Post retirement benefits other than pensions (PRBs)" means exactly what it says. PRBs includes any benefits (other than cash benefits and life insurance benefits paid by pension plans) provided to employees, their beneficiaries, and covered dependents during the period following the employees' retirement. These include postretirement health care, life insurance provided outside a pension plan, and other welfare benefits such as tuition assistance, day care, legal services, and housing subsidies provided after retirement. This is not an all-inclusive listing but out of this listing, health care coverage for retirees is the most significant in terms of costs and the most likely to attract the attention of the Government.
There's a two-step process for determining whether PRBs can be charged to Government contracts. The first test is to determine whether the contractor is obligated to pay. To be allowable under this first test, PRBs must be incurred pursuant to
- employer-employee agreement, or
- an established policy of the contractor.
If it passes this first hurdle, then things get a little more complicated. The rules are different depending upon the way that funding is structured.
Pay-as-you-go plans - PRB costs are not accrued during the working lives of employees. Costs are assigned to the period in which
- Benefits are actually provided; or
- The costs are paid to an insurer, provider, or other recipient for current year benefits or premiums
Terminal funding - PRB costs are not accrued during the working lives of the employees
Terminal funding occurs when the entire PRB liability is paid in a lump sum upon the termination of employees (or upon conversion to such a terminal-funded plan) to an insurer or trustee to establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees. Terminal funded costs shall be amortized over a period of 15 years.
Accrual basis - PRB costs are accrued during the working lives of employees. This method gets complicated very quickly. It requires actuarial assumptions on how long employees (or their dependents and beneficiaries) will live, healthcare inflation assumptions, investment earnings, and methods and time-frames for accruing actuarial gains and losses.
Needless to say, there are pros and cons to each of these methods. The first two methods (pay-as-you-go and terminal funding) saddle future work with past promises (e.g. look at the American auto industry). The accrual basis does the best job at matching expense with revenues but reduces short-term profits.
Next: Section (p) - Limitation on allowability of compensation for certain contractor personnel