OFPP Issues Final Rule Harmonizing CAS 412 & 413 With the Pension Protect Act
On December 27, 2011, the Office of Federal Procurement Policy (OFPP) issued its long anticipated final rule harmonizing Cost Accounting Standard (CAS) 412, Composition and Measurement of Pension Cost, and CAS 413, Adjustment and Allocation of Pension Cost with the Pension Protection Act. See 76 Fed. Reg. 81296 (December 27, 2011). As mandated by Section 106(d) of the Pension Protection Act of 2006 (PPA), OFPP issued the final rule to harmonize the measurement and period assignment of the pension cost allocable to government contracts with the minimum required contribution under the Employee Retirement Income Security Act of 1974 (ERISA).
The primary provisions of the final rule will be consolidated at CAS 412-50(b)(7), effective February 27, 2012. Notable revisions to CAS 412 and CAS 413 as a result of the final rule include:
- Recognition of a "Minimum Actuarial Liability" and "Minimum Normal Cost." Under the final rule, CAS 412 and CAS 413 will continue to measure the actuarial accrued liability and normal cost based on a going concern basis using "best-estimate" actuarial assumptions, projected benefits and the contractor's established immediate gain actuarial cost method. However, noting that both financial accounting and ERISA have taken a market-based approach toward pension liabilities-often referred to as "mark-to-market" liabilities-the final rule amends CAS 412 and CAS 413 to require that pension cost be determined using the minimum actuarial liability and minimum normal cost if the sum of the minimum actuarial liability and the minimum normal cost exceeds the sum of actuarial accrued liability and normal cost. The term "minimum actuarial liability" is designed to be consistent with ERISA's funding target and Generally Accepted Accounting Principles' (GAAP) accumulated benefit obligation. Similarly, "minimum normal cost" is designed to be consistent with the ERISA's target normal cost and GAAP's service cost (without salary projection).
- Accelerated Gain and Loss Amortization. The final rule accelerates the assignment of actuarial gains and losses by decreasing the amortization period from a 15-year to a 10-year period.
- Interest on Prepayments Credits. The new rule requires contractors to allocate to their prepayment credits a share of the pension fund's investment earnings and administrative expenses. According to OFPP, this will ensure that any investment gain or loss attributable to the assets accumulated in prepayments does not inequitably affect the gains and losses of the plan or any segments.
- Mandatory Cessation of Benefit Accruals. The final rule exempts any curtailment of benefit accrual required by ERISA from immediate adjustment under the segment closing provision of CAS 413-50(c)(12). Voluntary benefit curtailments will remain subject to immediate adjustment under CAS 413-50(c)(12).
- Projection of Flat Dollar Benefits. The final rule permits the projection of increases in specific dollar benefits granted under collective bargaining agreements. However, the recognition of such increases is limited to the average increase in such benefits over the preceding six years.
- Discounting of Contributions Receivable. The final rule discounts contributions attributable to the prior accounting period (but made after the asset valuation date) at the assumed interest rate from the date actually paid to the valuation date. The assumed interest rate is used to adjust amounts not yet funded, such as receivable contributions, quarterly pension costs and unfunded pension costs. However, interest adjustments on invested monies, such as prepayment credits, are discounted at the actual rate of return on the assets.
The final rule phases in the changes to CAS 412 and CAS 413 over five cost accounting periods-referred to in the final rule as the "Pension Harmonization Rule Transition Period." The purpose of the phase-in period is to gradually recognize the cost impact of the final rule and also moderate the difference in the pension cost allocable to fixed price contracts entered into prior to the effective date. Accordingly, the difference between the minimum actuarial liability and the going concern actuarial accrued liability, and the difference between the minimum normal cost and the going concern normal cost, will be recognized on the following schedule:
- 0% of the difference will be recognized in the First Cost Accounting Period,
- 25% in the Second Cost Accounting Period,
- 50% in the Third Cost Accounting Period,
- 75% in the Fourth Cost Accounting Period and
- 100% in the Fifth Cost Accounting Period.
While 0% of the difference will be recognized in the first accounting period, other incremental changes will be effective immediately (e.g., the change to 10-year amortization of gains and losses). The Pension Harmonization Rule Transition Period begins on the first day of the contractor's first cost accounting period that begins after June 30, 2012.