ASBCA Ruling on Northrop Grumman’s Reimbursement Request for Certain Post-Retirement Benefit Costs

In July 2023, the Armed Services Board of Contract Appeals (ASBCA) granted the Defense Contract Management Agency’s (DCMA) cross-motion for partial summary judgment against Northrop Grumman. The ASBCA determined that certain supplemental pension costs awarded to key employees of Northrop Grumman constitute unallowable costs. The determination hinged on the ASBCA’s conclusion that a portion of these pension costs were unallowable because they were calculated using a formula that included compensation amounts that exceeded the executive compensation benchmark limits per Federal Acquisition Regulation (FAR) 31.205-6(p). The ASBCA’s conclusion cites that “the challenged pension costs are unallowable because of their relationship to expressly unallowable compensation.”

Northrop Grumman’s Incurred Cost Submission (ICS) for FY2012 included pension costs incurred pursuant to several Northrop Grumman nonqualified defined-benefit pension plans. These specific pension plans provided supplemental retirement benefits for a select group of Northrop Grumman executives and other key employees to encourage the employees to continue providing services to Northrop Grumman until their retirement. The retirement benefits were included in the ICS on a “pay-as-you-go” method; in other words, the pension cost is recognized when the retirement benefit is paid to the retired plan participant.

The retirement benefits were determined based on specific “Retirement Benefit Formula” included in the supplemental pension plans at issue. Northrop Grumman determined these employee benefits based on final average earnings (an average of the highest years of the plan participant’s actual compensation), along with other variables. Certain pension plan participants who received a pension benefit in FY2012 had earned compensation in excess of the applicable FAR 31.205-6(p) limitation during their working years. Northrop Grumman included the total compensation paid to these plan participants when applying the Retirement Benefit Formula and in determining payable pension benefits under these supplemental pension plans.

The DCMA concluded that the amount of pension benefits derived from compensation paid to plan participants in excess of the FAR 31.205-6(p) executive compensation cap constitute “directly associated costs” generated solely as a result of unallowable compensation, and thus must be treated as unallowable. The government cited FAR 31.201-6(a), which states, “when an unallowable cost is incurred, its directly associated costs are also unallowable.”

The ASBCA ruled in the DCMA’s favor, stating “the challenged pension costs are unallowable because of their relationship to expressly unallowable compensation.”

Government contractors with supplemental retirement benefit pension plans should take note of this ruling. Contractors should review claimed pension costs to assess whether these costs have been determined based on any compensation paid in excess of allowable benchmark amounts.

Find the Ruling here: ASBCA Ruling