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Proposed Rule

Federal Acquisition Regulation; FAR Case 2006-021, Post Retirement Benefits (PRB), FAS 106

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


Proposed rule.


The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) are proposing to amend the Federal Acquisition Regulation (FAR) to permit the contractor to measure accrued PRB costs using either the criteria in Internal Revenue Code (IRC) 419 or the criteria in Financial Accounting Standard (FAS) 106.


Interested parties should submit written comments to the FAR Secretariat on or before January 14, 2008 to be considered in the formulation of a final rule.


Submit comments identified by FAR case number 2006-021 by any of the following methods:

Federal eRulemaking Portal:

  • To search for any document, first select under “Step 1,” “Documents with an Open Comment Period” and select under “Optional Step 2,” “Federal Acquisition Regulation” as the agency of choice. Under “Optional Step 3,” select “Proposed Rules”. Under “Optional Step 4,” from the drop down list, select “Document Title” and type the FAR Case number “2006-021”. Click the “Submit” button. Please include your name and company name (if any) inside the document. You may also search for any document by clicking on the “Search for Documents” tab at the top of the screen. Select from the agency field “Federal Acquisition Regulation”, and type “2006-021” in the “Document Title” field. Select the “Submit” button.
  • Fax: 202-501-4067.
  • Mail: General Services Administration, Regulatory Secretariat (VIR), 1800 F Street, NW, Room 4035, ATTN: Laurieann Duarte, Washington, DC 20405.

Instructions: Please submit comments only and cite FAR case 2006-021 in all correspondence related to this case. All comments received will be posted without change to, including any personal and/or business confidential information provided.

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Edward Chambers, Procurement Analyst, at (202) 501-3221, for clarification of content. For information pertaining to status or publication schedules, contact the FAR Secretariat at (202) 501-4755. Please cite FAR case 2006-021.

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A. Background

FAR 31.205-6(o) allows contractors to choose among three different accounting methods for PRB costs: cash basis, terminal funding, and accrual basis.

When the accrual basis is used, the FAR currently requires that costs must be measured based on the requirements of FAS 106.

However, the tax-deductible amount that is contributed to the retiree benefit trust is determined using IRC 419, which has different measurement criteria than FAS 106. As a result, the FAS 106 amount can often exceed the IRC 419 measured costs, and contractors that choose to accrue PRB costs for Government reimbursement face a dilemma: whether to fund the entire FAS 106 amount to obtain Government reimbursement of the costs, regardless of tax implications, or fund only the tax deductible amount and not be reimbursed for the entire FAS 106 amount under their Government contracts.Start Printed Page 64186

The Councils are proposing to amend FAR 31.205-6(o) to alleviate this dilemma. This amendment would provide the contractor an option of measuring accrued PRB costs using criteria based on IRC 419 rather than FAS 106, thereby permitting the contractor to fund the entire tax deductible amount without having a portion disallowed because it did not meet the FAR’s current measurement criteria. The Councils note that this amendment will not change the total measured PRB costs, i.e., the total measured PRB costs over the life of the PRB plan would be the same whether the contractor chose to apply the criteria in FAS 106 or IRC 419.

The Councils note that the proposed rule may result in the Government paying higher PRB costs, since under the current rule some contractors may have chosen to fund the IRC amount rather than the full FAS amount in current and future accounting periods. Absent this proposed revision, the resulting difference will be an unallowable cost. However, the Councils are unable to estimate the specific cost impact because the number of contractors who may choose to use the proposed IRC 419 measurement option is unknown. Moreover, the Councils further note that there may be a cost impact if the rule remains unchanged. For example, in lieu of funding the lower IRC amount, contractors could decide to fund the full FAS amount (and forego the tax benefit), change from accrual to pay-as-you go accounting, or terminate their PRB plans rather than fund amounts that are not tax deductible.

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 Councils do not expect this proposed rule to 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 small entities do not accrue PRB costs for Government contract costing purposes.

C. Paperwork Reduction Act

The Paperwork Reduction Act does apply; however, these changes to the FAR do not impose additional information collection requirements to the paperwork burden previously approved under OMB Control Number 9000-0013.

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List of Subjects in 48 CFR Part 31

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Dated: October 24, 2007

Al Matera,

Director, Office of Acquisition Policy.

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Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as set forth below:

1. The authority citation for 48 CFR part 31 continues to read as follows:

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

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2. Amend section 31.205-6 by revising paragraphs (o)(2)(iii)(A) and (B) to read as follows:

Compensation for personal services.
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(o) * * *

(2) * * *

(iii) * * *

(A) Measured and assigned in accordance with—

(1) 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; or

(2) The costs shall—

(i) Be measured using reasonable actuarial assumptions, which may include a healthcare inflation assumption;

(ii) Be assigned to accounting periods on the basis of the average future working lives of active employees covered by the PRB plan or a 15 year period, whichever period is longer; and

(iii) Exclude Federal income taxes, whether incurred by the fund or the contractor (including those taxes associated with any increase in PRB costs), unless the fund holding the plan assets is tax-exempt under the provisions of 26 U.S.C. 501(c);

(B) Paid to an insurer or trustee to establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees. The assets shall be segregated in the trust, or otherwise effectively restricted, so that they cannot be used by the employer for other purposes; and

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[FR Doc. 07-5669 Filed 11-14-07; 8:45 am]