[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Rules and Regulations]
[Pages 33671-33673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11185]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 31 and 52

[FAC 2005-04; FAR Case 2001-031; Item VII]
RIN 9000-AJ67


Federal Acquisition Regulation; Deferred Compensation and 
Postretirement Benefits Other Than Pensions

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 
amending the Federal Acquisition Regulation (FAR) by revising the cost 
principles for Deferred compensation other than pensions, and 
Postretirement benefits other than pensions. The related contract 
clause, Reversion or Adjustment of Plans for Postretirement Benefits 
(PRB) Other Than Pensions, is also revised. The rule revises the cost 
principle and contract clause 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 
of the cost principles in the FAR.

DATES: Effective Date: July 8, 2005.

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. Jeremy Olson, Procurement 
Analyst, at (202) 501-3221. Please cite FAC 2005-04, FAR case 2001-031.


SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 68 FR 33326, June 3, 2003, with request for public 
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 in Section B, Comments 2, 5, 6, and 
Changes for Clarity, below.

B. Public Comments

    Deferred compensation--Subsequent period awards

    1. Comment: Revise proposed FAR 31.205-6(k)(2). One respondent 
commented that the word ``made'' could be misconstrued to mean ``paid'' 
versus when the award program is instituted. The sentence should be 
changed to read: ``Deferred compensation awards are unallowable if the 
award program is instituted in a period subsequent to the accounting 
period when the work being remunerated was performed.''
    Councils' response: Nonconcur. The Councils believe that the 
proposed language (which is the same as the current language in the 
last sentence of paragraph (k)(1) and has been unchanged for many 
years) is clear. By definition, deferred compensation is an award 
``made'' to compensate an employee in a future period, i.e., the award 
is ``paid'' in the future. Therefore, the Councils do not believe it is 
likely that the word ``made'' will be misconstrued as ``paid.'' In 
addition, the respondent has provided no evidence that this language is 
being misinterpreted.
    Furthermore, the respondent's proposed language would change the 
meaning of the provision and create an inappropriate result. Under that 
proposed language, the contractor could ``institute'' an award program 
in 1999, and award an employee in 2003 for work performed during 2000. 
The purpose of the FAR provision is to preclude such retroactive 
awards; the respondent's proposed revision would thwart this purpose.

    Delayed recognition methodology for recognizing PRB past service 
costs

    2. Comment: Revise proposed FAR 31.205-6(o)(2)(iii)(A). The 
respondent believes that the second sentence of the provision could be 
misinterpreted to mean that the entire amount of PRB costs attributable 
to the past service (transition obligation) is unallowable, not just 
the portion of the PRB costs in excess of the amount assignable under 
the delayed recognition methodology. The provision should be revised to 
read as follows:
    ``However, the portion of PRB costs attributable to past service 
(``transition obligation'') as defined in Financial Accounting 
Standards Board Statement 106, paragraph 110, that is in excess of 
the amount assignable under the delayed recognition methodology 
described in paragraphs 112 and 113 of Statement 106 is 
unallowable.''
    Councils' response: Concur. The Councils agree that the language 
was intended to disallow only the excess amount, not the total amount. 
The Councils also agree that the respondent's proposed language, with 
some additional wording, is appropriate. Therefore, the Councils have 
revised the language to read as follows:
    ``However, the portion of PRB costs attributable to the 
transition obligation assigned to the current year that is in excess 
of the amount assignable under the delayed recognition methodology 
described in paragraphs 112 and 113 of Financial Accounting 
Standards Board Statement 106 is unallowable. The transition 
obligation is defined in Statement 106, paragraph 110.''

    Refund of Government share of PRB costs which revert or inure to 
the contractor

    3. Comment: Revise proposed FAR 31.205-6(o)(3). One respondent was 
concerned that, under the proposed language, the Government may be 
entitled to an equitable share of previously funded PRB costs when 
benefits are reduced but total costs are not. In the present 
environment, contractors may be required to reduce benefits to simply 
keep retiree health costs from increasing at an unsustainable level. 
The provision does not define what is meant by ``any amount of 
previously funded PRB costs which revert or inure to the contractor.'' 
The respondent recommends that the provision explicitly state that the 
Government is entitled to an equitable share of previously funded costs 
only when the costs are ultimately reduced.
    Councils' response: Nonconcur. The Councils believe the respondent 
is misapplying the provision. Neither a reduction in PRB costs nor a 
reduction in PRB benefits alone entitles the Government to an equitable 
share of previously funded PRB costs under proposed FAR 31.205-6(o)(3) 
(FAR 31.205-6(o)(5) of the final rule) or FAR 52.215-18. The Government 
is entitled to an equitable share when previously funded PRB costs 
revert or inure to the contractor, for whatever reason. ``Inure'' is 
defined in Webster's College Dictionary as ``to come into use or 
operation,'' while ``revert'' means ``to return or go back.'' Thus, 
this language applies whenever assets return or go back to the 
contractor, or come into use

[[Page 33672]]

or operation (i.e., are constructively received) by the contractor.
    4. Comment: Revise proposed FAR 31.205-6(o)(3). Two respondents 
asserted that the provision is one-sided by entitling the Government to 
share in any proceeds resulting from over funding but shielding the 
Government from liability in the event of under funding. The 
respondents recommend that the provision require the Government to 
receive a pro-rata share of the unfunded liability that exists at the 
time of a segment closing, plan termination, or curtailment of 
benefits. In addition, the rule should be amended so that PRB plan 
closing adjustments operate the same way as pension plan closing 
adjustments.
    Councils' response: Nonconcur. The assertion that the provision is 
one-sided is based on the assumption that this provision applies 
whenever the PRB plan is over funded. The provision at FAR 31.205-
6(o)(3) of the proposed rule (FAR 31.205-6(o)(5) of the final rule) 
does not apply simply because a PRB plan is over funded. The provision 
applies only when the assets revert, inure, or are constructively 
received by the contractor.
    The Councils do not believe that FAR 31.205-6(o)(3) should be 
revised to provide a segment closing adjustment for PRB costs. Unlike 
pension benefits, contractors generally reserve the right to reduce or 
eliminate PRB benefits. Therefore, the Councils do not believe an 
adjustment similar to the pension segment closing adjustment is 
appropriate for PRBs.
    5. Comment: Revise proposed FAR 31.205-6(o)(3). Four respondents 
believe that the last sentence of the provision (that specifies the 
contractor shall credit the Government's share of previously funded PRB 
costs to the Government, either as a cost reduction or by cash refund, 
at the option of the Government) is inequitable and should be 
eliminated because it ignores the interest of the contractor, it is 
both unnecessary and undesirable, and it is unduly prescriptive. In 
addition, the respondents believe that explicitly dictating the 
required alternative methods of adjustment reduces the flexibility to 
negotiate an equitable adjustment that considers the unique facts 
relating to a particular situation. The provision should be revised to 
read as follows:
    ``When determining or agreeing on the method for treating the 
equitable share, the contracting parties should consider the 
following methods: cost reduction, amortizing the cost over a number 
of years, cash refund or some other agreed upon method.''
    Councils' response: Partially concur. The Councils agree with the 
concept that the parties should attempt to negotiate the method of 
recovery for the Government's equitable share of PRB funds that inure 
or revert to the contractor. However, the rule must also address those 
instances where the parties fail to reach a settlement. While the 
contractor and the Government should attempt to negotiate a settlement, 
if the parties disagree, the Contracting Officer must designate the 
method for recovery of the equitable share. Therefore, to address this 
concern, the Councils deleted the last sentence of proposed 31.205-
6(o)(3) and added the following language to the related contract clause 
at 52.215-18(b):
    When determining or agreeing on the method for recovery of the 
Government's equitable share, the contracting parties should consider 
the following methods: cost reduction, amortizing the credit over a 
number of years (with appropriate interest), cash refund, or some other 
agreed upon method. Should the parties be unable to agree on the method 
for recovery of the Government's equitable share, through good faith 
negotiations, the Contracting Officer shall designate the method of 
recovery.

    Reduced benefits for a PRB plan

    6. Comment: Revise proposed FAR 52.215-18. One respondent asserted 
that the language in the first sentence of the contract clause, 
regarding what is meant by ``reduced benefits'' in a PRB plan, is 
ambiguous. A contractor might reduce benefits but, because of increased 
costs in other areas, the allocable costs of the PRB plan might stay 
steady or even increase. The respondent also believes that the language 
should focus on allocable costs and not on the level of benefits in the 
plan.
    Councils' response: Partially concur. The Councils agree that the 
phrase ``reduce a PRB plan'' is ambiguous and has revised it to read 
``reduce the benefits of a PRB plan.''
    The Councils do not agree that the language should be revised to 
focus on allocable costs. The language requires the contractor to 
notify the contracting officer when there is a PRB termination or a 
reduction in benefits under the PRB plan. The purpose of this provision 
is to assure that the Government is promptly notified so that timely 
adjustments can be made for purposes of contract negotiations (forward 
pricing rate adjustments) and billing (billing rate adjustments). The 
purpose is also to assure that the Government receives its equitable 
share of any previously funded PRB costs which inure or revert to the 
contractor as a result of a plan termination or reduction in benefits, 
or for any other reason. In those cases where there is a reduction in 
benefits but it does not affect the amount of PRB costs allocable to 
Government contracts, no adjustments would be made to the forward 
pricing or billing rates. If no funds inure or revert to the contractor 
as a result of the reduction in benefits, there would also be no refund 
or credit due the Government under the provision. However, the 
contractor must still notify the Contracting Officer so that the 
Government has an opportunity to review any assertion that the 
reduction in benefits does not impact allocable costs or result in a 
refund or credit due the Government.

    Changes for Clarity

    For purposes of enhancing clarity and structure, the Councils have 
revised the language at FAR 31.205-6(o)(2) and (3). In addition, upon 
further review, the Councils have determined that the language at FAR 
31.205-6(o)(3) applies to all of (o)(2), and not just (o)(2)(iii). 
Therefore, the language that was moved to FAR 31.205-6(o)(2)(iii)(D) in 
the proposed rule, has been moved back to FAR 31.205-6(o)(3) in the 
final rule.
    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.

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 discussed in this rule.

C. 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.


[[Page 33673]]


    Dated: May 27, 2005.
Julia B. Wise,
Director, Contract 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 revising paragraphs (k), (o)(2), (o)(3), 
and (o)(5) to read as follows:


31.205-6  Compensation for personal services.

* * * * *
    (k) Deferred compensation other than pensions. The costs of 
deferred compensation awards are allowable subject to the following 
limitations:
    (1) The costs shall be measured, assigned, and allocated in 
accordance with 48 CFR 9904.415, Accounting for the Cost of Deferred 
Compensation.
    (2) The costs of deferred compensation awards are unallowable if 
the awards are made in periods subsequent to the period when the work 
being remunerated was performed.
* * * * *
    (o) Postretirement benefits other than pensions (PRB).
* * * * *
    (2) To be allowable, PRB costs shall be incurred pursuant to law, 
employer-employee agreement, or an established policy of the 
contractor, and shall comply with paragraphs (o)(2)(i), (ii), or (iii) 
of this subsection.
    (i) Pay-as-you-go. PRB costs are not accrued during the working 
lives of employees. Costs are assigned to the period in which--
    (A) Benefits are actually provided; or
    (B) The costs are paid to an insurer, provider, or other recipient 
for current year benefits or premiums.
    (ii) Terminal funding. PRB costs are not accrued during the working 
lives of the employees.
    (A) Terminal funding occurs when the entire PRB liability is paid 
in a lump sum upon the termination of employees (or upon conversion to 
such a terminal-funded plan) to an insurer or trustee to establish and 
maintain a fund or reserve for the sole purpose of providing PRB to 
retirees.
    (B) Terminal funded costs shall be amortized over a period of 15 
years.
    (iii) Accrual basis. PRB costs are accrued during the working lives 
of employees. Accrued PRB costs shall be--
    (A) Measured and assigned in accordance with generally accepted 
accounting principles. However, the portion of PRB costs attributable 
to the transition obligation assigned to the current year that is in 
excess of the amount assignable under the delayed recognition 
methodology described in paragraphs 112 and 113 of Financial Accounting 
Standards Board Statement 106 is unallowable. The transition obligation 
is defined in Statement 106, paragraph 110;
    (B) Paid to an insurer or trustee to establish and maintain a fund 
or reserve for the sole purpose of providing PRB to retirees; and
    (C) Calculated in accordance with generally accepted actuarial 
principles and practices as promulgated by the Actuarial Standards 
Board.
    (3) To be allowable, PRB costs must be funded by the time set for 
filing the Federal income tax return or any extension thereof, or paid 
to an insurer, provider, or other recipient by the time set for filing 
the Federal income tax return or extension thereof. PRB costs assigned 
to the current year, but not funded, paid or otherwise liquidated by 
the tax return due date as extended are not allowable in any subsequent 
year.
* * * * *
    (5) The Government shall receive an equitable share of any amount 
of previously funded PRB costs which revert or inure to the contractor. 
Such equitable share shall reflect the Government's previous 
participation in PRB costs through those contracts for which cost or 
pricing data were required or which were subject to Subpart 31.2.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
3. Revise section 52.215-18 to read as follows:


52.215-18  Reversion or Adjustment of Plans for Postretirement Benefits 
(PRB) Other Than Pensions.

    As prescribed in 15.408(j), insert the following clause:
    REVERSION OR ADJUSTMENT OF PLANS FOR POSTRETIREMENT BENEFITS 
(PRB) OTHER THAN PENSIONS (JUL 2005)
    (a) The Contractor shall promptly notify the Contracting Officer 
in writing when the Contractor determines that it will terminate or 
reduce the benefits of a PRB plan.
    (b) If PRB fund assets revert or inure to the Contractor, or are 
constructively received by it under a plan termination or otherwise, 
the Contractor shall make a refund or give a credit to the 
Government for its equitable share as required by 31.205-6(o)(5) of 
the Federal Acquisition Regulation (FAR). When determining or 
agreeing on the method for recovery of the Government's equitable 
share, the contracting parties should consider the following 
methods: cost reduction, amortizing the credit over a number of 
years (with appropriate interest), cash refund, or some other agreed 
upon method. Should the parties be unable to agree on the method for 
recovery of the Government's equitable share, through good faith 
negotiations, the Contracting Officer shall designate the method of 
recovery.
    (c) The Contractor shall insert the substance of this clause in 
all subcontracts that meet the applicability requirements of FAR 
15.408(j).
    (End of clause)
[FR Doc. 05-11185 Filed 6-7-05; 8:45 am]
BILLING CODE 6820-EP-S