee Benefit Study, collectively called comparison studies in this report, to perform an appropriate evaluation of their benefit programs. Benefit value studies are intended to measure the relative worth of a contractor’s benefit programs to its employees. This is done through the calculation of a replacement value for the benefits offered in the contractor’s benefit program. Replacement values that may differ among employees, such as the use and extent of current employee health benefits, are calculated through the use of a hypothetical group of employees. This methodology allows comparisons between the provisions of benefit programs with different demographics, turnover and retirement rates, and benefit election patterns. As such, replacement values are also calculated for selected labor market competitors of the contractor and compared to the contractor replacement values. DOE contractors engage benefits consulting companies to assist with the benefit value studies and work with contracting officers to approve the methodologies used. Replacement values are found for each benefit component evaluated in the study and used to develop an overall benefit index program for that contractor. The final product of the benefit value study, called the net benefit value index, compares the relative value of the contractor’s employer-paid benefits to the employer-paid value of the average labor competitor’s benefits, represented by an index of 100. Therefore, a contractor with a net benefit value index of 107.0 offers benefits to its employees with a replacement value that is 7 percent above the average of the contractor’s labor competitors. As mentioned, the benefit value studies also create separate indexes for major individual benefit components, such as pension benefits and vacation time. The U.S. Chamber of Commerce Employee Benefit Study, or Chamber of Commerce cost study, provides a comparison of the annual employee benefit contributions and payments made by the contractor with the average contributions and payments of a survey population. The U.S. Chamber of Commerce Employee Benefit Study is an annual polling of domestic employers conducted by the U.S. Chamber of Commerce’s Statistics and Research Center and sponsored by American International Group, Inc. The survey publishes information on average employer benefit contributions and payments per full-time employee made during the preceding year and the percentage of total employer payroll spent on employee benefits.