[Federal Register Volume 68, Number 238 (Thursday, December 11, 2003)]
[Rules and Regulations]
[Pages 69251-69257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30477]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 31 and 52

[FAC 2001-18; FAR Case 2001-037; Item VI]
RIN 9000-AJ57


Federal Acquisition Regulation; Insurance and 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 (Councils) have agreed on a final rule

[[Page 69252]]

amending the Federal Acquisition Regulation (FAR) to revise the 
insurance and indemnification cost principle, and the portion of the 
compensation for personal services cost principle relating to pension 
costs. The rule revises both cost principles by improving clarity and 
structure and removing unnecessary and duplicative language. The 
revisions are intended to revise contract cost principles and 
procedures, in light of the evolution of Generally Accepted Accounting 
Principles (GAAP), the advent of Acquisition Reform, and experience 
gained from implementation pertaining to contract cost principles and 
procedures.

DATES: Effective Date: January 12, 2004.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755, 
for information pertaining to status or publication schedules. For 
clarification of content, contact Mr. Edward Loeb, Policy Advisor, at 
(202) 501-0650. Please cite FAC 2001-18, FAR case 2001-037.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 68 FR 4880, January 30, 2003, with a request for comments. 
Four respondents submitted comments. A discussion of the comments is 
provided below. The Councils considered all comments and concluded that 
the proposed rule should be converted to a final rule, with changes to 
the proposed rule. Differences between the proposed rule and final rule 
are discussed below:

B. Public Comments

General Reformatting of FAR 31.205

    Comment 1: In addition to specific comments regarding the subject 
case, a respondent also recommended reformatting this cost principle as 
part of a general reformat effort of FAR Part 31, Contract Cost 
Principles and Procedures. The respondent advocates establishing a 
common format for the selected costs detailed in FAR 31.205 will 
increase the clarity of the cost principles and reduce 
misinterpretation.
    Councils' response: Nonconcur. The Councils are unaware of any 
significant clarity problems with the current FAR cost principles and 
see no benefit in this recommendation. While it is true that the cost 
principles do not all share an identical format, it does not follow 
that this makes them difficult to understand. Moreover, such a 
comprehensive revision of the cost principles could actually increase 
disputes by substituting new wording for longstanding, court-tested 
language.
    Of the 48 current FAR cost principles, 16 are only one paragraph 
long, and 11 more are only two or three paragraphs long. The Councils 
question the need to ``force-fit'' such short cost principles into a 
uniform format, particularly in the absence of any significant clarity 
problems. Not only would the recommended general reformatting of the 
cost principles be difficult to accomplish, but it would also offer no 
obvious benefit to either industry or the Government.
    The Councils recommend instead that industry continue to identify 
those individual cost principles which it views as problematic and to 
provide specific proposals for appropriate revisions. It should be 
noted that the continuing Defense Procurement and Acquisition Policy 
initiative to reduce accounting and administrative burdens in the cost 
principles, without jeopardizing the Government's interests, has 
resulted in significant changes or deletions involving more than 20 
different cost principles to date. The Councils continue to believe 
that such a case-by-case cooperative effort with industry offers the 
best opportunity for meaningful change in this often controversial 
area.

Incorporating CAS Provisions in FAR Cost Principles

    Comment 2: A respondent asserted that the proposed rule 
incorporates substantial cost accounting standard (CAS) provisions into 
the FAR cost principles. The respondent believes this creates de facto 
CAS coverage when, by law, promulgations covering the measurement, 
assignment, and allocation of costs to cost objectives is assigned to 
the CAS Board, including the thresholds for which contracts will and 
will not include CAS provisions. The respondent further states that if 
the FAR includes CAS concepts, the inclusion should be done using 
direct quotes or references.
    Councils' response: Nonconcur. The Councils considered this 
proposal, but believe that eliminating all CAS from the FAR would 
create significant problems.
    It is the responsibility of the Councils, not the CAS Board, to 
promulgate rules for the measurement, assignment, and allocation of 
costs for non-CAS covered contracts. The CAS Board does not have 
jurisdiction over non-CAS covered contracts. For some costs, 
particularly deferred compensation including pension costs (CAS 412, 
413, and 415), cost of money (CAS 414/417), and self-insurance (CAS 
416), the Councils have chosen to use the same requirements for non-CAS 
covered contracts as the CAS Board has chosen to use for CAS-covered 
contracts. To eliminate all CAS from the FAR would require removal of 
these key FAR Part 31 provisions.
    As for the subject rule, the issue of an alternative to CAS 412/413 
for non-CAS covered contracts was discussed at the public meetings 
during the spring of 2001. None of the attendees proposed an 
alternative to the use of CAS 412/413. In fact, most of the attendees 
supported the application of CAS 412/413 to non-CAS covered contracts. 
As such, the Councils do not believe there is currently a viable 
alternative to applying CAS 412/413 to non-CAS covered contracts.
    In regard to CAS 416, the proposed rule included the CAS 
requirements for self-insurance. Without this provision, insurance 
costs for non-CAS covered contracts would be subject to Generally 
Accepted Accounting Principles (GAAP), which do not permit a self-
insurance charge. The Councils believe it would be inequitable to 
permit contractors with CAS-covered contracts to charge self-insurance 
costs while denying such charges for contractors with non-CAS covered 
contracts. In addition, a contractor with both CAS and non-CAS covered 
contracts would need two sets of accounting practices if it wanted to 
charge self-insurance for CAS-covered contracts. Such a requirement 
would result in an unnecessary administrative burden to both the 
contractor and the Government.
    As for the incorporation of the CAS provisions into the FAR, the 
respondent did not specify any particular language that it believes has 
been paraphrased. Nevertheless, the Councils reviewed the proposed rule 
to see if any such paraphrasing existed and found that the proposed 
rule references the specific CAS standards (412, 413, and 416); it does 
not paraphrase any CAS requirements.

FAR 31.205-6--Compensation for Personal Services

FAR 31.205-6(j)--Definition of Pension Plan
    Comment 3: A respondent recommends that the current language at FAR 
31.205-6(j)(1) be retained and asserts that the current language 
includes allowability criteria that would be eliminated if the 
definition is removed. The language currently reads as follows:

    (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

[[Page 69253]]

pension costs, provided the benefits are an integral part of the 
pension plan and meet all the criteria pertaining to pension costs. 
(Emphasis added.)

    Councils' response: Nonconcur. The Councils do not believe the 
above-italicized language provides allowability criteria. It simply 
states when additional benefits ``may be treated as pension costs.'' In 
defining a pension plan, FAR 31.001, Definitions, reads in part:

    * * * 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.

    The Councils believe this definition, which is identical to that 
used in CAS 412, should not be supplemented by the language currently 
at FAR 31.205-6(j)(1). Under the language at FAR 31.205-6(j)(1), 
additional benefits that are an integral part of a pension plan ``may 
be treated as pension costs.'' This phrase could be misinterpreted to 
mean that a contractor has the right to subjectively choose when such 
benefits will be pension costs and when they will not. Conversely, the 
definition at FAR 31.001 and CAS 412 simply states that such benefits 
may be an integral part of the pension plan.
FAR 31.205-6(j)(3)(i)(C) and FAR Clause 52.215-15(b)(3)--Segment 
Closings
    Comment 4: Two respondents stated that the language at FAR 31.205-
6(j) regarding segment closings is more restrictive than the CAS 
requirements. One respondent asserts there are optional settlement 
methods provided for in CAS 413, specifically amortization, and that 
the proposed FAR language does not address underfunding as does the 
CAS.
    Councils' response: Concur in part. Upon further review, the 
Councils determined that the proposed language on settlement should be 
deleted. The current language in CAS 413, which is incorporated into 
FAR 31.205-6(j) by reference, adequately addresses the issue of 
settlement. Thus, there is no need to include the specific language in 
the FAR. The Councils, therefore, deleted the proposed language at FAR 
31.205-6(j)(3)(C) and the FAR clause at 52.215-5(b)(3).
FAR 31.205-6(j)(6)--Early Retirement Incentive Plans
    Comment 5: A respondent asserts that current FAR language clearly 
states that plans based on life income settlements are not treated as 
early retirement incentives plans and recommends retaining that 
language.
    Councils' response: Nonconcur. Based on a review of the original 
promulgation documents, it is clear that the drafters intended to 
include early retirement incentive payments made from within, as well 
as outside, the pension trust. Although the drafters believed it would 
be rare for a pension plan to include an early retirement incentive 
with a life income settlement, they intended that such amendments be 
included as early retirement incentives and be subject to the 
conditions outlined in the cost principle. There was no intention by 
the drafters to exclude such settlements.
    The Councils believe this continues to be an appropriate policy. 
Early retirement incentive plans include any incentive given to an 
employee to retire early, regardless of whether payment is made in the 
form of a life income settlement or a lump sum. The method of payment 
should not determine whether the cost is allowable. The limitation 
should apply regardless of whether the contractor decides to make the 
payment over a period of years or in a single payment.
FAR 31.205-6(q)--Defer Revision to Employee Stock Ownership Plans 
(ESOPs)
    Comment 6: Two respondents recommend that further FAR action be 
deferred until the CAS Board proposal on ESOPs can be reviewed for 
consistency.
    Councils' response: Nonconcur. The proposed rule does not add any 
new measurement, assignment, or allocation provisions for ESOPs. Under 
both the existing and proposed rules, ESOPs that meet the definition of 
a pension plan are covered by CAS 412, and those that do not are 
covered by CAS 415. While the proposed rule consolidates the 
allowability requirements for ESOP costs into a single provision, it 
does not change the measurement, assignment, or allocability 
requirements for such costs. Since this FAR provision does not revise 
existing measurement, assignment, or allocation requirements, the 
Councils do not believe it should be delayed in anticipation of actions 
by the CAS Board. The Councils recognize that this FAR provision may 
require further modification as a result of the current ESOP project 
being pursued by the CAS Board.
FAR 31.205-6(q)(2)(iii)--Allowability Limitation on ESOP Contributions
    Comment 7: A respondent asserts that the proposed provision that 
limits ESOP contributions in any one year to 25 percent of compensation 
is inconsistent with the IRS Code and should be revised accordingly.
    Councils' response: Concur in part. The fact that the cost is 
deductible by the IRS does not necessarily mean that it is reasonable 
or allowable for Government contract costing purposes. Nevertheless, 
since ESOP costs are included in determining the overall reasonableness 
of compensation costs, the Councils revised the specific allowability 
ceiling for ESOP costs to only require that they be deductible under 
the IRS Code.
FAR 31.205-6(q)(2)(v)--ESOP Stock in Excess of Fair Market Value.
    Comment 8: A respondent expressed concern regarding the ``new'' 
provision that disallows purchases in excess of fair market value. The 
respondent believes that this provision could be interpreted as either 
(a) requiring that valuation be based on the value of the stock 
immediately after a leveraged ESOP transaction occurs (the ``Farnum 
Theory'', which the respondent states has been discredited), or (b) 
measurement of the value of the stock based on its annual value, rather 
than the value at the time the shares were acquired by the ESOP trust
    Councils' response: Nonconcur. The Councils have not added a new 
provision. The provision in the proposed rule currently exists in FAR 
31.205-6(j)(8)(i)(E), which applies to ESOPs that meet the definition 
of a pension plan. The proposed rule merely extends the application of 
that provision to all ESOPs. The Councils believe that purchases in 
excess of fair market value should not be allowable costs. The words in 
the proposed FAR 31.205-6(q) are identical to those currently at FAR 
31.205-6(j)(8). As such, the Councils do not agree that this change 
could be interpreted as an endorsement of any new valuation technique.
FAR 31.205-6(q)(2)(iv)--Valuation of ESOP Stock Using IRS Guidelines
    Comment 9: A respondent expressed concern regarding the new 
language that requires valuation of ESOP stock using IRS guidelines on 
a ``case-by-case basis.'' The respondent recommends that, if the 
valuation has been done by a competent independent valuation expert, 
there is no need for the auditing agency to start with a valuation from 
``scratch.''
    Councils' response: Nonconcur. The Councils have not added a new 
provision. The provision in the proposed rule currently exists in FAR 
31.205-6(j)(8)(i)(E), which applies to ESOPs that meet the definition 
of a pension plan. The proposed rule merely extends the application of 
that provision to all ESOPs. In addition, the Councils believe that 
deleting the words ``case-by-case basis'' would cause potential

[[Page 69254]]

confusion. The IRS guidelines must be applied based on the particular 
facts and circumstances of each case, i.e., on a ``case-by-case 
basis.'' Furthermore, the concerns of the respondent focus on the 
extent to which the auditor is required to rely upon the work of 
others, in this case the valuation expert. An independent audit 
requires that the auditor determine the scope of the audit, including 
the extent of reliance on the work of others. This issue is properly 
addressed in Generally Accepted Government Auditing Standards. It is 
not something that should be addressed in the FAR.

FAR 31.205-19--Insurance and Indemnification

FAR 31.205-19(c)(4)--Definition of Catastrophic Losses
    Comment 10: One respondent asserts that self-insurance charges for 
catastrophic losses should be allowable, and that the definition in the 
proposed rule could be interpreted to include deductibles or over 
ceiling amounts for property insurance policies and other high dollar 
policies. Another respondent states that the new definition of 
catastrophic losses may cause contention and uncertainty in the field 
because it does not account for the relatively large losses among 
different sized contractors. The respondent also believes ``very low 
frequency of loss'' adds confusion. The respondent further contends 
that the definition should be deleted and existing practices that rely 
upon individual circumstances and general reasonableness should 
continue to be used.
    Councils' response: Concur in part. Upon further review, the 
Councils deleted the definition of catastrophic losses from the final 
rule. The Councils continue to believe that the proposed definition is 
consistent with the intent of the promulgators of the current language, 
as evidenced by the March 19, 1979, report underlying DAR case 78-400-
7.
    The intent of the proposed coverage was to distinguish catastrophic 
losses as used in the cost principle from the type of catastrophic loss 
anticipated by the illustration at CAS 416.60(h). In that illustration, 
motor vehicle liability losses in excess of a specified amount were 
absorbed by the home office and reallocated to all segments. In the 
particular case described, the specified amount was too low based on 
loss experience to be considered catastrophic under the provisions of 
CAS 416. However, the illustration appears to anticipate losses that 
may be catastrophic to a particular segment of a company but not 
necessarily catastrophic in a more general sense. The Councils do not 
believe the drafters of the cost principle intended to disallow self-
insurance charges for the type of loss anticipated by the CAS 
illustration. However, since CAS does not include a definition of 
catastrophic loss, defining the term in the FAR could cause confusion 
by the users of these regulations.
    As to the respondent's recommendation that self-insurance charges 
for catastrophic losses should be allowable, the Councils disagree. As 
was noted in the report on DAR case 78-400-7, the Government should not 
allow self-insurance charges for catastrophic losses, such as 
earthquakes, which have a very small likelihood of occurring for any 
particular contractor.

C. Regulatory Planning and Review

    This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

D. 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 discussed in this rule.

E. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose information collection requirements that 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 31 and 52

    Government procurement.

    Dated: December 4, 2003.
Laura Auletta,
Director, Acquisition Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 31 and 52 as set forth 
below:
0
1. The authority citation for 48 CFR parts 31 and 52 is revised to read 
as follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

0
2. Amend section 31.205-6 by--
0
a. Removing from the second sentence of paragraph (g)(1) ``(j)(7)'' and 
adding ``(j)(6)'' in its place;
0
b. Revising paragraph (j);
0
c. Removing from the second parenthetical in paragraph (p)(2)(i) 
``paragraphs (j)(5) and (j)(8)'' and adding ``paragraphs (j)(4) and 
(q)'' in its place; and
0
d. Adding paragraph (q) to read as follows:


31.205-6  Compensation for personal services.

* * * * *
    (j) Pension costs. (1) Pension plans are normally segregated into 
two types of plans: defined-benefit and defined-contribution pension 
plans. The contractor shall measure, assign, and allocate the costs of 
all defined-benefit pension plans and the costs of all defined-
contribution pension plans in compliance with 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. Pension 
costs are allowable subject to the referenced standards and the cost 
limitations and exclusions set forth in paragraph (j)(1)(i) and in 
paragraphs (j)(2) through (j)(6) of this subsection.
    (i) Except for nonqualified pension plans using the pay-as-you-go 
cost method, to be allowable in the current year, the contractor shall 
fund pension costs by the time set for filing of the Federal income tax 
return or any extension. Pension costs assigned to the current year, 
but not funded by the tax return time, are not allowable in any 
subsequent year. For nonqualified pension plans using the pay-as-you-go 
method, to be allowable in the current year, the contractor shall 
allocate pension costs in the cost accounting period that the pension 
costs are assigned.
    (ii) Pension payments 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 to the terms and conditions of the 
established plan. The cost of changes in pension plans are not 
allowable if the changes are discriminatory to the Government or are 
not intended to be applied consistently for all employees under similar 
circumstances in the future.
    (iii) Except as provided for early retirement benefits in paragraph 
(j)(6) of

[[Page 69255]]

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.
    (2) Defined-benefit pension plans. 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, are not 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 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 in that period and shall be 
accounted for as set forth at 48 CFR 9904.412-50(a)(4). The excess 
amount is allowable in the future period to which it is assigned, to 
the extent it is not otherwise unallowable.
    (iii) Increased pension costs are unallowable if the increase is 
caused by a delay in funding beyond 30 days after each quarter of the 
year to which they are assignable. 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). The contractor shall make 
determinations of unallowable costs in accordance with the actuarial 
method used in calculating pension costs.
    (iv) The contracting officer will consider the 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 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 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(c)(3) and (d)(3), 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)(3) 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 receives a credit equal to the 
amount of the Government's equitable share of the gross withdrawal or 
transfer.
    (3) Pension adjustments and asset reversions. (i) For segment 
closings, pension plan terminations, or curtailment of benefits, the 
amount of the adjustment shall be--
    (A) For contracts and subcontracts that are subject to full 
coverage under the Cost Accounting Standards (CAS) Board rules and 
regulations, the amount measured, assigned, and allocated in accordance 
with 48 CFR 9904.413-50(c)(12); and
    (B) For contracts and subcontracts that are not subject to full 
coverage under the CAS, 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) is 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)(3)(ii) are unallowable in 
accordance with 31.205-41(b)(6).
    (4) Defined-contribution pension plans. In addition to defined-
contribution pension plans, this paragraph also covers profit sharing, 
savings plans, and other such plans, provided the plans fall within the 
definition of a pension plan at 31.001.
    (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)(2)(ii) and (iv) of this 
subsection apply to defined-contribution plans.
    (5) Pension plans using the pay-as-you-go cost method. When using 
the pay-as-you-go cost method, the contractor shall measure, assign, 
and allocate the cost of pension plans in accordance with 48 CFR 
9904.412 and 9904.413. Pension costs for a pension plan using the pay-
as-you-go cost method are allowable to the extent they are not 
otherwise unallowable.
    (6) Early retirement incentives. An early retirement incentive is 
an incentive given to an employee to retire early. For contract costing 
purposes, costs of early retirement incentives are allowable subject to 
the pension cost criteria contained in paragraphs (j)(2)(i) through 
(iv) of this subsection provided--
    (i) The contractor measures, assigns, and allocates the costs in 
accordance with the contractor's accounting practices for pension 
costs;

[[Page 69256]]

    (ii) The incentives are in accordance with the terms and conditions 
of an early retirement incentive plan;
    (iii) The contractor applies the plan only to active employees. The 
cost of extending the plan to employees who retired or were terminated 
before the adoption of the plan is unallowable; and
    (iv) The present value of the total incentives given to any 
employee in excess of the amount of the employee's annual salary for 
the previous fiscal year before the employee's retirement is 
unallowable. The contractor shall compute the present value in 
accordance with its accounting practices for pension costs. The 
contractor shall account for any unallowable costs in accordance with 
48 CFR 9904.412-50(a)(2).
* * * * *
    (q) Employee stock ownership plans (ESOP). (1) An ESOP is a stock 
bonus plan designed to invest primarily in the stock of the employer 
corporation. The contractor's contributions to an Employee Stock 
Ownership Trust (ESOT) may be in the form of cash, stock, or property.
    (2) Costs of ESOPs are allowable subject to the following 
conditions:
    (i) For ESOPs that meet the definition of a pension plan at 31.001, 
the contractor--
    (A) Measures, assigns, and allocates the costs in accordance with 
48 CFR 9904.412;
    (B) Funds the pension costs by the time set for filing of the 
Federal income tax return or any extension. Pension costs assigned to 
the current year, but not funded by the tax return time, are not 
allowable in any subsequent year; and
    (C) Meets the requirements of paragraph (j)(2)(ii) of this 
subsection.
    (ii) For ESOPs that do not meet the definition of a pension plan at 
31.001, the contractor measures, assigns, and allocates costs in 
accordance with 48 CFR 9904.415.
    (iii) Contributions by the contractor in any one year that exceed 
the deductibility limits of the Internal Revenue Code for that year are 
unallowable.
    (iv) When the contribution is in the form of stock, the value of 
the stock contribution is limited to the fair market value of the stock 
on the date that title is effectively transferred to the trust.
    (v) When the contribution is in the form of cash--
    (A) Stock purchases by the ESOT in excess of fair market value are 
unallowable; and
    (B) When stock purchases are in excess of fair market value, the 
contractor shall credit the amount of the excess to the same indirect 
cost pools that were charged for the ESOP contributions in the year in 
which the stock purchase occurs. However, when the trust purchases the 
stock with borrowed funds which will be repaid over a period of years 
by cash contributions from the contractor to the trust, the contractor 
shall credit the excess price over fair market value to the indirect 
cost pools pro rata over the period of years during which the 
contractor contributes the cash used by the trust to repay the loan.
    (vi) When the fair market value of unissued stock or stock of a 
closely held corporation is not readily determinable, the valuation 
will be made on a case-by-case basis taking into consideration the 
guidelines for valuation used by the IRS.
* * * * *

0
3. Revise section 31.205-19 to read as follows:


31.205-19  Insurance and indemnification.

    (a) Insurance by purchase or by self-insuring includes--
    (1) Coverage the contractor is required to carry or to have 
approved, under the terms of the contract; and
    (2) Any other coverage the contractor maintains in connection with 
the general conduct of its business.
    (b) For purposes of applying the provisions of this subsection, the 
Government considers insurance provided by captive insurers (insurers 
owned by or under control of the contractor) as self-insurance, and 
charges for it shall comply with the provisions applicable to self-
insurance costs in this subsection. However, if the captive insurer 
also sells insurance to the general public in substantial quantities 
and it can be demonstrated that the charge to the contractor is based 
on competitive market forces, the Government will consider the 
insurance as purchased insurance.
    (c) Whether or not the contract is subject to CAS, self-insurance 
charges are allowable subject to paragraph (e) of this subsection and 
the following limitations:
    (1) The contractor shall measure, assign, and allocate costs in 
accordance with 48 CFR 9904.416, Accounting for Insurance Costs.
    (2) The contractor shall comply with (48 CFR) part 28. However, 
approval of a contractor's insurance program in accordance with part 28 
does not constitute a determination as to the allowability of the 
program's cost.
    (3) If purchased insurance is available, any self-insurance charge 
plus insurance administration expenses in excess of the cost of 
comparable purchased insurance plus associated insurance administration 
expenses is unallowable.
    (4) Self-insurance charges for risks of catastrophic losses are 
unallowable (see 28.308(e)).
    (d) Purchased insurance costs are allowable, subject to paragraph 
(e) of this subsection and the following limitations:
    (1) For contracts subject to full CAS coverage, the contractor 
shall measure, assign, and allocate costs in accordance with 48 CFR 
9904.416.
    (2) For all contracts, premiums for insurance purchased from 
fronting insurance companies (insurance companies not related to the 
contractor but who reinsure with a captive insurer of the contractor) 
are unallowable to the extent they exceed the sum of--
    (i) The amount that would have been allowed had the contractor 
insured directly with the captive insurer; and
    (ii) Reasonable fronting company charges for services rendered.
    (3) Actual losses are unallowable unless expressly provided for in 
the contract, except--
    (i) Losses incurred under the nominal deductible provisions of 
purchased insurance, in keeping with sound business practice, are 
allowable; and
    (ii) Minor losses, such as spoilage, breakage, and disappearance of 
small hand tools that occur in the ordinary course of business and that 
are not covered by insurance, are allowable.
    (e) Self-insurance and purchased insurance costs are subject to the 
cost limitations in the following paragraphs:
    (1) Costs of insurance required or approved pursuant to the 
contract are allowable.
    (2) Costs of insurance maintained by the contractor in connection 
with the general conduct of its business are allowable subject to the 
following limitations:
    (i) Types and extent of coverage shall follow sound business 
practice, and the rates and premiums shall be reasonable.
    (ii) Costs allowed for business interruption or other similar 
insurance shall be limited to exclude coverage of profit.
    (iii) The cost of property insurance premiums for insurance 
coverage in excess of the acquisition cost of the insured assets is 
allowable only when the contractor has a formal written policy assuring 
that in the event the insured property is involuntarily converted, the 
new asset shall be valued at the book value of the replaced asset plus 
or minus adjustments for differences between insurance proceeds and 
actual replacement cost. If the

[[Page 69257]]

contractor does not have such a formal written policy, the cost of 
premiums for insurance coverage in excess of the acquisition cost of 
the insured asset is unallowable.
    (iv) Costs of insurance for the risk of loss of, or damage to, 
Government property are allowable only to the extent that the 
contractor is liable for such loss or damage and such insurance does 
not cover loss or damage which results from willful misconduct or lack 
of good faith on the part of any of the contractor's directors or 
officers, or other equivalent representatives.
    (v) Costs of insurance on the lives of officers, partners, 
proprietors, or employees are allowable only to the extent that the 
insurance represents additional compensation (see 31.205-6).
    (3) The cost of insurance to protect the contractor against the 
costs of correcting its own defects in materials and workmanship is 
unallowable. However, insurance costs to cover fortuitous or casualty 
losses resulting from defects in materials or workmanship are allowable 
as a normal business expense.
    (4) Premiums for retroactive or backdated insurance written to 
cover losses that have occurred and are known are unallowable.
    (5) The Government is obligated to indemnify the contractor only to 
the extent authorized by law, as expressly provided for in the 
contract, except as provided in paragraph (d)(3) of this subsection.
    (6) Late premium payment charges related to employee deferred 
compensation plan insurance incurred pursuant to section 4007 (29 
U.S.C. 1307) or section 4023 (29 U.S.C. 1323) of the Employee 
Retirement Income Security Act of 1974 are unallowable.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Amend section 52.215-15 by revising the date of the clause and 
paragraph (b) to read as follows:


52.215-15  Pension Adjustments and Asset Reversions.

* * * * *

Pension Adjustments and Asset Reversions (Jan 2004)

* * * * *
    (b) For segment closings, pension plan terminations, or 
curtailment of benefits, the amount of the adjustment shall be--
    (1) For contracts and subcontracts that are subject to full 
coverage under the Cost Accounting Standards (CAS) Board rules and 
regulations (48 CFR Chapter 99), the amount measured, assigned, and 
allocated in accordance with 48 CFR 9904.413-50(c)(12); and
    (2) For contracts and subcontracts that are not subject to full 
coverage under the CAS, 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 904.413-50(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.
* * * * *
(End of clause)

[FR Doc. 03-30477 Filed 12-10-03; 8:45 am]
BILLING CODE 6820-EP-P