[Federal Register Volume 68, Number 175 (Wednesday, September 10, 2003)]
[Proposed Rules]
[Pages 53312-53314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23053]
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OFFICE OF MANAGEMENT AND BUDGET
48 CFR Part 9904
Cost Accounting Standards Board; Accounting for the Costs of
Post-Retirement Benefit Plans Sponsored by Government Contractors
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, OMB.
ACTION: Notice of withdrawal of Advance Notice of Proposed Rulemaking.
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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost
Accounting Standards (CAS) Board, is providing public notification of
the decision to discontinue the development of a Cost Accounting
Standard (CAS) addressing the recognition of costs of post-retirement
benefit plans under government cost-based contracts and subcontracts.
FOR FURTHER INFORMATION CONTACT: Robert Burton, Office of Federal
Procurement Policy (telephone: 202-395-3302).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The Cost Accounting Standards Board's rules, regulations and
Standards are codified at 48 CFR Chapter 99. The Office of Federal
Procurement Policy Act, 41 U.S.C. 422(g)(1), requires the Board, prior
to the establishment of any new or revised Cost Accounting Standard, to
complete a prescribed rulemaking process. The process generally
consists of the following four steps:
1. Consult with interested persons concerning the advantages,
disadvantages, and improvements anticipated in the pricing and
administration of government contracts as a result of the adoption
of a proposed Standard.
2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
3. Promulgate a Notice of Proposed Rulemaking (NPRM).
4. Promulgate a Final Rule.
This notice announces the discontinuation of a case after
completing steps one and two of the four-step process in accordance
with the requirements of 41 U.S.C. 422(g)(1)(B) and (C).
B. Background and Summary
Prior Promulgations
Post-retirement benefit plans have existed for many years, 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 of
1990. In response to numerous public comments recommending that the CAS
Board establish a case concerning the measurement, assignment, and
allocation of the costs of post-retirement benefit plans, at a February
24, 1995 meeting, the CAS Board directed the staff to begin work on a
Staff Discussion Paper (SDP).
On September 20, 1996, the Board published an SDP, ``Post-
Retirement Benefit Plans Other Than Pension Plans Sponsored by
Government Contractors' (61 FR 49533), identifying the cost accounting
issues related to post-retirement benefit plans. On January 12, 1999,
the Board sent a letter to all the respondents to the SDP. This letter
was also made widely available for public comment on February 18, 1999
(64 FR 8141).
The Board published an ANPRM (65 FR 59503), ``Accounting for the
Costs of Post-Retirement Benefit Plans Sponsored by Government
Contractors,'' on October 5, 2000.
Public Comments
The Board received twenty-three (23) sets of public comments in
response to the ANPRM. Most respondents believed that 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
respondents believed that 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.
Moreover, the continuing high level of medical inflation coupled with
various economic factors, and global competition, raises the question
whether any contractor could risk the adverse effects of providing any
level of nonforfeitable benefits. The argument has been made 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
commenters did not believe the Board should proceed with this project.
Continuing Research
Subsequent to the publication of the ANPRM, the General Accounting
Office (GAO) issued a report to the Chairman, Committee on Health,
Education, Labor, and Pensions, U.S. Senate, entitled ``RETIREE HEALTH
BENEFITS--Employer-Sponsored Benefits May Be Vulnerable to Further
Erosion'' (GAO-01-374) in May 2001. The GAO summarized its findings as
follows:
Despite a sustained strong economy and several years of
relatively low rates of increase in health insurance premiums, the
decline in the availability of employer-sponsored retiree health
benefits has not reversed since 1997--the last year for which we had
reported previously--and several indicators suggest that there may
be further erosion in these benefits. Employer benefit consultants
we contacted generally indicated that retiree health benefits were
continuing to decline. Two widely cited employer benefit surveys,
however, provide conflicting data as to whether the proportion of
employers sponsoring retiree health insurance remained stable or
declined slightly from 1997 through 2000. In some cases, employers
provide retiree health benefits to current retirees or long-term
employees, but newly hired employees are not eligible. To date,
however, the percentage of retirees with employer-sponsored coverage
has remained relatively stable over the past several years, with
about 37 percent of early retirees and 26 percent of Medicare-
eligible retirees receiving retiree health coverage from a former
employer. This stability may also be linked to employers' tendency
to reduce coverage for future rather than current retirees. In some
cases, 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
[[Page 53313]]
deductibles, or capping the employers' expenditures for coverage.
Several current and developing market, legal, and demographic
factors may contribute to a further decline in employer-sponsored
retiree health benefits. These factors include--
[sbull] A resumption of health insurance premiums rising at a rate
faster than general inflation;
[sbull] Proposed changes in Medicare coverage, such as adding a new
prescription drug benefit, that could affect the costs and design of
employers supplemental health benefits for Medicare-eligible retirees;
[sbull] A recent circuit court ruling allowing claims of violations
of federal age discrimination law when employers make distinctions in
health benefits they offer retirees on the basis of Medicare
eligibility; and
[sbull] The movement of the baby boom generation into retirement
age, leading some employers to have a growing number of retirees
relative to active workers.
Retirees whose former employers reduce or eliminate health benefits
often face limited or unaffordable alternatives to obtaining coverage.
Retirees may purchase coverage on their own--either individual
insurance policies for these under age 65 or Medicare supplemental
plans for those age 65 or older. However, despite federal laws that
guarantee access to some individual insurance policies to certain
individuals who lose group coverage, retirees' ages and often poorer
health status combine to make individually purchased health insurance
expensive. For example, the majority of states do not restrict the
price of premiums that carriers may charge individuals who purchase
individual insurance policies. Thus, carriers in these states may
charge 60-year-old males a monthly premium close to 4 times higher than
what they charge 30-year-old males, and there may be an even bigger
difference if the older individual is not healthy. Similarly, the
number of Medicare supplemental plans that federal law guarantees to
retirees over 65 whose employers eliminate coverage is limited, and
they do not include coverage for benefits such as prescription drugs.
Thus, retirees seeking alternative coverage could receive less
comprehensive coverage and pay more for it than they had previously.
The findings of the GAO report were supported and expanded upon by
the Employee Benefit Research Institute (EBRI) Issue Brief Number 236,
``Retiree Health Benefits: Trends and Outlook,'' authored by Paul
Fronstin in August 2001. The Issue Brief reported that employers had
taken various actions in response to SFAS 106, including placing caps
on the employers' expenditures, changing age and service requirements,
and moving to ``defined contribution'' health benefits. Some employers
dropped all retiree health benefits for future retirees and other
employers dropped benefits for current retirees' coverage, though this
action occurred less often than did other changes. Regarding future
trends, EBRI found the following:
While the changes employers have made to retiree health benefits
do not appear to be having much impact on current retirees, they are
likely to be felt most by future retirees who have not yet or may
never become eligible for retiree health benefits because the courts
have ruled that an employer has a right to terminate or amend
retiree health benefits only if it has proved that such a right has
been reserved or stated in specific language and on a widely known
basis.
The EBRI Issue Brief also remarked that many early retirees, ages
55-64, who were not covered by employment-based retiree health
insurance, had difficulty finding affordable insurance. This
observation helped to explain the report's finding that--
By law, employers are under no obligation to provide retiree
health benefits, except to current retirees who can prove that they
were previously promised a specific benefit. Between 1994 and 1999,
retirees ages 55-64 experienced an increase in the likelihood of
being uninsured, but, as mentioned above, the percentage of retirees
covered by health benefits through a former employer or union was
unchanged (although as is shown below, current retirees have seen
increases in their share of health insurance premiums). In addition,
the likelihood of an early retiree having health insurance through
his or her own spouse increased. An erosion of public health
insurance and health insurance purchased directly from an insurer
accounts for the increase in the uninsured.
The courts continue to find that an employer has a right to
terminate or amend retiree health benefits if such a right has been
reserved or stated in specific language and on a widely known basis. In
Hughes v. 3M Retiree Medical Plan (2002 CA8), 2002 WL 276767, the
Eighth Circuit held that an employee booklet describing a retiree
health plan did not create a ``lifetime'' benefit because the summary
plan description was silent as to vesting. The Court also noted that
the benefit booklet contained the statement that ``[t]he company hopes
and expects to continue these plans indefinitely, but reserves the
right to amend or discontinue them, subject to collective bargaining as
required.''
A recent study by a joint project of the Kaiser Family Foundation,
the Commonwealth Fund, and the Health Research & Education Trust found
not only that the number of employers who sponsor retiree health plans
is continuing to decline, but that those plan sponsors who are
continuing their retiree health plans are considering shifting more of
the cost to the retirees. Mark A. Hoffmann, writing for ``Business
Insurance'' on April 17, 2002, reported the following:
The percentage of employers offering retiree health care
coverage is continuing to drop, according to a survey released
earlier this week.
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, according to the study, titled
``Erosion of Private Health Care Insurance Coverage for Retirees.''
The study. . . also found that 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.
``By 2001, numerous warning signs indicate that, although few
employers are dropping coverage altogether, many say they plan to
make changes that shift a greater share of costs to retirees, by
raising premium contributions and imposing greater cost-sharing
requirements for benefits such as prescription drugs,'' the report
states.
As did the EBRI Issue Brief, the study found that while retiree
health coverage will probably continue to be provided for current
retirees, the prospect of retiree health coverage for future
retirees is less certain. The survey made the following observation:
Yet, just 4% of companies offering retiree coverage say they are
likely to eliminate that coverage entirely in the next two years.
Seven percent of firms say it's likely they will eliminate retiree
benefits for new employees or for existing workers who have not yet
retired.
However, while no jumbo firms indicate they would eliminate
retiree health coverage entirely, 11% say they are likely to
eliminate them for new employees or existing workers who have not
yet retired.
The staff reviewed copies of post-retirement benefit documents and
plan descriptions of several defense contractors. At the request of the
CAS Board staff, the Defense Contract Audit Agency (DCAA) provided
these copies from their contract files after obtaining permission from
the contractors to release these proprietary materials for review by
the Board and its staff in their deliberation on this case. While the
details and the benefits provided by these plans were quite varied
among the plan documents, the provisions of these plans were consistent
with the general description of post-retirement benefit
[[Page 53314]]
plans found in most articles and literature on the subject. In
particular, attainment of an age close to retirement and significant
service--e.g., age 50 and 20 years of service--were usually required
for eligibility. All the plans contained reference to the contractor's
unrestricted right to amend or terminate the plan.
There have also been a number of news stories in the print and
broadcast media concerning retirees from large private companies who
have lost their employer-based retiree health insurance and have been
unable to purchase health insurance coverage on their own due to pre-
existing conditions or cost. As the general public has become
increasing aware of this issue, some members of Congress have begun
considering how the protections of the Employee Retirement Income
Security Act of 1974 (ERISA) or other statutes might be extended to
protect these retirees.
In response to a request from Representative Carolyn McCarthy, the
GAO did a survey of three major defense contractors. In a letter to the
Congresswoman dated February 27, 2003, which reported on ``Retiree
Health Benefits at Selected Government Contractors,'' the GAO wrote:
DCMA and DCAA closely monitored postretirement health benefits to
ensure charges to the government were made in compliance with federal
regulations. As part of their oversight efforts, the two agencies
performed risk assessments and conducted regular reviews of the
contractors' actual and projected postretirement health benefits costs
and the assumptions underlying future projections. For the 2 years
covered in our review, neither DCAA nor DCMA found any significant
problems with the contractors' actual or projected postretirement
health benefit costs. For example, DCAA took no exceptions to the
projected costs reflected in the contractors' pricing proposals and
took exception to less than 1 percent of the $756 million in
postretirement health benefits costs incurred by the contractors over
the 2-year period.
Conclusions
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 Board 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 Board has
decided to discontinue further development of the rule proposed in the
ANPRM and the project (CASB Docket No. 96-02A) to develop a separate
Cost Accounting Standard (CAS) that addresses the recognition of costs
of post-retirement benefit plans under government cost-based contracts
and subcontracts.
Angela B. Styles,
Chair, Cost Accounting Standards Board.
[FR Doc. 03-23053 Filed 9-9-03; 8:45 am]
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