[Federal Register Volume 60, Number 61 (Thursday, March 30, 1995)]
[Rules and Regulations]
[Pages 16534-16557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7555]




[[Page 16533]]

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Part II





Office of Management and Budget





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Office of Federal Procurement Policy



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48 CFR Parts 9903 and 9904



Cost Accounting Standards Board; Cost Accounting Standards for 
Composition, Measurement, Adjustment, and Allocation of Pension Costs; 
Final Rule

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

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 
full-funding 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 [[Page 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 tax-deductible 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-as-you-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. 
[[Page 16536]] 

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 tax-deductibility, 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 [[Page 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 
full-funding 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 full-funding 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, full-funding, 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 tax-deductible 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 
[[Page 16538]] 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 tax-deductible 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 plan-wide 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- [[Page 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 defined-benefit 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 sixty-month 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 non-Government 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 
[[Page 16540]] 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 tax-
deductible amount for the cost accounting period determined in 
accordance with the Employee Retirement Income Security Act of 1974 
[[Page 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 pay-as-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. 
[[Page 16542]] 
    (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 [[Page 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 pay-as-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 
tax-deductible amount plus the accumulated value of prepayment credits.
    (3) The cost of nonqualified defined-benefit 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 defined-benefit 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-as-you-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 defined-benefit 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 
[[Page 16544]] 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 defined-benefit 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 defined-
contribution 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
------------------------------------------------------------------------

    [[Page 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 x 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-as-you-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 x 1.08) is excluded from the amount considered fully 
amortized in 1996. The next year, 1997, Contractor K must eliminate 
$233,280 ($216,000 x 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 
[[Page 16546]] 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 tax-deductible 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 carried-forward 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 [[Page 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  x  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  x  (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%  x  $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%  x  ($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 CAS-covered 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 
[[Page 16548]] 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 tax-deductible 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  x  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  x  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  x  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 [[Page 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  x  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-you-go 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 [[Page 16550]] 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 [[Page 16551]] costs are measured by an immediate-gain 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 defined-benefit 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 
[[Page 16552]] 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, [[Page 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 
defined-benefit 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      Market  
                                                   method               
------------------------------------------------------------------------
Cash..........................................     $100,000      100,000
Equity securities.............................    6,000,000    7,800,000
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 [[Page 16554]] 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 Government-
owned 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 over-contributed 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 [[Page 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 [[Page 16556]] 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 tax-
deductible 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 tax-deductible maximum is $40,000 and the ERISA minimum funding 
requirement is $18,000. Since funding of the accrued pension cost is 
not constrained by tax-deductibility, 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 
[[Page 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 CAS-covered 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]
BILLING CODE 3110-01-P