(a) Components of pension cost. (1) Contractor A has insured pension plans for each of two small groups of employees. One plan is exclusively funded through a group permanent life insurance contract and is exempt from the minimum funding requirements of ERISA. The other plan is funded through a deposit administration contract, which is a form of group deferred annuity contract that is not exempt from ERISA's minimum funding requirements. Both plans provide for defined benefits. Pursuant to 9904.412-50(a)(6), for purposes of this Standard the plan financed through a group permanent insurance contract shall be considered to be a defined-contribution pension plan; the net premium required to be paid for a cost accounting period (after deducting dividends and any credits) shall be the pension cost for that period. However, the deposit administration contract plan is subject to the provisions of this Standard that are applicable to defined-benefit plans.
(1) Contractor A has insured pension plans for each of two small groups of employees. One plan is exclusively funded through a group permanent life insurance contract and is exempt from the minimum funding requirements of ERISA. The other plan is funded through a deposit administration contract, which is a form of group deferred annuity contract that is not exempt from ERISA's minimum funding requirements. Both plans provide for defined benefits. Pursuant to 9904.412-50(a)(6), for purposes of this Standard the plan financed through a group permanent insurance contract shall be considered to be a defined-contribution pension plan; the net premium required to be paid for a cost accounting period (after deducting dividends and any credits) shall be the pension cost for that period. However, the deposit administration contract plan is subject to the provisions of this Standard that are applicable to defined-benefit plans.
(2) Contractor B provides pension benefits for certain hourly employees through a multiemployer defined-benefit plan. Under the collective bargaining agreement, the contractor pays six cents into the fund for each hour worked by the covered employees. Pursuant to 9904.412-50(a)(8), the plan shall be considered to be a defined-contribution pension plan. The payments required to be made for a cost accounting period shall constitute the assignable pension cost for that period.
(3) Contractor C provides pension benefits for certain employees through a defined-contribution pension plan. However, the contractor has a separate fund that is used to supplement pension benefits for all of the participants in the basic plan in order to provide a minimum monthly retirement income to each participant. Pursuant to 9904.412-50(a)(7), the two plans shall be considered as a single plan for purposes of this Standard. Because the effect of the supplemental plan is to provide defined-benefits for the plan's participants, the provisions of this Standard relative to defined-benefit pension plans shall be applicable to the combined plan.
(4) Contractor D provides supplemental benefits to key management employees through a nonqualified defined-benefit pension plan funded by a so-called ``Rabbi Trust.'' The trust agreement provides that Federal income taxes levied on the earnings of the Rabbi trust may be paid from the trust. The contractor's actuarial cost method recognizes the administrative expenses of the plan and trust, such as broker and attorney fees, by adding the prior year's expenses to the current year's normal cost. The income taxes paid by the trust on trust earnings shall be accorded the same treatment as any other administrative expense in accordance with 9904.412-50(a)(5).
(5) (i) Contractor E has been using the entry age normal actuarial cost method to compute pension costs. The contractor has three years remaining under a firm fixed price contract subject to this Standard. The contract was priced using the unfunded actuarial liability, normal cost, and net amortization installments developed using the entry age normal method. The contract was priced as follows:
(i) Contractor E has been using the entry age normal actuarial cost method to compute pension costs. The contractor has three years remaining under a firm fixed price contract subject to this Standard. The contract was priced using the unfunded actuarial liability, normal cost, and net amortization installments developed using the entry age normal method. The contract was priced as follows:
Entry Age Normal Values------------------------------------------------------------------------
Cost component Year 1 Year 2 Year 3------------------------------------------------------------------------Normal cost............................ $100,000 $105,000 $110,000Amortization........................... 50,000 50,000 50,000
--------------------------------
Pension cost......................... 150,000 155,000 160,000------------------------------------------------------------------------
(ii) The contractor, after notifying the cognizant Federal official, switches to the projected unit credit actuarial cost method. The unfunded actuarial liability and normal cost decreased when redetermined under the projected unit credit method. Pursuant to 9904.412-50(a)(1)(vii), the contractor determines that an annual installment credit of $20,000 will amortize the decrease in unfunded actuarial liability (UAL) over ten years. The following pension costs are determined under the projected unit credit method:
Projected Unit Credit Values------------------------------------------------------------------------
Cost component Year 1 Year 2 Year 3------------------------------------------------------------------------Normal cost............................ $80,000 $85,000 $90,000Amortization:
Prior method......................... 50,000 50,000 50,000
UAL decrease......................... (20,000) (20,000) (20,000)
--------------------------------Pension cost........................... 110,000 115,000 120,000------------------------------------------------------------------------
(iii) The change in cost method is a change in accounting method that decreased previously priced pension costs by $40,000 per year. In accordance with 9903.302, Contractor E shall adjust the cost of the firm fixed-price contract for the remaining three years by $120,000 ($40,000x3 years).
(6) Contractor F has a defined-benefit pension plan for its employees. Prior to being subject to this Standard the contractor's policy was to compute and fund as annual pension cost normal cost plus only interest on the unfunded actuarial liability. Pursuant to 9904.412-40(a)(1), the components of pension cost for a cost accounting period must now include not only the normal cost for the period and interest on the unfunded actuarial liability, but also an amortized portion of the unfunded actuarial liability. The amortization of the liability and the interest equivalent on the unamortized portion of the liability must be computed in equal annual installments.
(b) Measurement of pension cost. (1) Contractor G has a pension plan whose costs are assigned to cost accounting periods by use of an actuarial cost method that does not separately identify actuarial gains and losses or the effect on pension cost resulting from changed actuarial assumptions. Contractor G's method is not an immediate-gain cost method and does not comply with the provisions of 9904.412-50(b)(1).
(1) Contractor G has a pension plan whose costs are assigned to cost accounting periods by use of an actuarial cost method that does not separately identify actuarial gains and losses or the effect on pension cost resulting from changed actuarial assumptions. Contractor G's method is not an immediate-gain cost method and does not comply with the provisions of 9904.412-50(b)(1).
(2) For several years Contractor H has had an unfunded nonqualified pension plan which provides for payments of $200 a month to employees after retirement. The contractor is currently making such payments to several retired employees and recognizes those payments as its pension cost. The contractor paid monthly annuity benefits totaling $24,000 during the current year. During the prior year, Contractor H made lump sum payments to irrevocably settle the benefit liability of several participants with small benefits. The annual installment to amortize these lump sum payments over fifteen years at the interest rate assumption, which is based on expected rate of return on investments and complies with 9904.412-40(b)(2) and 9904.412-50(b)(4), is $5,000. Since the plan does not meet the criteria set forth in 9904.412-50(c)(3)(ii), pension cost must be accounted for using the pay-as-you-go cost method. Pursuant to 9904.412-50(b)(3), the amount of assignable cost allocable to cost objectives of that period is $29,000, which is the sum of the amount of benefits actually paid in that period ($24,000) and the second annual installment to amortize the prior year's lump sum settlements ($5,000).
(3) Contractor I has two qualified defined-benefit pension plans that provide for fixed dollar payments to hourly employees.
(i) Under the first plan, in which the benefits are not subject to a collective bargaining agreement, the contractor's actuary believes that the contractor will be required to increase the level of benefits by specified percentages over the next several years based on an established pattern of benefit improvements. In calculating pension costs for this first plan, the contractor may not assume future benefits greater than that currently required by the plan.
(ii) With regard to the second plan, a collective bargaining agreement negotiated with the employees' labor union provides that pension benefits will increase by specified percentages over the next several years. Because the improved benefits are required to be made, the contractor can consider not only benefits increases required by the collective bargaining agreement, but may also consider subsequent benefit increases based on the average increase in benefits during the previous 6 years in computing pension costs for the current cost accounting period in accordance with 9904.412-50(b)(5). The contractor shall limit projected benefits to the increases specified in the provisions of the existing plan, as amended by the collective bargaining agreement, in accordance with 9904.412-50(b)(5).
(4) In addition to the facts of 9904.412-60(b)(3), assume that Contractor I was required to contribute at a higher level for ERISA purposes because the plan was underfunded. To compute pension costs that are closer to the funding requirements of ERISA, Contractor I decides to ``fresh start'' the unfunded actuarial liability being amortized pursuant to 9904.412-50(a)(1); i.e., treat the entire amount as a newly established portion of unfunded actuarial liability, which is amortized over 10 years in accordance with 9904.412-50(a)(1)(ii). Because the contractor has changed the periods for amortizing the unfunded actuarial liability established pursuant to 9904.412-50(a)(3), the contractor has made a change in accounting practice subject to the provisions of Cost Accounting Standard 9903.302.
(c) Assignment of pension cost. (1) Contractor J maintains a qualified defined-benefit pension plan. The actuarial accrued liability for the plan is $20 million and is measured by the minimum actuarial liability in accordance with 9904.412-50(b)(7)(ii) since the criterion of 9904.412-50(b)(7(i) has been satisfied. The actuarial value of the assets of $18 million is subtracted from the actuarial accrued liability of $20 million to determine the total unfunded actuarial liability of $2 million. Pursuant to 9904.412-50(a)(1), Contractor J has identified and is amortizing twelve separate portions of unfunded actuarial liabilities. The sum of the unamortized balances for the twelve separately maintained portions of unfunded actuarial liability equals $1.8 million. In accordance with 9904.412-50(a)(2), the contractor has separately identified, and eliminated from the computation of pension cost, $200,000 attributable to a pension cost assigned to a prior period that was not funded. The sum of the twelve amortization bases maintained pursuant to 9904.412-50(a)(1) and the amount separately identified under 9904.412-50(a)(2) equals $2 million ($1,800,000 + 200,000). Because the sum of all identified portions of unfunded actuarial liability equals the total unfunded actuarial liability, the plan is in actuarial balance and Contractor J can assign pension cost to the current cost accounting period in accordance with 9904.412-40(c).
(1) Contractor J maintains a qualified defined-benefit pension plan. The actuarial accrued liability for the plan is $20 million and is measured by the minimum actuarial liability in accordance with 9904.412-50(b)(7)(ii) since the criterion of 9904.412-50(b)(7(i) has been satisfied. The actuarial value of the assets of $18 million is subtracted from the actuarial accrued liability of $20 million to determine the total unfunded actuarial liability of $2 million. Pursuant to 9904.412-50(a)(1), Contractor J has identified and is amortizing twelve separate portions of unfunded actuarial liabilities. The sum of the unamortized balances for the twelve separately maintained portions of unfunded actuarial liability equals $1.8 million. In accordance with 9904.412-50(a)(2), the contractor has separately identified, and eliminated from the computation of pension cost, $200,000 attributable to a pension cost assigned to a prior period that was not funded. The sum of the twelve amortization bases maintained pursuant to 9904.412-50(a)(1) and the amount separately identified under 9904.412-50(a)(2) equals $2 million ($1,800,000 + 200,000). Because the sum of all identified portions of unfunded actuarial liability equals the total unfunded actuarial liability, the plan is in actuarial balance and Contractor J can assign pension cost to the current cost accounting period in accordance with 9904.412-40(c).
(2) Contractor K's pension cost computed for 2017, the current year, is $1.5 million. This computed cost is based on the components of pension cost described in 9904.412-40(a) and 9904.412-50(a) and is measured in accordance with 9904.412-40(b) and 9904.412-50(b). The assignable cost limitation, which is defined at 9904.412-30(a)(9), is $1.3 million. In accordance with the provisions of 9904.412-50(c)(2)(ii)(A), Contractor K's assignable pension cost for 2017 is limited to $1.3 million. In addition, all amounts that were previously being amortized pursuant to 9904.412-50(a)(1) and 9904.413-50(a) are considered fully amortized in accordance with 9904.412-50(c)(2)(ii)(B). The following year, 2018, Contractor K computes an unfunded actuarial liability of $4 million. Contractor K has not changed his actuarial assumptions nor amended the provisions of his pension plan. Contractor K has not had any pension costs disallowed or unfunded in prior periods. Contractor K must treat the entire $4 million of unfunded actuarial liability as an actuarial loss to be amortized over a ten-year period beginning in 2018 in accordance with 9904.412-50(c)(2)(ii)(C) and 9904.413-50(a)(2)(ii).
(3) Assume the same facts shown in illustration 9904.412-60(c)(2), except that in 2016, the prior year, Contractor K's assignable pension cost was $800,000, but Contractor K only funded and allocated $600,000. Pursuant to 9904.412-50(a)(2), the $200,000 of unfunded assignable pension cost was separately identified and eliminated from other portions of unfunded actuarial liability. This portion of unfunded actuarial liability was adjusted for 8% interest, which is the interest assumption for 2016 and 2017, and was brought forward to 2017 in accordance with 9904.412-50(a)(2). Therefore, $216,000 ($200,000x1.08) is excluded from the amount considered fully amortized in 2017. The next year, 2018, Contractor K must eliminate $233,280 ($216,000x1.08) from the $4 million so that only $3,766,720 is treated as an actuarial loss in accordance with 9904.412-50(c)(2)(ii)(C).
(4) Assume, as in 9904.412-60(c)(2), the 2017 pension cost computed for Contractor K's qualified defined-benefit pension plan is $1.5 million and the assignable cost limitation is $1.7 million. The accumulated value of prepayment credits is $0. However, because of the limitation on tax-deductible contributions imposed by the Internal Revenue Code at Title 26 of the U.S.C., Contractor K cannot fund more than $1 million without incurring an excise tax, which 9904.412-50(a)(5) does not permit to be a component of pension cost. In accordance with the provisions of 9904.412-50(c)(2)(iii), Contractor K's assignable pension cost for the period is limited to $1 million. The $500,000 ($1.5 million-$1 million) of pension cost not funded is reassigned to the next ten cost accounting periods beginning in 2018 as an assignable cost deficit in accordance with 9904.412-50(a)(1)(vi).
(5) Assume the same facts for Contractor K in 9904.412-60(c)(4), except that the accumulated value of prepayment credits equals $700,000. Therefore, in addition to the $1 million tax-deductible contribution which was deposited on the first day of the plan year, Contractor K could apply up to $700,000 of the accumulated value of prepayment credits towards the pension cost computed for the period. In accordance with the provisions of 9904.412-50(c)(2)(iii), the amount of pension cost assigned to the current period shall not exceed $1,700,000, which the sum of the $1 million maximum tax-deductible amount and $700,000 accumulated value of prepayment credits. Contractor K's assignable pension cost for the period is the full $1.5 million computed for the period. A new prepayment credit of $200,000 is created by the excess funding after applying sum of the $1 million contribution and $700,000 accumulated value of prepayment credits towards the $1.5 million assigned pension cost ($700,000 + $1,000,000-$1,500,000). The $200,000 of remaining accumulated value of prepayment credits is adjusted for $14,460 of investment income allocated in accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7) and the sum of $214,460 is carried forward until needed in future accounting periods in accordance with 9904.412-50(a)(4) and 9904.412-50(c)(1).
(6) Assume the same facts for Contractor K in 9904.412-60(c)(4), except that the 2017 assignable cost limitation is $1.3 million and the accumulated value of prepayment credits is $0. Pension cost of $1.5 million is computed for the cost accounting period, but the assignable cost is limited to $1.3 million in accordance with 9904.412-50(c)(2)(ii)(A). Pursuant to 9904.412-50(c)(2)(ii)(B), all existing amortization bases maintained in accordance with 9904.412-50(a)(1) are considered fully amortized. The assignable cost of $1.3 million is then compared to the maximum tax-deductible amount of $1 million. Pursuant to 9904.412-50(c)(2)(iii), Contractor K's assignable pension cost for the period is limited to $1 million. The $300,000 ($1.3 million-$1 million) excess of the assignable cost limitation over the tax-deductible maximum is assigned to future periods as an assignable cost deficit.
(7) Contractor L is currently amortizing a large decrease in unfunded actuarial liability over a period of ten years. A similarly large increase in unfunded actuarial liability is being amortized over 30 years. The absolute value of the resultant net amortization credit is greater than the normal cost so that the pension cost computed for the period is a negative $200,000. Contractor L first applies the provisions of 9904.412-50(c)(2)(i) and determines the assignable pension cost is $0. The negative pension cost of $200,000 is assigned to the next ten cost accounting periods as an assignable cost credit in accordance with 9904.412-50(a)(1)(vi). However, when Contractor L applies the provisions of 9904.412-50(c)(2)(ii), the assignable cost limitation is also $0. Because the assignable cost of $0 determined under 9904.412-50(c)(2)(i) is equal to the assignable cost limitation, the assignable cost credit of $200,000 is considered fully amortized along with all other portions of unfunded actuarial liability being amortized pursuant to 9904.412-50(a)(1). Conversely, if the assignable cost limitation had been greater than zero, the assignable cost credit of $200,000 would have carried-forward and amortized in future periods.
(8) Contractor M has a qualified defined-benefit pension plan which is funded through a funding agency. It computes $1 million of pension cost for a cost accounting period. However, pursuant to a waiver granted under the provisions of ERISA, Contractor M is required to fund only $800,000. Under the provisions of 9904.412-50(c)(5), the remaining $200,000 shall be accounted for as an assignable cost deficit and assigned to the next five cost accounting periods in accordance with the terms of the waiver.
(9) Contractor N has a company-wide defined-benefit pension plan, wherein benefits are calculated on one consistently applied formula. That part of the formula defining benefits within ERISA limits is administered and reported as a qualified plan and funded through a funding agency. The remainder of the benefits are considered to be a supplemental or excess plan which, while it meets the criteria at 9904.412- 50(c)(3)(iii) as to nonforfeitability and communication, is not funded. The costs of the qualified portion of the plan shall be comprised of those elements of costs delineated at 9904.412-40(a)(1), while the supplemental or excess portion of the plan shall be accounted for and assigned to cost accounting periods under the pay-as-you-go cost method provided at 9904.412-40(a)(3) and 9904.412-50(c)(4).
(10) Assuming the same facts as in 9904.412-60(c)(9), except that Contractor N funds its supplemental or excess plan using a so-called ``Rabbi Trust'' vehicle. Because the nonqualified plan is funded, the plan meets the criteria set forth at 9904.412-50(c)(3)(ii). Contractor N may account for the supplemental or excess plan in the same manner as its qualified plan, if it elects to do so pursuant to 9904.412-50(c)(3)(i).
(11) Assuming the same facts as in 9904.412-60(c)(10), except that under the nonqualified portion of the pension plan a former employee will forfeit his pension benefit if the employee goes to work for a competitor within three years of terminating employment. Since the right to a benefit cannot be affected by the unilateral action of the contractor, the right to a benefit is considered to be nonforfeitable for purposes of 9904.412-30(a)(17). The nonqualified plan still meets the criteria set forth at 9904.412-50(c)(3)(iii), and Contractor N may account for the supplemental or excess plan in the same manner as its qualified plan, if it elects to do so.
(12) Assume the same facts as in 9904.412-60(c)(11), except that Contractor N, while maintaining a ``Rabbi Trust'' funding vehicle elects to have the plan accounted for under the pay-as-you-go cost method so as to have greater latitude in annual funding decisions. It may so elect pursuant to 9904.412-50(c)(3)(i).
(13) The assignable pension cost for Contractor O's qualified defined-benefit plan is $600,000. For the same period Contractor O contributes $700,000 which is the minimum funding requirement under ERISA. In addition, there exists $75,000 of unfunded actuarial liability that has been separately identified pursuant to 9904.412-50(a)(2). Contractor O may use $75,000 of the contribution in excess of the assignable pension cost to fund this separately identified unfunded actuarial liability, if he so chooses. The effect of the funding is to eliminate the unassignable $75,000 portion of unfunded actuarial liability that had been separately identified and thereby eliminated from the computation of pension costs. Contractor O shall then account for the remaining $25,000 ([$700,000 - $600,000] - $75,000) of excess contribution as a prepayment credit in accordance with 9904.412-50(a)(4).
(d) Allocation of pension cost. (1) Assume the same set of facts for Contractor M in 9904.412-60(c)(8) except there was no ERISA waiver; i.e., only $800,000 was funded against $1 million of assigned pension cost for the period. Under the provisions of 9904.412-50(d)(1), only $800,000 may be allocated to Contractor M's intermediate and final cost objectives. The remaining $200,000 of assigned cost, which has not been funded, shall be separately identified and maintained in accordance with 9904.412-50(a)(2) so that it will not be reassigned to any future accounting periods.
(1) Assume the same set of facts for Contractor M in 9904.412-60(c)(8) except there was no ERISA waiver; i.e., only $800,000 was funded against $1 million of assigned pension cost for the period. Under the provisions of 9904.412-50(d)(1), only $800,000 may be allocated to Contractor M's intermediate and final cost objectives. The remaining $200,000 of assigned cost, which has not been funded, shall be separately identified and maintained in accordance with 9904.412-50(a)(2) so that it will not be reassigned to any future accounting periods.
(2) Contractor P has a nonqualified defined-benefit pension plan which covers benefits in excess of the ERISA limits. Contractor P has elected to account for this plan in the same manner as its qualified plan and, therefore, has established a ``Rabbi Trust'' as the funding agency. For the current cost accounting period, the contractor computes and assigns $100,000 as pension cost. The contractor funds $65,000, which is equivalent to a funding level equal to the complement of the highest published Federal corporate income tax rate of 35%. Under the provisions of 9904.412-50(d)(2), the entire $100,000 is allocable to cost objectives of the period.
(3) Assume the set of facts in 9904.412-60(d)(2), except that Contractor P's contribution to the Trust is $59,800. In that event, the provisions of 9904.412-50(d)(2)(i) would limit the amount of assigned cost allocable within the cost accounting period to the percentage of cost funded (i.e., $59,800/$65,000 = 92%). This results in allocable cost of $92,000 (92% of $100,000) for the cost accounting period. Under the provisions of 9904.412- 40(c) and 9904.412-50(d)(2)(i), respectively, the unallocable $8,000 may not be assigned to any future cost accounting period. In addition, in accordance with 9904.412-50(a)(2), the $8,000 must be separately identified and no amount of interest on such separately identified $8,000 shall be a component of pension cost in any future cost accounting period.
(4) Again, assume the set of facts in 9904.412-60(d)(2) except that, Contractor P's contribution to the Trust is $105,000 based on an interest assumption of 8%, which is based on the expected rate of return on investments and complies with 9904.412-40(b)(2) and 9904.412-50(b)(4). Under the provisions of 9904.412-50(d)(2) the entire $100,000 is allocable to cost objectives of the period. In accordance with the provisions of 9904.412-50(c)(1) Contractor P has funded $5,000 ($105,000-$100,000) in excess of the assigned pension cost for the period. The $5,000 shall be accounted for as a prepayment credit. Pursuant to 9904.412-50(a)(4), the $5,000 shall be adjusted for an allocated portion of the total investment income and expenses in accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7). Allocated earnings and expenses, and the prepayment credits, shall be excluded from the actuarial value of assets used to compute the next year's pension cost. For the current period the net return on assets attributable to investment income and expenses was 6.5%. Therefore, the accumulated value of prepayment credits of $5,325 (5,000x1.065) may be used to fund the next year's assigned pension cost, if needed.
(5) Contractor Q maintains a nonqualified defined-benefit pension plan which satisfies the requirements of 9904.412-50(c)(3). As of the valuation date, the reported funding agency balance is $3.4 million excluding any accumulated value of prepayment credits. When the adjusted funding agency balance is added to the accumulated value of permitted unfunded accruals of $1.6 million, the market value of assets equals $5.0 million ($3.4 million + $1.6 million) in accordance with 9904.412-30(a)(13). During the plan year, retirees receive monthly benefits totalling $350,000. Pursuant to 9904.412-50(d)(2)(ii)(A), at least 32% ($1.6 million divided by $5 million) of these benefit payments shall be made from sources other than the funding agency. Contractor Q, therefore, draws $238,000 from the funding agency assets and pays the remaining $112,000 using general corporate funds.
(6) Assume the same facts as 9904.412-60(d)(5), except that by the time Contractor Q receives its actuarial valuation it has paid retirement benefits equalling $288,000 from funding agency assets. The contractor has made deposits to the funding agency equal to the tax complement of the $500,000 assignable pension cost for the period. Pursuant to 9904.412-50(d)(2)(ii)(B), the assignable $500,000 shall be reduced by the $50,000 ($288,000--$238,000) of benefits paid from the funding agency in excess of the permitted $238,000, unless the contractor makes a deposit to replace the $50,000 inadvertently drawn from the funding agency. If this corrective action is not taken within the time permitted by 9904.412-50(d)(4), Contractor Q shall allocate only $450,000 ($500,000-$50,000) to final cost objectives. Furthermore, the $50,000, which was thereby attributed to benefit payments instead of funding, must be separately identified and maintained in accordance with 9904.412-50(a)(2).
(7) Contractor R has a nonqualified defined-benefit plan that meets the criteria of 9904.412-50(c)(3). For 1996, the funding agency balance was $1,250,000 and the accumulated value of permitted unfunded accruals was $600,000. During 1996 the earnings and appreciation on the assets of the funding agency equalled $125,000, benefit payments to participants totalled $300,000, and administrative expenses were $60,000. All transactions occurred on the first day of the period. In accordance with 9904.412-50(d)(2)(ii)(A), $200,000 of benefits were paid from the funding agency and $100,000 were paid directly from corporate assets. Pension cost of $400,000 was assigned to 1996. Based on the current corporate tax rate of 35%, $260,000 ($400,000x(1-35%)) was deposited into the funding agency at the beginning of 1996. For 1997 the funding agency balance is $1,375,000 ($1,250,000 + $260,000 + $125,000-$200,000-$60,000). The actual annual earnings rate of the funding agency was 10% for 1996. Pursuant to 9904.412-50(d)(2)(iii), the accumulated value of permitted unfunded accruals is updated from 1996 to 1997 by: (i) adding $140,000 (35% x $400,000), which is the unfunded portion of the assigned cost; (ii) subtracting the $100,000 of benefits paid directly by the contractor; and (iii) increasing the value of the assets by $64,000 for imputed earnings at 10% (10% x ($600,000 + $140,000-$100,000)). The accumulated value of permitted unfunded accruals for 1997 is $704,000 ($600,000 + $140,000-$100,000 + $64,000). [60 FR 16544, Mar. 30, 1995, as amended at 76 FR 81311, Dec. 27, 2011] Sec. 9904.412-60.1 Illustrations--CAS Pension Harmonization Rule.
The following illustrations address the measurement, assignment and allocation of pension cost on or after the Applicability Date of the CAS Harmonization Rule. The illustrations present the measurement, assignment and allocation of pension cost for a contractor that separately computes pension costs by segment or aggregation of segments. The actuarial gain and loss recognition of changes between measurements based on the actuarial accrued liability, determined without regard to the provisions of 9904.412-50(b)7) and the minimum actuarial liability are illustrated in 9904.412-60.1(d). The structural format for 9904.412.60.1 differs from the format for 9904.412-60.
(a) Description of the pension plan, actuarial assumptions and actuarial methods used for 9904.412-60.1 Illustrations--(1) Introduction: Harmony Corporation has a defined-benefit pension plan covering employees at seven segments, of which some segments have contracts that are subject to this Standard and 9904.413, while other segments perform commercial work only. The demographic experience regarding employee terminations for employees of Segment 1 is materially different from that of the other six segments so that pursuant to 9904.413-50(c)(2)(iii) the contractor must separately compute the pension cost for Segment 1. Because the factors comprising pension cost for Segments 2 through 7 are relatively equal, the contractor computes pension cost for these six segments in the aggregate and allocates the aggregate cost to segments on a composite basis. Inactive employees are retained in the segment from which they terminated employment. The contractor has received its annual actuarial valuation for its qualified defined benefit pension plan, which bases the pension benefit on the employee's final average salary.
(1) Introduction: Harmony Corporation has a defined-benefit pension plan covering employees at seven segments, of which some segments have contracts that are subject to this Standard and 9904.413, while other segments perform commercial work only. The demographic experience regarding employee terminations for employees of Segment 1 is materially different from that of the other six segments so that pursuant to 9904.413-50(c)(2)(iii) the contractor must separately compute the pension cost for Segment 1. Because the factors comprising pension cost for Segments 2 through 7 are relatively equal, the contractor computes pension cost for these six segments in the aggregate and allocates the aggregate cost to segments on a composite basis. Inactive employees are retained in the segment from which they terminated employment. The contractor has received its annual actuarial valuation for its qualified defined benefit pension plan, which bases the pension benefit on the employee's final average salary.
(2) Actuarial Methods and Assumptions: (i) Salary Projections: As permitted by 9904.412-50(b)(5), the contractor includes a projection of future salary increases and uses the projected unit credit cost method, which is an immediate gain actuarial cost method that satisfies the requirements of 9904.412-40(b)(1) and 50(b)(1), for measuring the actuarial accrued liability and normal cost. The contractor uses the accrued benefit cost method (also known as the unit credit cost method without projection) to measure the minimum actuarial liability and minimum normal cost. The accrued benefit cost method satisfies 9904.412-50(b)(7)(ii) as well as 9904.412-40(b)(1) and 50(b)(1).
(ii) Interest Rates: (A) Assumed interest rate used to measure the actuarial accrued liability and normal cost: The contractor's basis for establishing the expected rate of return on investments assumption satisfies the criteria of 9904.412-40(b)(2) and 9904.412-50(b)(4). This is referred to as the ``assumed interest rate'' for purposes of this illustration.
(B) Corporate bond rate used to measure the minimum actuarial liability and minimum normal cost: For purposes of measuring the minimum actuarial liability and minimum normal cost the contractor has elected to use a specific set of investment grade corporate bond yield rates published by the Secretary of the Treasury for ERISA's minimum funding requirements. The basis for establishing the set of corporate bond rates meets the requirements of 9904.412-50(b)(7)(iii)(A) as permitted by 9904.412-50(b)(7)(iii)(B). This set of rates is referred to as the ``corporate bond rates'' for purposes of this illustration.
(iii) Mortality: The mortality assumption is based on a table of generational mortality rates published by the Secretary of the Treasury and reflects recent mortality improvements. This table satisfies 9904.412-40(b)(2) which requires assumptions to ``represent the contractor's best estimates of anticipated experience under the plan, taking into account past experience and reasonable expectations.'' The specific table used for each valuation shall be identified.
(iv) Termination of Employment: The termination of employment (turnover) assumption is based on an experience study of Harmony Company employee terminations or causes other than retirement. Because the experience for Segment 1 was materially different from the experience for the rest of the company, the termination of employee assumption for Segment 1 was developed based on the experience of that segment only in accordance with 9904.413-50(c)(2)(iii). The termination of employment experiences for each of Segments 2 through 7 were materially similar, and therefore the termination of employee assumption for Segments 2 through 7 was developed based on the experiences of those segments in the aggregate.
(v) Actuarial Value of Assets: The valuation of the actuarial value of assets used for CAS 412 and 413 is based on a recognized smoothing technique that ``provides equivalent recognition of appreciation and depreciation of the market value of the assets of the pension plan.'' The disclosed method also constrains the asset value to a corridor bounded by 80% to 120% of the market value of assets. This method for measuring the actuarial value of assets satisfies the provisions of 9904.413-50(b)(2).
(b) Measurement of Pension Costs. Based on the pension plan, actuarial methods and actuarial assumptions described in 9904.412-60.1(a), the Harmony Corporation determines that the pension plan, as well as Segment 1 and Segments 2 through 7, have unfunded actuarial liabilities and measures its pension cost for plan year 2017 as follows:
(1) Asset Values: (i) Market Values of Assets: The contractor accounts for the market value of assets in accordance with 9904.413-50(c)(7). The contractor has elected to separately identify the accumulated value of prepayment credits from the assets allocated to segments. The accumulated value of prepayment credits are adjusted in accordance with 9904.412-50(a)(4) and 9904.413-50(c)(7). The market value of assets as of January 1, 2017, including the accumulated value of prepayment credits, is summarized in Table 1.
Table 1--January 1, 2017, Market Value of Assets----------------------------------------------------------------------------------------------------------------
Segments 2 Accumulated
Total plan Segment 1 through 7 prepayments Note----------------------------------------------------------------------------------------------------------------Market Value of Assets.......... $14,257,880 $1,693,155 $11,904,328 $660,397 1----------------------------------------------------------------------------------------------------------------Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.
(ii) Actuarial Value of Assets: Based on the contractor's disclosed asset valuation method, and recognition of the asset gain or loss, which is the difference between the expected income, based on the assumed interest rate, which complies with 9904.412-40(b)(2) and 9904.412-50(b)(4), and the actual income, including realized and unrealized appreciation and depreciation for the current and four prior periods as required by 9904.413-40(b), is delayed and amortized over a five-year period. The portion of the appreciation and depreciation that is deferred until future periods is subtracted from the market value of assets to determine the actuarial value of assets for CAS 412 and 413 purposes. The actuarial value of assets cannot be less than 80%, or more than 120%, of the market value of assets. The development of the actuarial value of assets for the total plan, as well as for Segment 1 and Segments 2 through 7, as of January 1, 2017 is shown in Table 2.
Table 2--January 1, 2017, Actuarial Value of Assets----------------------------------------------------------------------------------------------------------------
Segments 2 Accumulated
Total plan Segment 1 through 7 prepayments Note----------------------------------------------------------------------------------------------------------------Market Value at January 1, 2017.. $14,257,880 $1,693,155 $11,904,328 $660,397 1
Total Deferred Appreciation.. (37,537) (4,398) (31,400) (1.739) 2
--------------------------------------------------------------------Unlimited Actuarial Value of 14,220,343 1,688,757 11,872,928 658,658
Assets..........................CAS 413 Asset Corridor 80% of 11,406,304 1,354,524 9,523,462 528,318
Market Value of Assets..........Market Value at January 1, 2017.. 14,257,880 1,693,155 11,904,328 660,397 1120% of Market Value of Assets... 17,109,456 2,031,786 14,285,194 792,476CAS Actuarial Value of Assets.... 14,220,343 1,688,757 11,872,928 658,658 3, 4----------------------------------------------------------------------------------------------------------------Note 1: See Table 1.Note 2: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation.Note 3: CAS Actuarial Value of Assets cannot be less than 80% of Market Value of Assets or more than 120% of
Market Value of Assets.Note 4: The Actuarial Value of Assets are used in determination of any Unfunded Actuarial Liability or Unfunded
Actuarial Surplus regardless of whether the liability is based on the actuarial accrued liability measured
without regard to 9904.412-50(b)(7) or minimum actuarial liability measured in accordance with 9904.412-
50(b)(7).
(2) Liabilities and Normal Costs: (i) Actuarial Accrued Liabilities and Normal Costs: Based on the plan population data and the disclosed methods and assumptions for CAS 412 and 413 purposes, the contractor measures the actuarial accrued liability and normal cost on a going concern basis using an assumed interest rate that satisfies the requirements of 9904.412-40(b)(2) and 9904.412-50(b)(4). The actuarial accrued liability and normal cost for each segment are measured based on the termination of employment assumption unique to that segment. The actuarial accrued liability and normal cost for the total plan is the sum of the actuarial accrued liability and normal cost for the segments. The actuarial accrued liability and normal cost are shown in Table 3.
Table 3--Actuarial Accrued Liabilities and Normal Costs as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------Actuarial Accrued Liability (AAL)................. $16,325,000 $2,100,000 $14,225,000 1Normal Cost....................................... 910,700 89,100 821,600 1Expense Load on Normal Cost....................... ............... ............... ............... 1, 2----------------------------------------------------------------------------------------------------------------Note 1: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation. The actuarial accrued liability and normal cost are computed using the assumed
interest rate in accordance with 9904.412-40(b)(2) and 9904.412.50(b)(4).Note 2: Expected administrative expenses are implicitly recognized as part of the assumed interest rate.
(ii) Likewise, based on the plan population data and the disclosed methods and assumptions for CAS 412 and 413 purposes, the contractor measures the minimum actuarial liability and minimum normal cost using a set of investment grade corporate bond yield rates published by the Secretary of the Treasury that satisfy the requirements of 9904.412-50(b)(7)(iii). The minimum actuarial liability and minimum normal cost for each segment are measured based on the termination of employment assumption for that segment. The minimum actuarial liability and minimum normal cost for the total plan is the sum of the actuarial accrued liability and normal cost for the segments as shown in Table 4.
Table 4--Minimum Actuarial Liabilities and Minimum Normal Costs as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------Minimum Actuarial Liability....................... $16,636,000 $2,594,000 $14,042,000 1Minimum Normal Cost............................... 942,700 102,000 840,700 1
Expense Load on Minimum Normal Cost............... 82,000 8,840 73,160 1, 2----------------------------------------------------------------------------------------------------------------Note 1: Plan level information taken directly from the actuarial valuation report prepared for ERISA purposes
and supporting documentation and equals the sum of the data for the segments. Data for the segments is taken
directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and supporting
documentation.Note 2: Anticipated annual administrative expenses are separately recognized as an incremental component of
minimum normal cost in accordance with 9904.412-50(b)(7)(ii)(B).
(3) CAS Pension Harmonization Test: (i) In accordance with 9904.412-50(b)(7)(i), the contractor compares the sum of the actuarial accrued liability and normal cost plus any expense load, to the sum of the minimum actuarial liability and minimum normal cost plus any expense load. Because the contractor separately computes pension costs by segment, or aggregation of segments, the applicability of 9904.412-50(b)(7)(i) is determined separately for Segment 1 and Segments 2 through 7. See Table 5, which shows the application of the provisions of 9904.412-50(b)(7)(i), i.e., the CAS pension harmonization test.
Table 5--CAS Pension Harmonization Test at January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------
(Note 1) (Note 2) (Note 2)``Going Concern'' Liability for Period:........... ............... ............... ............... 3
Actuarial Accrued Liability................... ............... $2,100,000 $14,225,000 4
Normal Cost................................... ............... 89,100 821,600 4
Expense Load on Normal Cost................... ............... ............... ............... 4, 5
----------------------------------
Total Liability for Period................ ............... 2,189,100 15,046,600Minimum Liability for Period:
Minimum Actuarial Liability................... ............... 2,594,000 14,042,000 6
Minimum Normal Cost........................... ............... 102,000 840,700 6
Expense Load on Minimum Normal Cost........... ............... 8,840 73,160 6, 7
----------------------------------
Total Minimum Liability for Period........ ............... 2,704,840 14,955,860----------------------------------------------------------------------------------------------------------------Note 1: Because the contractor determines pension costs separately for Segment 1 and Segments 2 through 7, the
data for the Total Plan is not needed for purposes of the 9904.412-50(b)(7)(i) determination.Note 2: Because the contractor determines pension cost separately for Segment 1 and Segments 2 through 7, the
9904.412-50(b)(7) CAS Pension Harmonization test is applied at the segment level to determine the larger of
the Total Liability for Period or the Total Minimum Liability for Period. For Segment 1, the larger Total
Minimum Liability for Period determines the measurement basis for the liability and normal cost. For Segments
2 through 7, the larger Total Liability for Period determines the measurement basis for the liability and
normal cost.Note 3: The actuarial accrued liability and normal cost plus any expense load are computed using interest
assumptions based on long-term expectations in accordance with 9904.412-40(b)(2) and 9904.412-50(b)(4). For
purposes of Illustration 9904.412-60.1(b), the sum of these amounts are referred to as the ``Going Concern''
Liability for the Period.Note 4: See Table 3.Note 5: Because the contractor's assumed interest rate implicitly recognizes expected administrative expenses
there is no explicit amount added to the normal cost.Note 6: See Table 4.Note 7: The contractor explicitly identifies the expected expenses as a separate component of the minimum normal
cost, as required by 9904.412-50(b)(7)(ii)(B).
(ii) As shown in Table 5 for Segment 1, the total minimum liability for the period (minimum actuarial liability and minimum normal cost) of $2,704,840 exceeds the total liability for the period (actuarial accrued liability and normal cost) of $2,189,100. Therefore, the contractor must measure the pension cost for Segment 1 using the minimum actuarial liability and minimum normal cost as the values of the actuarial accrued liability and normal cost in accordance with 9904.412-50(b)(7)(i). In other words, the contractor substitutes the minimum actuarial liability and minimum normal cost for the actuarial accrued liability and normal cost.
(iii) Conversely, as shown in Table 5 for Segments 2 through 7, the total liability for the period of $15,046,600 exceeds the total minimum liability for the period of $14,955,860 for Segments 2 through 7. Therefore, the contractor must measure the pension cost using the actuarial accrued liability and normal cost without regard for the minimum actuarial liability and minimum normal cost.
(4) Measurement of Current Period Pension Cost: (i) To determine the pension cost for Segment 1, the contractor measures the unfunded actuarial liability, pension cost without regard to 9904.412-50(c)(2) limitations, and the assignable cost limitation using the actuarial accrued liability and normal cost as measured by the minimum actuarial liability and minimum normal cost, respectively, which are based on the accrued benefit cost method. This measurement complies with the requirements of 9904.412-50(b)(7) and the definition of actuarial accrued liability, 9904.412-30(a)(2) and normal cost, 9904.412-30(a)(18).
(ii) To determine the pension cost for Segments 2 through 7, the contractor measures the unfunded actuarial liability, pension cost without regard to 9904.412-50(c)(2) limitations, and the assignable cost limitation using the actuarial accrued liability and normal cost based on the projected unit credit cost method, which is the contractor's established cost accounting method and the contractor's assumed interest rate based on long-term trends as required by 9904.412-50(b)(4).
(iii) Unfunded Actuarial Liability (Table 6):
Table 6--Unfunded Actuarial Liability as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ...............Actuarial Accrued Liability....................... $16,819,000 $ 2,594,000 $14,225,000 2CAS Actuarial Value of Assets..................... (13,561,685) (1,688,757) (11,872,928) 3
---------------------------------------------------Unfunded Actuarial Liability...................... 3,257,315 905,243 2,352,072----------------------------------------------------------------------------------------------------------------Note 1: Because the contractor determines pensions separately for Segment 1 and Segments 2 through 7, the values
are the sum of the values for Segment 1 and Segments 2 through 7.Note 2: For Segment 1, the actuarial accrued liability is measured by the accrued benefit cost method as
required by 9904.412-50(b)(7), i.e., the minimum actuarial liability as described in 9904.412-50(b)(7)(ii).
See Table 4. For Segments 2 through 7, the actuarial accrued liability is measured by the projected unit
credit cost method, which is the contractor's established actuarial cost method since these the 9904.412-
50(b)(7)(i) criterion was not met for these segments. See Table 3.Note 3: See Table 2. The CAS Actuarial Value of Assets is used regardless of the basis for determining the
liabilities. The CAS Actuarial Value of Assets allocated to Segment 1 and Segments 2 through 7 excludes the
accumulated value of prepayment credits as required by 9904.412-50(a)(4).
(iv) Measurement of the Adjusted Pension Cost (Table 7):
Table 7--Measurement of Pension Cost at January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ...............Normal Cost....................................... ............... $ 102,000 $821,600 2Expense Load on Normal Cost....................... ............... 8,840 ............... 2, 3Amortization Installments......................... ............... 140,900 366,097 4
---------------------------------------------------Measured Pension Cost............................. 1,439,437 251,740 1,187,697----------------------------------------------------------------------------------------------------------------Note 1: Because the contractor separately computes pension cost for Segment 1 and Segments 2 through 7, only the
total pension cost is shown.Note 2: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii). See Table 4. For Segments 2
through 7, the normal cost is measured by the contractor's established immediate gain cost method since these
the 9904.412-50(b)(7)(i) criterion was not met for these segments. See Table 3.Note 3: Because the criterion of 9904.412-50(b)(7)(i) was met for Segment 1, the Normal Cost is measured by the
Minimum Normal Cost, which explicitly identifies the expected expenses as a separate component of the minimum
normal cost in accordance with 9904.412-50(b)(7)(ii)(B). See Table 4. For Segments 2 through 7, the normal
cost is measured by the contractor's established immediate gain cost method, which implicitly recognizes
expenses as a decrement to expected assumed interest rate, since the 9904.412-50(b)(7)(i) criterion was not
met for these segments. See Table 3.Note 4: Net amortization installment based on the unfunded actuarial liability of $3,257,315 ($905,243 for
Segment 1, and $2,352,072 for Segments 2 through 7) and the contractor's assumed interest rate in compliance
with 9904.412-40(b)(2) and 9904.412-50(b)(4). See Table 6.
(c) Assignment of Pension Cost. In 9904.412-60.1(b), the Harmony Corporation measured the total pension cost to be $1,439,437 ($251,740 for Segment 1 and $1,187,697 for Segments 2 through 7). The contractor must now determine if any of the limitations of 9904.412-50(c)(2) apply at the segment level.
(1) Zero Dollar Floor: The contractor compares the measured pension cost to a zero dollar floor as required by 9904.412-50(c)(2)(i). In this case, the measured pension cost is greater than zero and no assignable cost credit is established. See Table 8.
Table 8--CAS 412-50(c)(2)(i) Zero Dollar Floor as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ...............Measured Pension Cost = $0............. ............... $251,740 $1,187,697 2Assignable Cost Credit............................ ............... ............... ............... 3----------------------------------------------------------------------------------------------------------------Note 1: Because the provisions of CAS 412-50(c)(2)(i) are applied at the segment level, no values are shown for
the Total Plan.Note 2: See Table 7. The Assignable Pension Cost in accordance with 9904.412-50(c)(2)(i) is the greater of zero
or the Harmonized Pension Cost.Note 3: There is no Assignable Cost Credit since the Measured Pension Cost is greater than zero.
(2) Assignable Cost Limitation: (i) As required by 9904.412-50(c)(2)(ii), the contractor measures the assignable cost limitation amount. The pension cost assigned to the period cannot exceed the assignable cost limitation amount. Because the measured pension cost for Segment 1 met the harmonization criterion of 9904.412-50(b)(7)(i), the assignable cost limitation is based on the sum of the actuarial accrued liability and normal cost plus expense load, using the accrued benefit cost method in accordance with 9904.412-50(b)(7)(ii). Therefore, the actuarial accrued liability and normal cost plus expense load are measured by the minimum actuarial liability and minimum normal cost plus expense load. See Table 9.
Table 9--CAS 412-50(c)(2)(ii) Assignable Cost Limitation as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------
(Note 1) ............... ...............Actuarial Accrued Liability....................... ............... $2,594,000 $14,225,000 2Normal Cost....................................... ............... 102,000 821,600 3Expense Load on Normal Cost....................... ............... 8,840 ............... 4
----------------------------------Total Liability for Period........................ ............... $2,704,840 $15,046,600CAS Actuarial Value of Plan Assets................ ............... (1,688,757) (11,872,928) 5
(A) Assignable Cost Limitation Amount............. ............... $1,016,083 $3,173,672 6(B) 412-50(c)(2)(i) Assigned Cost................. ............... $251,740 $1,187,697 7(C) 412-50(c)(2)(ii) Assigned Cost................ $1,439,437 $251,740 $1,187,697 8----------------------------------------------------------------------------------------------------------------Note 1: Because the assignable cost limitation is applied at the segment level when pension costs are separately
calculated by segment or aggregation of segments, no values are shown for the Total Plan other than the
Assigned Cost after consideration of the Assignable Cost Limit.Note 2: For Segment 1, the actuarial accrued liability is measured by the accrued benefit cost method as
required by 9904.412-50(b)(7), i.e., the minimum actuarial liability as described in 9904.412-50(b)(7)(ii)(A).
See Table 4. For Segments 2 through 7, the actuarial accrued liability is measured by the contractor's
established immediate gain cost method since these the 9904.412-50(b)(7)(i) criterion was not met for these
segments. See Table 3.Note 3: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii)(B). See Table 4. For Segments 2
through 7, the normal cost is measured by the contractor's established immediate gain cost method since these
the 9904.412-50(b)(7)(i) criterion was not met for these segments. See Table 3.Note 4: For Segment 1, the normal cost is measured by the accrued benefit cost method as required by 9904.412-
50(b)(7), i.e., the minimum normal cost as described in 9904.412-50(b)(7)(ii)(B), which explicitly identifies
the expected expenses as a separate component of the minimum normal cost. See Table 4. For Segments 2 through
7, the normal cost is measured by the contractor's established immediate gain cost method, which implicitly
recognizes expenses as a decrement to the assumed interest rate since these the 9904.412-50(b)(7)(i) criterion
was not met for these segments. See Table 3.Note 5: See Table 2. The CAS Actuarial Value of Assets is used regardless of the basis for determining the
liabilities. The CAS Actuarial Value of Assets allocated to Segment 1 and Segments 2 through 7 excludes the
accumulated value of prepayment credits as required by 9904.412-50(a)(4).Note 6: The Assignable Cost Limitation cannot be less than $0.Note 7: See Illustration 9904.412-60.1(c)(1), Table 8.Note 8: Lesser of lines (A) or (B).
(ii) As shown in Table 9, the contractor determines that the measured pension costs for Segment 1 and Segments 2 through 7 do not exceed the assignable cost limitation and are not limited.
(3) Measurement of Tax-Deductible Limitation on Assignable Pension Cost: (i) Finally, after limiting the measured pension cost in accordance with 9904.412-50(c)(2)(i) and (ii), the contractor checks to ensure that the total assigned pension cost will not exceed $15,674,697, which is the sum of the maximum tax-deductible contribution ($15,014,300), which is developed in the actuarial valuation prepared for ERISA, and the accumulated value of prepayment credits ($660,397) shown in Table 1. Since the tax-deductible contribution and accumulated value of prepayment credits are maintained for the plan as a whole, these values are allocated to segments based on the assignable pension cost after adjustment, if any, for the assignable cost limitation in accordance with 9904.413-50(c)(1)(ii). See Table 10.
Table 10--CAS 412-50(c)(2)(iii) Tax-Deductible Limitation as of January 1, 2017----------------------------------------------------------------------------------------------------------------
Segments 2
Total plan Segment 1 through 7 Notes----------------------------------------------------------------------------------------------------------------Maximum Tax-deductible Amount..................... $15,014,300 $2,625,818 $12,388,482 1, 2Accumulated Prepayment Credits.................... 660,397 115,495 544,902 3, 4
(A) 412-50(c)(2)(iii) Limitation.................. $15,674,697 $2,741,313 $12,933,384(B) 412-50(c)(2)(ii) Assigned Cost................ $1,439,437 $251,740 $1,187,697 5Assigned Pension Cost............................. $1,439,437 $251,740 $1,187,697 6----------------------------------------------------------------------------------------------------------------Note 1: The Maximum Deductible Amount for the Total Plan is obtained from the valuation report prepared for
ERISA purposes.Note 2: The Maximum Tax-deductible Amount for the Total Plan is allocated to segments based on the assigned cost
after application of 9904.412-50(c)(2)(ii) in accordance with 9904.413-50(c)(1)(i) for purposes of this
assignment limitation test.Note 3: The Accumulated Prepayment Credits for the Total Plan are allocated to segments based on the assigned
cost after application of 9904.412-50(c)(2)(ii) in accordance with 9904.413-50(c)(1)(i) for purposes of this
assignment limitation test.Note 4: See Table 1.Note 5: See Table 9.Note 6: Lesser of lines (A) or (B).
(ii) For Segment 1, the assignable pension cost of $251,740, measured after considering the assignable cost limitation, does not exceed the 9904.412-50(c)(2)(iii) limit of $2,741,313. For Segments 2 through 7, the assignable pension cost of $1,187,697, measured after considering the assignable cost limitation, does not exceed the 9904.412-50(c)(2)(iii) limit of $12,933,384.
(d) Actuarial Gain and Loss--Change in Liability Basis. (1) Assume the same facts shown in 9904.412-60.1(b) for Segment 1 of the Harmony Corporation for 2017. Table 11 shows the actuarial liabilities and normal costs plus any expense loads for Segment 1 for 2016 through 2018.
Table 11--Summary of Liabilities for Segment 1 as of January 1----------------------------------------------------------------------------------------------------------------
2016 2017 2018 Notes----------------------------------------------------------------------------------------------------------------``Going Concern'' Liabilities for the Period:
Actuarial Accrued Liability................... $1,915,000 $2,100,000 $2,305,000 1
Normal Cost................................... 89,600 89,100 99,500 1
Expense Load on Normal Cost................... ............... ............... ............... 1, 2
---------------------------------------------------
Total Liability for Period................ $2,004,600 $2,189,100 $2,404,500Minimum Liabilities for the Period:
Minimum Actuarial Liability................... $1,901,000 $2,594,000 $2,212,000 3
Minimum Normal Cost........................... 83,800 102,000 96,500 3
Expense Load on Minimum Normal Cost........... 8,300 8,840 9,300 3, 4
---------------------------------------------------
Total Minimum Liability for Period........ $1,993,100 $2,704,840 $2,317,800Interest Basis as Determined by Segment's 9904.412-50(b)( 9904.412-50(b)( 9904.412-50(b)( 5
Liabilities for Period........................... 4) 7)(iii) 4)----------------------------------------------------------------------------------------------------------------Note 1: See Table 3 for 2017 values. For 2016 and 2018, the data for Segment 1 is taken directly from the
actuarial valuation report prepared for CAS 412 and 413 purposes and supporting documentation, including
subtotals of the data by segment.
Note 2: Because the contractor's interest assumption, which satisfies the requirements of 9904.412-40(b)(2) and
9904.412-50(b)(4), implicitly recognizes expected administrative expenses there is no explicit amount shown
for the normal cost.Note 3: See Table 4 for 2017 values. For 2016 and 2018, the data for Segment 1 is taken directly from the
actuarial valuation report prepared for ERISA purposes and supporting documentation, including subtotals of
the data by segment. The values for 2016 are based on the transitional minimum actuarial liability and
transitional minimum normal cost measured in accordance with 9904.412-64.1(a) and (b).Note 4: For purposes of determining minimum normal cost, the contractor explicitly identifies the expected
administrative expense as a separate component as required by 9904.412-50(b)(7)(ii)(B).Note 5: For determining the pension cost for the period, the measurements are based on the actuarial accrued
liability and normal cost unless the total minimum liability for the period exceeds the ``Going Concern''
total liability for the period. The measurement basis was separately determined for each segment in accordance
with 9904.412-50(b)(7)(i).
(2) For 2016, the sum of the minimum actuarial liability and minimum normal cost does not exceed the sum of the actuarial accrued liability and normal cost. Therefore the criterion of 9904.412-50(b)(7)(i) is not met, and the actuarial accrued liability and normal cost are used to compute the pension cost for 2016. For 2017, the sum of the minimum actuarial liability and minimum normal cost exceeds the sum of the actuarial accrued liability and normal cost, and therefore the pension cost is computed using minimum actuarial liability and minimum normal cost as required by 9904.412-50(b)(7)(i). For 2018, the sum of the minimum actuarial liability and minimum normal cost does not exceed the sum of the actuarial accrued liability and normal cost, and the actuarial accrued liability and normal cost are used to compute the pension cost for 2018 because the criterion of 9904.412-50(b)(7)(i) is not met. Table 12 shows the measurement of the unfunded actuarial liability for 2016 through 2018.
Table 12--Unfunded Actuarial Liability for Segment 1 as of January 1----------------------------------------------------------------------------------------------------------------
2016 2017 2018 Notes----------------------------------------------------------------------------------------------------------------Current Year Actuarial Liability Basis............ 9904.412-50(b)( 9904.412-50(b)( 9904.412-50(b)( 1
4) 7)(iii) 4)Actuarial Accrued Liability....................... $1,915,000 $2,594,000 $2,305,000 1CAS Actuarial Value of Assets..................... (1,500,000) (1,688,757) (1,894,486) 2
---------------------------------------------------Unfunded Actuarial Liability (Actual)............. $415,000 $905,243 $410,514----------------------------------------------------------------------------------------------------------------Note 1: See Table 11.Note 2: The 2017 CAS Actuarial Value of Assets is developed in Table 2. For 2016 and 2018, the Actuarial Value
of Assets for Segment 1 is taken directly from the actuarial valuation report prepared for CAS 412 and 413
purposes and supporting documentation.
(3) Except for changes in the value of the assumed interest rate used to measure the minimum actuarial liability and minimum normal cost, there were no changes to the pension plan's actuarial assumptions or actuarial cost methods during the period of 2016 through 2018. The contractor's actuary measured the expected unfunded actuarial liability and determined the actuarial gain or loss for 2017 and 2018 as shown in Table 13.
Table 13--Measurement of Actuarial Gain or Loss for Segment 1 as of January 1----------------------------------------------------------------------------------------------------------------
2016 2017 2018 Notes----------------------------------------------------------------------------------------------------------------Actual Unfunded Actuarial Liability.............. (Note 1) $905,243 $410,514 2Expected Unfunded Actuarial Liability............ ................ (381,455) (848,210) 3
----------------------------------Actuarial Loss (Gain)............................ ................ $523,788 $(437,696)----------------------------------------------------------------------------------------------------------------Note 1: The determination of the actuarial gain or loss that occurred during 2015 and measured on 2016 is
outside the scope of this Illustration.Note 2: See Table 12.Note 3: Information taken directly from the actuarial valuation report prepared for CAS 412 and 413 purposes and
supporting documentation. The expected unfunded actuarial liability is based on the prior unfunded actuarial
liability updated based on the assumed interest rate in compliance with 9904.412-40(b)(2) and 9904.412-
50(b)(4). Note that in accordance with 9904.412-50(b)(7)(iii)(D), the corporate bond yield rate is only used
to determine the minimum actuarial liability but not to adjust the liability for the passage of time.
(4) According to the actuarial valuation report, the 2017 actuarial loss of $523,788 includes a $494,000 actuarial loss due to a change in measurement basis from using an actuarial accrued liability of $2,100,000 to using a minimum actuarial liability of $2,594,000, including the effect of any change in the interest rate basis. (See Table 11 for the actuarial accrued liability and the minimum actuarial liability.) The $494,000 loss ($2,594,000-$2,100,000) due to the change in the liability basis is amortized as part of the total actuarial loss of $523,788 over a ten-year period in accordance with 9904.412-50(a)(1)(v) and 9904.413-50(a)(2)(ii). Similarly, the next year's valuation report shows a 2018 actuarial gain of $437,696, which includes a $93,000 actuarial gain ($2,305,000-$2,212,000) due to a change from a minimum actuarial liability back to a an actuarial accrued liability basis, which includes the effect of any change in interest rate basis. The $93,000 gain due the change in the liability basis will be amortized as part of the total $437,696 actuarial gain over a ten-year period in accordance with 9904.412-50(a)(1) and 9904.413-50(a)(2)(ii). [76 FR 81312, Dec. 27, 2011, as amended at 77 FR 43543, July 25, 2012]