[Federal Register Volume 68, Number 175 (Wednesday, September 10, 2003)]
[Proposed Rules]
[Pages 53312-53314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23053]



48 CFR Part 9904

Cost Accounting Standards Board; Accounting for the Costs of 
Post-Retirement Benefit Plans Sponsored by Government Contractors

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Notice of withdrawal of Advance Notice of Proposed Rulemaking.


SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards (CAS) Board, is providing public notification of 
the decision to discontinue the development of a Cost Accounting 
Standard (CAS) addressing the recognition of costs of post-retirement 
benefit plans under government cost-based contracts and subcontracts.

FOR FURTHER INFORMATION CONTACT: Robert Burton, Office of Federal 
Procurement Policy (telephone: 202-395-3302).


A. Regulatory Process

    The Cost Accounting Standards Board's rules, regulations and 
Standards are codified at 48 CFR Chapter 99. The Office of Federal 
Procurement Policy Act, 41 U.S.C. 422(g)(1), requires the Board, prior 
to the establishment of any new or revised Cost Accounting Standard, to 
complete a prescribed rulemaking process. The process generally 
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 the adoption 
of a proposed Standard.
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.

    This notice announces the discontinuation of a case after 
completing steps one and two of the four-step process in accordance 
with the requirements of 41 U.S.C. 422(g)(1)(B) and (C).

B. Background and Summary

Prior Promulgations

    Post-retirement benefit plans have existed for many years, but 
received little attention until the Financial Accounting Standards 
Board (FASB) examined the potential liabilities and costs of these 
plans and issued Statement No. 106, ``Employers' Accounting for Post-
Retirement Benefits Other Than Pensions'' (SFAS 106), in December of 
1990. In response to numerous public comments recommending that the CAS 
Board establish a case concerning the measurement, assignment, and 
allocation of the costs of post-retirement benefit plans, at a February 
24, 1995 meeting, the CAS Board directed the staff to begin work on a 
Staff Discussion Paper (SDP).
    On September 20, 1996, the Board published an SDP, ``Post-
Retirement Benefit Plans Other Than Pension Plans Sponsored by 
Government Contractors' (61 FR 49533), identifying the cost accounting 
issues related to post-retirement benefit plans. On January 12, 1999, 
the Board sent a letter to all the respondents to the SDP. This letter 
was also made widely available for public comment on February 18, 1999 
(64 FR 8141).
    The Board published an ANPRM (65 FR 59503), ``Accounting for the 
Costs of Post-Retirement Benefit Plans Sponsored by Government 
Contractors,'' on October 5, 2000.

Public Comments

    The Board received twenty-three (23) sets of public comments in 
response to the ANPRM. Most respondents believed that accrual 
accounting following the provisions of SFAS 106 was the most 
appropriate basis for measuring and assigning the costs of a post-
retirement benefit plan that created a firm liability. However, many 
respondents believed that the imposition of any nonforfeitability 
criteria, as proposed, could lock a contractor into providing explicit 
benefits with no ability to control the employer-paid portion of the 
cost or to switch to alternative benefit delivery arrangements. 
Moreover, the continuing high level of medical inflation coupled with 
various economic factors, and global competition, raises the question 
whether any contractor could risk the adverse effects of providing any 
level of nonforfeitable benefits. The argument has been made that the 
only prudent way of providing some assurance that some level of benefit 
will be available in the future, is for a contractor to currently fund 
the accrued cost as permitted by existing procurement regulations. Many 
commenters did not believe the Board should proceed with this project.

Continuing Research

    Subsequent to the publication of the ANPRM, the General Accounting 
Office (GAO) issued a report to the Chairman, Committee on Health, 
Education, Labor, and Pensions, U.S. Senate, entitled ``RETIREE HEALTH 
BENEFITS--Employer-Sponsored Benefits May Be Vulnerable to Further 
Erosion'' (GAO-01-374) in May 2001. The GAO summarized its findings as 

    Despite a sustained strong economy and several years of 
relatively low rates of increase in health insurance premiums, the 
decline in the availability of employer-sponsored retiree health 
benefits has not reversed since 1997--the last year for which we had 
reported previously--and several indicators suggest that there may 
be further erosion in these benefits. Employer benefit consultants 
we contacted generally indicated that retiree health benefits were 
continuing to decline. Two widely cited employer benefit surveys, 
however, provide conflicting data as to whether the proportion of 
employers sponsoring retiree health insurance remained stable or 
declined slightly from 1997 through 2000. In some cases, employers 
provide retiree health benefits to current retirees or long-term 
employees, but newly hired employees are not eligible. To date, 
however, the percentage of retirees with employer-sponsored coverage 
has remained relatively stable over the past several years, with 
about 37 percent of early retirees and 26 percent of Medicare-
eligible retirees receiving retiree health coverage from a former 
employer. This stability may also be linked to employers' tendency 
to reduce coverage for future rather than current retirees. In some 
cases, employers that continue to offer retiree health benefits have 
reduced the terms of these benefits by increasing the share of 
premiums that retirees pay for health benefits, increasing co-
payments and

[[Page 53313]]

deductibles, or capping the employers' expenditures for coverage.

    Several current and developing market, legal, and demographic 
factors may contribute to a further decline in employer-sponsored 
retiree health benefits. These factors include--

    [sbull] A resumption of health insurance premiums rising at a rate 
faster than general inflation;
    [sbull] Proposed changes in Medicare coverage, such as adding a new 
prescription drug benefit, that could affect the costs and design of 
employers supplemental health benefits for Medicare-eligible retirees;
    [sbull] A recent circuit court ruling allowing claims of violations 
of federal age discrimination law when employers make distinctions in 
health benefits they offer retirees on the basis of Medicare 
eligibility; and
    [sbull] The movement of the baby boom generation into retirement 
age, leading some employers to have a growing number of retirees 
relative to active workers.
    Retirees whose former employers reduce or eliminate health benefits 
often face limited or unaffordable alternatives to obtaining coverage. 
Retirees may purchase coverage on their own--either individual 
insurance policies for these under age 65 or Medicare supplemental 
plans for those age 65 or older. However, despite federal laws that 
guarantee access to some individual insurance policies to certain 
individuals who lose group coverage, retirees' ages and often poorer 
health status combine to make individually purchased health insurance 
expensive. For example, the majority of states do not restrict the 
price of premiums that carriers may charge individuals who purchase 
individual insurance policies. Thus, carriers in these states may 
charge 60-year-old males a monthly premium close to 4 times higher than 
what they charge 30-year-old males, and there may be an even bigger 
difference if the older individual is not healthy. Similarly, the 
number of Medicare supplemental plans that federal law guarantees to 
retirees over 65 whose employers eliminate coverage is limited, and 
they do not include coverage for benefits such as prescription drugs. 
Thus, retirees seeking alternative coverage could receive less 
comprehensive coverage and pay more for it than they had previously.
    The findings of the GAO report were supported and expanded upon by 
the Employee Benefit Research Institute (EBRI) Issue Brief Number 236, 
``Retiree Health Benefits: Trends and Outlook,'' authored by Paul 
Fronstin in August 2001. The Issue Brief reported that employers had 
taken various actions in response to SFAS 106, including placing caps 
on the employers' expenditures, changing age and service requirements, 
and moving to ``defined contribution'' health benefits. Some employers 
dropped all retiree health benefits for future retirees and other 
employers dropped benefits for current retirees' coverage, though this 
action occurred less often than did other changes. Regarding future 
trends, EBRI found the following:

    While the changes employers have made to retiree health benefits 
do not appear to be having much impact on current retirees, they are 
likely to be felt most by future retirees who have not yet or may 
never become eligible for retiree health benefits because the courts 
have ruled that an employer has a right to terminate or amend 
retiree health benefits only if it has proved that such a right has 
been reserved or stated in specific language and on a widely known 

    The EBRI Issue Brief also remarked that many early retirees, ages 
55-64, who were not covered by employment-based retiree health 
insurance, had difficulty finding affordable insurance. This 
observation helped to explain the report's finding that--

    By law, employers are under no obligation to provide retiree 
health benefits, except to current retirees who can prove that they 
were previously promised a specific benefit. Between 1994 and 1999, 
retirees ages 55-64 experienced an increase in the likelihood of 
being uninsured, but, as mentioned above, the percentage of retirees 
covered by health benefits through a former employer or union was 
unchanged (although as is shown below, current retirees have seen 
increases in their share of health insurance premiums). In addition, 
the likelihood of an early retiree having health insurance through 
his or her own spouse increased. An erosion of public health 
insurance and health insurance purchased directly from an insurer 
accounts for the increase in the uninsured.

    The courts continue to find that an employer has a right to 
terminate or amend retiree health benefits if such a right has been 
reserved or stated in specific language and on a widely known basis. In 
Hughes v. 3M Retiree Medical Plan (2002 CA8), 2002 WL 276767, the 
Eighth Circuit held that an employee booklet describing a retiree 
health plan did not create a ``lifetime'' benefit because the summary 
plan description was silent as to vesting. The Court also noted that 
the benefit booklet contained the statement that ``[t]he company hopes 
and expects to continue these plans indefinitely, but reserves the 
right to amend or discontinue them, subject to collective bargaining as 
    A recent study by a joint project of the Kaiser Family Foundation, 
the Commonwealth Fund, and the Health Research & Education Trust found 
not only that the number of employers who sponsor retiree health plans 
is continuing to decline, but that those plan sponsors who are 
continuing their retiree health plans are considering shifting more of 
the cost to the retirees. Mark A. Hoffmann, writing for ``Business 
Insurance'' on April 17, 2002, reported the following:

    The percentage of employers offering retiree health care 
coverage is continuing to drop, according to a survey released 
earlier this week.
    Only 34% of U.S. companies with 200 or more employees offered 
health care coverage to Medicare-eligible retirees in 2001, down 
from 37% in 2000 and 41% in 1999, according to the study, titled 
``Erosion of Private Health Care Insurance Coverage for Retirees.''
    The study. . . also found that Medicare-age retirees, on 
average, pay 26% of the total cost of their health care premiums, 
compared with 13% paid by active workers in the same firms.
    ``By 2001, numerous warning signs indicate that, although few 
employers are dropping coverage altogether, many say they plan to 
make changes that shift a greater share of costs to retirees, by 
raising premium contributions and imposing greater cost-sharing 
requirements for benefits such as prescription drugs,'' the report 

    As did the EBRI Issue Brief, the study found that while retiree 
health coverage will probably continue to be provided for current 
retirees, the prospect of retiree health coverage for future 
retirees is less certain. The survey made the following observation:

    Yet, just 4% of companies offering retiree coverage say they are 
likely to eliminate that coverage entirely in the next two years. 
Seven percent of firms say it's likely they will eliminate retiree 
benefits for new employees or for existing workers who have not yet 
    However, while no jumbo firms indicate they would eliminate 
retiree health coverage entirely, 11% say they are likely to 
eliminate them for new employees or existing workers who have not 
yet retired.

    The staff reviewed copies of post-retirement benefit documents and 
plan descriptions of several defense contractors. At the request of the 
CAS Board staff, the Defense Contract Audit Agency (DCAA) provided 
these copies from their contract files after obtaining permission from 
the contractors to release these proprietary materials for review by 
the Board and its staff in their deliberation on this case. While the 
details and the benefits provided by these plans were quite varied 
among the plan documents, the provisions of these plans were consistent 
with the general description of post-retirement benefit

[[Page 53314]]

plans found in most articles and literature on the subject. In 
particular, attainment of an age close to retirement and significant 
service--e.g., age 50 and 20 years of service--were usually required 
for eligibility. All the plans contained reference to the contractor's 
unrestricted right to amend or terminate the plan.
    There have also been a number of news stories in the print and 
broadcast media concerning retirees from large private companies who 
have lost their employer-based retiree health insurance and have been 
unable to purchase health insurance coverage on their own due to pre-
existing conditions or cost. As the general public has become 
increasing aware of this issue, some members of Congress have begun 
considering how the protections of the Employee Retirement Income 
Security Act of 1974 (ERISA) or other statutes might be extended to 
protect these retirees.
    In response to a request from Representative Carolyn McCarthy, the 
GAO did a survey of three major defense contractors. In a letter to the 
Congresswoman dated February 27, 2003, which reported on ``Retiree 
Health Benefits at Selected Government Contractors,'' the GAO wrote:
    DCMA and DCAA closely monitored postretirement health benefits to 
ensure charges to the government were made in compliance with federal 
regulations. As part of their oversight efforts, the two agencies 
performed risk assessments and conducted regular reviews of the 
contractors' actual and projected postretirement health benefits costs 
and the assumptions underlying future projections. For the 2 years 
covered in our review, neither DCAA nor DCMA found any significant 
problems with the contractors' actual or projected postretirement 
health benefit costs. For example, DCAA took no exceptions to the 
projected costs reflected in the contractors' pricing proposals and 
took exception to less than 1 percent of the $756 million in 
postretirement health benefits costs incurred by the contractors over 
the 2-year period.


    Because contractors need the flexibility to modify, reduce, or even 
eliminate post-retirement benefits in the future in response to the 
pressures of medical inflation, an aging population, and global 
competition, the Board finds that the liability for post-retirement 
benefits cannot be made sufficiently firm to be recognized for 
government cost accounting purposes without undue financial risk to 
both the contractor and the government. Therefore, the Board has 
decided to discontinue further development of the rule proposed in the 
ANPRM and the project (CASB Docket No. 96-02A) to develop a separate 
Cost Accounting Standard (CAS) that addresses the recognition of costs 
of post-retirement benefit plans under government cost-based contracts 
and subcontracts.

Angela B. Styles,
Chair, Cost Accounting Standards Board.
[FR Doc. 03-23053 Filed 9-9-03; 8:45 am]