DATE: September 10, 2003

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

SOURCE: Federal Register, September 10, 2003, Vol. 68, No. 175, page 53312

AGENCIES: Cost Accounting Standards Board (CASB), Office of Federal Procurement Policy (OFPP), Office of Management and Budget (OMB)

ACTION: Withdrawal of Advance Notice of Proposed Rulemaking (ANPR)

SYNOPSIS: The Cost Accounting Standards Board (CASB) has decided to discontinue the development of a Cost Accounting Standard (CAS) 419, Cost Accounting Standard for Measurement, Assignment, Allocation, and Adjustment of Post-Retirement Benefit Cost, which would have addressed the recognition of costs of post-retirement benefit plans under government cost-based contracts and subcontracts.

EDITOR'S NOTE: The CAS are 19 standards which apply to large contractors performing large contracts. They are in Chapter 99 of Title 48 of the Code of Federal Regulations, and are included as an appendix to the paper-version of the Federal Acquisition Regulation (FAR) for information purposes. The CAS are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.

For more on the ANPR being withdrawn, see the October 5, 2000, FEDERAL CONTRACTS DISPATCH "Cost Accounting Standards Board; Accounting for the Costs of Post-Retirement Benefit Plans."

FOR FURTHER INFORMATION CONTACT: Robert A. Burton, Associate Administrator, OFPP, 202-395-3302.

SUPPLEMENTAL INFORMATION: Post-retirement benefits are specified benefits, such as health care, tuition assistance, or legal services, that are provided to retirees as the need arises (such as certain health care benefits), or they may be defined in terms of monetary amounts that become payable on the occurrence of a specified event (such as life insurance benefits not provided through a pension plan). They have existed for many years, sometimes as an adjunct to a company's pension plan, 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 1990.

The CASB received numerous recommendations that it establish a case concerning the measurement, assignment, and allocation of the costs of post-retirement benefit plans. The CASB began work in 1995, and in 1996 it published a Staff Discussion Paper identifying the cost accounting issues related to post-retirement benefit plans, and requested comments on whether an Interpretation should be published, or a current CAS be amended, or a new CAS be developed. In 1999, the CASB sent a letter to all those submitting comments on the Staff Discussion Paper asking them to elaborate on their opinions and positions, and on October 5, 2000, the CASB announced that it was accepting comments on a proposed CAS 419.

Proposed CAS 419 would have addressed: (a) the recognition and identification of post-retirement benefit costs; (b) the measurement and period assignment of post-retirement benefit costs; (c) the allocation of post-retirement benefit costs to segments; (d) the allocation of post-retirement benefit costs from segments to the intermediate and final cost objectives of a segment; (e) the adjustment of the contractor's records when there is a curtailment, settlement, or granting of special termination benefits; and (f) the adjustment of contract pricing when a segment is closed. Essentially, proposed CAS 419 would have required accrual accounting for post-retirement benefits that are documented in writing, communicated to employees, nonforfeitable once earned, and legally enforceable. The cost of any post-retirement benefits that fail to meet these criteria would have to be accounted using the pay-as-you-go method.

The CASB received comments from 23 respondents on the ANPR. Most believed 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 believed 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. In addition, with the continuing high level of medical inflation coupled with various economic factors, and global competition, the question was raised whether any contractor could risk the adverse effects of providing any level of nonforfeitable benefits. These respondents argued 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 of these respondents believe the CASB should not proceed with this project.

Despite a sustained strong economy through the early 2000s and several years of relatively low rates of increase in health insurance premiums, the decline in the availability of employer-sponsored retiree health benefits continues, and there may be further erosion in these benefits. In some cases, employers provide retiree health benefits to current retirees or long-term employees, but newly hired employees are not eligible. Also, some 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 deductibles, or capping the employers' expenditures for coverage. 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. In addition, 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.

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

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 CASB 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 CASB has decided to discontinue further development of CAS 419.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2003 by Panoptic Enterprises. All Rights Reserved.

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