[Federal Register Volume 63, Number 210 (Friday, October 30, 1998)]
[Rules and Regulations]
[Pages 58595-58598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28958]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 15, 31 and 52

[FAC 97-09; FAR Case 89-012; Item IV]
RIN 9000-AC90


Federal Acquisition Regulation; Pay-As-You-Go Pension Costs

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council have agreed on a final rule amending 
the Federal Acquisition Regulation (FAR) for consistency with the cost 
accounting standards for composition and measurement of pension cost 
and adjustment and allocation of pension cost. This regulatory action 
was not subject to Office of Management and Budget review under 
Executive Order 12866, dated September 30, 1993. This is not a major 
rule under 5 U.S.C. 804.

EFFECTIVE DATE: December 29, 1998.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC 20405, (202) 501-4755, for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jeremy F. Olson at (202) 501-0692. Please cite FAC 
97-09, FAR case 89-012.

SUPPLEMENTARY INFORMATION:

A. Background

    An interim rule was published in the Federal Register at 54 FR 
13022, March 29, 1989. The issuance of an interim rule was necessary 
because the United States Court of Appeals had ruled that FAR 31.205-
6(j)(5) was inconsistent with 48 CFR 9904.412, Cost accounting standard 
for composition and measurement of pension cost (CAS 412), and that the 
controlling regulation was CAS 412.
    Since the 1989 interim FAR rule was published, the Office of 
Federal Procurement Policy, Cost Accounting Standards Board, made 
substantial changes to CAS 412 and 48 CFR 9904.413, Adjustment and 
allocation of pension cost (CAS 413), relating to accounting for 
pension costs under negotiated Government contracts. These proposed 
changes were published and made available for public comment on 
November 5, 1993 (58 FR 58999). Public comments were received and 
considered in the development of the final CAS rule which was published 
in the Federal Register at 60 FR 16534, March 30, 1995. The changes in 
the final CAS rule addressed 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.
    A proposed FAR rule was published in the Federal Register at 62 FR 
49900, September 23, 1997, to provide consistency with the revised CAS 
412 and CAS 413. The rule proposed to (1) revise the definitions at FAR 
31.001 to conform with the CAS Board's definitions; (2) delete 
references to ``unfunded pension plans'' since CAS 412 and CAS 413 no 
longer refer to unfunded pension plans; (3) add new language to FAR 
31.205-6(j) to address transfer of assets to another account within the 
same fund, to address the allowability of costs for nonqualified 
pension plans using the pay-as-you-go cost method, and to address both 
CAS requirements and all other situations not covered by CAS; (4) add 
new language at FAR 31.205-6(j)(6), which was previously reserved, to 
refer to CAS 412 and CAS 413 for treatment of pension plans using the 
pay-as-you-go cost method; (5) provide other editorial changes to make 
FAR 31.001 and 31.205-6 consistent with the language of CAS 412 and CAS 
413; and (6) revise the clause at FAR 52.215-27, Termination of Defined 
Benefit Pension Plans, to conform the clause with the

[[Page 58596]]

proposed FAR Part 31 changes. Six sources submitted comments in 
response to the proposed FAR rule. All comments were considered in the 
development of this final rule.
    This final rule amends FAR 15.408, Solicitation provisions and 
contract clauses; FAR 31.001, Definitions; FAR 31.205-6, Compensation 
for personal services; and FAR 52.215-15, Pension Adjustments and Asset 
Reversions. The final rule differs from the proposed rule by--(1) 
revising FAR 31.205-6(j)(3)(i)(A) to address the deferral of pension 
costs pursuant to a waiver under the Employee's Retirement Income 
Security Act of 1974 (ERISA); (2) revising FAR 31.205-6(j)(3)(v) to 
clarify that the provisions of FAR 31.205-6(j)(4) apply if the 
withdrawal of assets is a pension plan termination under ERISA; (3) 
revising FAR 31.205-6(j)(4)(i) and 52.215-15(b) to clarify the 
calculation of the adjustment amounts for both CAS and non-CAS-covered 
contracts; and (4) making a number of editorial revisions, including 
changes (e.g., renumbering FAR 52.215-27 as FAR 52.215-15) resulting 
from publication of Federal Acquisition Circular 97-02 on September 30, 
1997 (62 FR 51224).

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded 
to small entities use simplified acquisition procedures or are awarded 
on a competitive, fixed-price basis, and do not require application of 
the cost principle contained in this rule.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose recordkeeping or information collection 
requirements, or collections of information from offerors, contractors, 
or members of the public which require the approval of the Office of 
Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Parts 15, 31, and 52

    Government procurement.

    Dated: October 22, 1998.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.
    Therefore, 48 CFR Parts 15, 31, and 52 are amended as set forth 
below:
    1. The authority citation for 48 CFR Parts 15, 31, and 52 continues 
to read as follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 15--CONTRACTING BY NEGOTIATION

    2. Section 15.408 is amended by revising paragraph (g) to read as 
follows:


15.408  Solicitation provisions and contract clauses.

* * * * *
    (g) Pension Adjustments and Asset Reversions. The contracting 
officer shall insert the clause at 52.215-15, Pension Adjustments and 
Asset Reversions, in solicitations and contracts for which it is 
anticipated that cost or pricing data will be required or for which any 
preaward or postaward cost determinations will be subject to Part 31 of 
the FAR.
* * * * *

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    3. Section 31.001 is amended by removing the definitions 
``Actuarial liability'' ``Termination of gain or loss'' and ``Unfunded 
pension plan'' ; by adding, in alphabetical order, the definitions 
``Actuarial accrued liability'', ``Nonqualified pension plan'', 
``Qualified pension plan'' and ``Termination of employment gain or 
loss'' ; and by revising the definitions of ``Accrued benefit cost 
method'', ``Actuarial assumption'', ``Actuarial cost method'', 
``Actuarial valuation'', ``Funded pension cost'', ``Normal cost'', 
``Pension plan'', and ``Projected benefit cost method'', to read as 
follows:


31.001  Definitions.

    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; i.e., 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.)
* * * * *
    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.
    Actuarial assumption means an estimate of future conditions 
affecting pension cost; e.g., mortality rate, employee turnover, 
compensation levels, earnings on pension plan assets, and changes in 
values of pension plan assets.
    Actuarial cost method means a technique that uses actuarial 
assumptions to measure the present value of future pension benefits and 
pension plan administrative expenses, and that 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.
* * * * *
    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.
* * * * *
    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.
* * * * *
    Nonqualified pension plan means any pension plan other than a 
qualified pension plan as defined in this part.
    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.
* * * * *
    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 retirements, 
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

[[Page 58597]]

beneficiaries of deceased employees, may be an integral part of a 
pension plan.
* * * * *
    Projected benefit cost method means either--
    (1) Any of the several actuarial cost methods that distribute the 
estimated total cost of all of the employees' prospective benefits over 
a period of years, usually their working careers; or
    (2) A modification of the accrued benefit cost method that 
considers projected compensation levels.
* * * * *
    Qualified pension plan means a pension plan comprising a definite 
written program communicated to and for the exclusive benefit of 
employees that 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.
* * * * *
    Termination of employment gain or loss means an actuarial gain or 
loss resulting from the difference between the assumed and actual rates 
at which pension plan participants separate from employment for reasons 
other than retirement, disability, or death.
* * * * *
    4. Section 31.201-5 is amended by revising the last sentence to 
read as follows:


31.201-5  Credits.

    * * * See 31.205-6(j)(4) for rules governing refund or credit to 
the Government associated with pension adjustments and asset 
reversions.
    5. Section 31.205-6 is amended by revising paragraphs (j)(1) 
through (j)(6) to read as follows:


31.205-6  Compensation for personal services.

* * * * *
    (j) Pension costs. (1) A pension plan, as defined in 31.001, is a 
deferred compensation plan. Additional benefits such as permanent and 
total disability and death payments and survivorship payments to 
beneficiaries of deceased employees may be treated as pension costs, 
provided the benefits are an integral part of the pension plan and meet 
all the criteria pertaining to pension costs.
    (2) Pension plans are normally segregated into two types of plans: 
defined-benefit or defined-contribution pension plans. The cost of all 
defined-benefit pension plans shall be measured, allocated, and 
accounted for in compliance with the provisions of 48 CFR 9904.412, 
Cost accounting standard for composition and measurement of pension 
cost, and 48 CFR 9904.413, Adjustment and allocation of pension cost. 
The costs of all defined-contribution pension plans shall be measured, 
allocated, and accounted for in accordance with the provisions of 48 
CFR 9904.412 and 48 CFR 9904.413. Pension costs are allowable subject 
to the referenced standards and the cost limitations and exclusions set 
forth in paragraphs (j)(2)(i) and (j)(3) through (8) of this 
subsection.
    (i) Except for nonqualified pension plans using the pay-as-you-go 
cost method, to be allowable in the current year, pension costs must be 
funded by the time set for filing of the Federal income tax return or 
any extension thereof. Pension costs assigned to the current year, but 
not funded by the tax return time, shall not be allowable in any 
subsequent year. For nonqualified pension plans using the pay-as-you-go 
cost method, to be allowable in the current year, pension costs must be 
allocable in accordance with 48 CFR 9904.412-50(d)(3).
    (ii) Pension payments must be reasonable in amount and must be paid 
pursuant to--an agreement entered into in good faith between the 
contractor and employees before the work or services are performed; and 
the terms and conditions of the established plan. The cost of changes 
in pension plans that are discriminatory to the Government or are not 
intended to be applied consistently for all employees under similar 
circumstances in the future are not allowable.
    (iii) Except as provided for early retirement benefits in paragraph 
(j)(7) of this subsection, one-time-only pension supplements not 
available to all participants of the basic plan are not allowable as 
pension costs unless the supplemental benefits represent a separate 
pension plan and the benefits are payable for life at the option of the 
employee.
    (iv) Increases in payments to previously retired plan participants 
covering cost-of-living adjustments are allowable if paid in accordance 
with a policy or practice consistently followed.
    (3) Defined-benefit pension plans. This paragraph covers pension 
plans 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. The cost limitations and 
exclusions pertaining to defined-benefit plans are as follows:
    (i)(A) Except for nonqualified pension plans, pension costs (see 48 
CFR 9904.412-40(a)(1)) assigned to the current accounting period, but 
not funded during it, shall not be allowable in subsequent years 
(except that a payment made to a fund by the time set for filing the 
Federal income tax return or any extension thereof is considered to 
have been made during such taxable year). However, 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 the Employee's Retirement Income Security Act of 1974 
(ERISA), will be allowable in those future accounting periods in which 
the funding of such excess amounts occurs (see 48 CFR 9904.412-
50(c)(5)).
    (B) For nonqualified pension plans, except those using the pay-as-
you-go cost method, allowable costs are limited to the amount allocable 
in accordance with 48 CFR 9904.412-50(d)(2).
    (C) For nonqualified pension plans using the pay-as-you-go cost 
method, allowable costs are limited to the amounts allocable in 
accordance with 48 CFR 9904.412-50(d)(3).
    (ii) Any amount funded in excess of the pension cost assigned to a 
cost accounting period is not allowable and shall be accounted for as 
set forth at 48 CFR 9904.412-50(a)(4), and shall be allowable in the 
future period to which it is assigned, to the extent it is allocable, 
reasonable, and not otherwise unallowable.
    (iii) Increased pension costs caused by delay in funding beyond 30 
days after each quarter of the year to which they are assignable are 
unallowable. If a composite rate is used for allocating pension costs 
between the segments of a company and if, because of differences in the 
timing of the funding by the segments, an inequity exists, allowable 
pension costs for each segment will be limited to that particular 
segment's calculation of pension costs as provided for in 48 CFR 
9904.413-50(c). Determinations of unallowable costs shall be made in 
accordance with the actuarial cost method used in calculating pension 
costs.
    (iv) Allowability of the cost of indemnifying the Pension Benefit 
Guaranty Corporation (PBGC) under ERISA Section 4062 or 4064 arising 
from terminating an employee deferred compensation plan will be 
considered on a case-by-case basis, provided that if insurance was 
required by the PBGC under ERISA Section 4023, it was so obtained and 
the indemnification payment is not recoverable under the insurance. 
Consideration under the foregoing circumstances will be primarily for 
the purpose of appraising

[[Page 58598]]

the extent to which the indemnification payment is allocable to 
Government work. If a beneficial or other equitable relationship 
exists, the Government will participate, despite the requirements of 
31.205-19(a)(3) and (b), in the indemnification payment to the extent 
of its fair share.
    (v) Increased pension costs resulting from the withdrawal of assets 
from a pension fund and transfer to another employee benefit plan fund, 
or transfer of assets to another account within the same fund, are 
unallowable except to the extent authorized by an advance agreement. If 
the withdrawal of assets from a pension fund is a plan termination 
under ERISA, the provisions of paragraph (j)(4) of this subsection 
apply. The advance agreement shall--
    (A) State the amount of the Government's equitable share in the 
gross amount withdrawn or transferred; and
    (B) Provide that the Government receive a credit equal to the 
amount of the Government's equitable share of the gross withdrawal or 
transfer.
    (4) Pension adjustments and asset reversions. (i) For segment 
closings, pension plan terminations, or curtailment of benefits, the 
adjustment amount shall be the amount measured, assigned, and allocated 
in accordance with 48 CFR 9904.413-50(c)(12) for contracts and 
subcontracts that are subject to Cost Accounting Standards (CAS) Board 
rules and regulations (48 CFR Chapter 99). For contracts and 
subcontracts that are not subject to CAS, the adjustment amount shall 
be the amount measured, assigned, and allocated in accordance with 48 
CFR 9904.413-50(c)(12), except the numerator of the fraction at 48 CFR 
9904.413-50(c)(12)(vi) shall be the sum of the pension plan costs 
allocated to all non-CAS-covered contracts and subcontracts that are 
subject to Subpart 31.2 or for which cost or pricing data were 
submitted.
    (ii) For all other situations where assets revert to the 
contractor, or such assets are constructively received by it for any 
reason, the contractor shall, at the Government's option, make a refund 
or give a credit to the Government for its equitable share of the gross 
amount withdrawn. The Government's equitable share shall reflect the 
Government's participation in pension costs through those contracts for 
which cost or pricing data were submitted or that are subject to 
Subpart 31.2. Excise taxes on pension plan asset reversions or 
withdrawals under this paragraph (j)(4)(ii) are unallowable in 
accordance with 31.205-41(b)(6).
    (5) Defined-contribution pension plans. This paragraph covers those 
pension plans in which the contributions are established in advance and 
the level of benefits is determined by the contributions made. It also 
covers profit sharing, savings plans, and other such plans, provided 
the plans fall within the definition of a pension plan in paragraph 
(j)(1) of this subsection.
    (i) Allowable pension cost is limited to the net contribution 
required to be made for a cost accounting period after taking into 
account dividends and other credits, where applicable. However, 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 will be allowable in those future 
accounting periods in which the funding of such excess amounts occurs 
(see 48 CFR 9904.412-50(c)(5)).
    (ii) The provisions of paragraphs (j)(3) (ii) and (iv) of this 
subsection apply to defined-contribution plans.
    (6) Pension plans using the pay-as-you-go cost method. The cost of 
pension plans using the pay-as-you-go cost method shall be measured, 
allocated, and accounted for in accordance with 48 CFR 9904.412 and 
9904.413. Pension costs for a pension plan using the pay-as-you-go cost 
method shall be allowable to the extent they are allocable, reasonable, 
and not otherwise unallowable.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    6. Section 52.215-15 is revised to read as follows:


52.215-15  Pension adjustments and asset reversions.

    As prescribed in 15.408(g), insert the following clause:

Pension Adjustments and Asset Reversions (Dec 1998)

    (a) The Contractor shall promptly notify the Contracting Officer 
in writing when it determines that it will terminate a defined-
benefit pension plan or otherwise recapture such pension fund 
assets.
    (b) For segment closings, pension plan terminations, or 
curtailment of benefits, the adjustment amount shall be the amount 
measured, assigned, and allocated in accordance with 48 CFR 
9904.413-50(c)(12) for contracts and subcontracts that are subject 
to Cost Accounting Standards (CAS) Board rules and regulations (48 
CFR Chapter 99). For contracts and subcontracts that are not subject 
to CAS, the adjustment amount shall be the amount measured, 
assigned, and allocated in accordance with 48 CFR 9904.413-
50(c)(12), except the numerator of the fraction at 48 CFR 9904.413-
50(c)(12)(vi) shall be the sum of the pension plan costs allocated 
to all non-CAS-covered contracts and subcontracts that are subject 
to Federal Acquisition Regulation (FAR) Subpart 31.2 or for which 
cost or pricing data were submitted.
    (c) For all other situations where assets revert to the 
Contractor, or such assets are constructively received by it for any 
reason, the Contractor shall, at the Government's option, make a 
refund or give a credit to the Government for its equitable share of 
the gross amount withdrawn. The Government's equitable share shall 
reflect the Government's participation in pension costs through 
those contracts for which cost or pricing data were submitted or 
that are subject to FAR Subpart 31.2.
    (d) The Contractor shall include the substance of this clause in 
all subcontracts under this contract that meet the applicability 
requirement of FAR 15.408(g).

(End of clause)

[FR Doc. 98-28958 Filed 10-29-98; 8:45 am]
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