Steven Shamlian, President, Government Contract Compliance Management, LLC
703.350.8010, sshamlian@gccm-llc.com
The Patient Protection and Affordable Care Act (ACA) is upon us. Do you know how it is likely to impact your business and your Government contracts? How are you going to estimate benefit costs for next year? What costs will be allowable? What options do you have for allocating those costs? Will it be considered reasonable to continue existing practices?
As of this point, the Government has not provided any guidance. Let’s consider the options available.
The ACA allows employers to offer insurance or not. Those who do not offer it face an “assessable payment”. Those who offer insurance must offer, at a minimum, a plan that provides certain enumerated benefits and pays for 60% of the actuarial value of those benefits (a “Bronze Plan”), but may offer greater levels of coverage until they reach a level that subjects them to an excise tax, referred to as the “Cadillac Tax”’.
How does this compare to what Government contractors are currently doing?
Contractors can provide insurance or not without incurring Federal penalties.
The level of insurance provided depends upon what the contractor determines is reasonable for its individual business needs.
So we see that the ACA fundamentally changes how the industry provides healthcare benefits, and raises some difficult questions about compliance with the ACA, FAR and CAS. Let’s answer some of the easy questions first, keeping in mind the basics in FAR 31.201-2; a cost is allowable if it is:
1. Reasonable,
2. Allocable,
3. Compliant with Cost Accounting Standards, if applicable, or Generally Accepted Accounting Standards,
4. Compliant with the terms of the contract, and
5. Compliant with FAR Part 31.
Easy Question 1: What is the consequence of not providing healthcare insurance?
Answer: Some have debated whether the assessed payment for not offering insurance is a penalty or an excise tax. At this point in time, we do not care which it is. If it is a penalty, it is unallowable per FAR 31.205-15. If it is an excise tax, the tax is found in subtitle D, Chapter 43 of the Internal Revenue Code and is unallowable per FAR 31.205-41. The only question remaining is whether the assessed payment is expressly unallowable or not, a subject for another discussion.
For those who are considering converting their employees to part-time, please consult with your attorneys, and consider the probability of being sued and the allowability of the resulting legal costs.
Easy Question 2: What is the consequence of providing a generous healthcare insurance plan?
Answer: Deferring the issue of reasonableness, if the level of insurance is subject to the “Cadillac tax”, the tax/penalty/payment is found in subtitle D, Chapter 43 of the Internal Revenue Code and is unallowable per FAR 31.205-41.
Somewhat Harder Question 1: If we are subject to either payment found in subtitle D, Chapter 43 of the IRC, how do we allocate the cost?
Answer: There are at least two answers to this question.
The first is to allocate the payment as part of the G&A pool. This answer has the advantage that the payment is not a benefit. The payment has the appearance of being a penalty, and penalties are typically found in the G&A pool.
The second answer is to allocate the payment as you would allocate the healthcare insurance costs. This answer has the advantages that (1) there is a nexus between the payment and healthcare insurance, and (2) that the payment is based on the number of affected employees (a measurement of employees is typically a fringe benefit or overhead allocation base) rather than some criteria that is a measure of business activity (i.e., a G&A base). A disadvantage to this allocation method is, for those that use an allocation base that includes fringe benefits, the unallowable costs in the fringe benefit base will increase that total unallowable costs of the organization.
Somewhat Harder Question 2: How do I estimate the cost of the insurance I will offer?
Answer: The easy answer may be to renew your policy with your insurance carrier before the pricing and terms change. The harder answer is first, estimate who will purchase the coverage you intend to offer. You may have to offer a plan that provides fewer benefits at a much higher cost than some of your employees will be able to afford forcing those employees to get insurance elsewhere. On the other hand, your plan may be less expensive than those on the exchanges and more of your employees will seek coverage under your plan. Next, estimate the rate that you will pay per employee. You may have to pay individual rates, instead of group rates as you have been assessed in the past.
Hard Questions
The hard questions have a simple answer: we don’t know yet, but that does not mean that we can afford to ignore those questions or wait until some authoritative guidance is forthcoming. The answers to these questions will ultimately be based upon what is reasonable or by a change in regulation. Existing applicable regulations are FAR 31.205-6 and FAR 31.201-3.
FAR 31.205-6 states that benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or the policy of the contractor. FAR 31.201-3 states that a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business, and provides the following considerations and circumstances to establish what costs are reasonable:
Generally recognized as ordinary and necessary for the conduct of the business or performance of the contract.
Generally accepted sound business practices, resulting from arm’s length bargaining, and Federal and state laws and regulations.
The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public, and
Any significant deviations from the contractor’s established practices.
The established practices of many contractors provide for a higher level of insurance plan and greater than required benefits. Some of the benefits may be required by contract or be necessary to the performance of a contract. In any case, at some point it was determined that the established level of insurance was reasonable. Now, a minimum standard has been established by law.
Hard Question 1: What are the consequences of offering the minimum benefit plan required by law?
Answer: The answer to this question is determined by answering two additional questions: (1) Will the employees you seek to attract and retain want to work for you if you do not provide the benefits they expect at a price they can afford? (2) What other options will they have?
Hard Question 2: My employees expect a high level of healthcare benefits (due to the nature of the work, market pressures, etc.), and I have provided those benefits as part of my established practices. If I continue to provide the same benefits, it will cost more than providing the minimum required benefits. Would this be considered reasonable?
Answer: Whether the level of benefits is considered reasonable or not will depend upon Government policy. If the level of benefits is consistent with your long-held established practice, it should be considered reasonable; however, the reasonableness of healthcare cost (including benefits offered, employer subsidy provided, dependents covered, and possibly provider used) can no longer just be assumed. Rates for each provider will be readily available on the insurance exchanges; the minimum benefits that must be provided will be established in the law; and the law specifies that only the cost of the employees’ coverage need be subsidized. Offering a benefit package or a choice of providers that is consistent with your established practices and suitable to your business needs, but exceeding the minimum legal requirements, may be questioned as unreasonable.
FAR provides for an advance agreement between the contractor and the contracting officer to clarify what costs are allowable, allocable and reasonable. There is also a statute of limitations limiting the ability of the Government to retroactively disallow your costs. Some ways to obtain the protection these rules provide are:
Submit a proposal for an advance agreement. The contracting officer may never sign it, but he or she will be put on notice that you provide benefits that are greater than the minimum and that you believe that you can justify the reasonableness of those benefits.
Include a full disclosure of your benefit plan in your cost proposals. Often cost proposals are incorporated into the contract by reference, which may make the benefit plan a contractual requirement.
Disclose the benefit levels on schedule M of your incurred cost submission. This should be done in addition to seeking an advance agreement, not as the only means of disclosing your benefit plan.
(How you disclose your benefit plan should be based upon competent advice that considers your unique circumstances e.g., you may want the flexibility to change benefits from year to year, and significant differences in contractually required benefits may require different means of allocating the costs.)
Hard Question 3: My employees engage in dangerous activities or travel to distant locations where acceptable medical care is not available. What can I do to provide appropriate benefits?
Answer: You may want to consider a level of insurance that is an appropriate general standard for the company and provide appropriate additional benefits to those employees who require them. These additional benefits may be included as other direct costs for direct employees or purchased on an as needed basis for indirect employees. Your insurance broker can provide you with more information on the availability and cost of additional benefit packages.
Conclusion:
The Patient Protection and Affordable Care Act establishes a legal minimum level of healthcare benefits that is below the level provided by many Government contractors and is generally inadequate for their needs. It will be incumbent upon contractors to justify the reasonableness of the additional cost of benefit plans that suit their needs. Due to the potential magnitude of the cost difference between the minimum legal plan and an acceptable plan, Government contractors should not wait until after the costs have been incurred to disclose the details and costs of their plans. They should consider seeking agreement from (or at least disclosure to) the Government that the plans offered are reasonable.
703.350.8010
www.gccm-llc.com
Disclaimer - The information contained in this publication is general in nature and is based on authorities subject to change. The writer does not guarantee the accuracy or completeness of any information contained herein and is not responsible for errors or omissions, or for results obtained by others as a result of reliance upon information contained in this publication. The writer assumes no obligation to inform the reader of any changes in laws, regulations or Government policies that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult competent advisors concerning the application of laws or regulations to their particular circumstances.
© August 2013 Government Contract Compliance
