[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Rules and Regulations]
[Pages 73451-73454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29151]
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DEPARTMENT OF DEFENSE
Defense Acquisition Regulations System
48 CFR Part 231
RIN 0750-AH76
Defense Federal Acquisition Regulation Supplement: Unallowable
Fringe Benefit Costs (DFARS Case 2012-D038)
AGENCY: Defense Acquisition Regulations System, Department of Defense
(DoD).
ACTION: Final rule.
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SUMMARY: DoD is issuing a final rule amending the Defense Federal
Acquisition Regulation Supplement (DFARS) to explicitly state that
fringe benefit costs that are contrary to law, employer-employee
agreement, or an established policy of the contractor are unallowable.
DATES: Effective December 6, 2013.
FOR FURTHER INFORMATION CONTACT: Ms. Susan Williams, telephone 571-372-
6092.
SUPPLEMENTARY INFORMATION:
I. Background
DoD published a proposed rule in the Federal Register at 78 FR
13606 on February 28, 2013, to revise the DFARS at 231.205-6 to
implement the Director of Defense Pricing policy memo ``Unallowable
Costs for Ineligible Dependent Health Care Benefits'', dated February
17, 2012. This rule adds paragraph 231.205-6(m)(1) to explicitly state
that fringe benefit costs that are contrary to law, employer-employee
agreement, or an established policy of the contractor are unallowable.
II. Discussion and Analysis of Public Comments
DoD reviewed the public comments in the development of the final
rule. A discussion of the comments and the changes made as a result of
those comments is provided, as follows:
A. Summary of Significant Changes from the Proposed Rule
After consideration of a public comment, DoD determined that the
reference to ``incurred or estimated'' within the DFARS text should be
deleted.
[[Page 73452]]
B. Analysis of Public Comments
Two respondents submitted comments on the proposed rule.
1. Policy Memo Disagreement
Comment: One respondent disagreed with the conclusions of the
Director of Defense Pricing policy memorandum. However, the respondent
agreed that contractors should monitor healthcare dependent eligibility
to ensure only proper healthcare charges are included as an element of
fringe benefit costs.
Response: The memorandum emphasizes and clarifies existing policies
but does not create new policies. These existing policies make fringe
benefit costs unallowable when such costs are unreasonable or conflict
with law, employer-employee agreement, or an established policy of the
contractor. DoD shares the respondent's belief that contractors should
have adequate internal controls to ensure improper healthcare charges
are excluded from fringe benefit costs. The rule encourages contractors
to adopt reasonable internal controls to eliminate costs that are
already unallowable.
2. Broadening the Category of Fringe Benefits
Comment: One respondent took exception to the rule addressing the
broad category of fringe benefits when the Director of Defense Pricing
policy memorandum only addresses the cost of health care benefits for
ineligible dependents.
Response: The policy at FAR 31.205-6(m) states, in part, that
fringe benefit costs are allowable to the extent they are required by
law, employer-employee agreement, or an established policy of the
contractor. The DFARS policy memo addressed only the area that has
experienced recent problems. Reasonable internal controls can
significantly reduce the amount of ineligible dependent healthcare
claims that are already unallowable if they fail to meet the conditions
in FAR 31.205-6(m). The same logic applies to all fringe benefits.
3. Immaterial and No-Impact
Comment: One respondent asserted that industry-wide ineligible
dependent costs are immaterial, and thus have no impact on contract
billing or pricing. The respondent suggested that DoD should review the
DCAA findings in its policy memo 09-PSP-016(R), dated August 4, 2009,
before proceeding with further rulemaking.
Response: Research indicates the rate of ineligible dependent
claims can represent as much as 3 percent or more of total healthcare
costs. The overall cost for ineligible dependent claims, which are
often fraudulent, can be significant for large contractors that spend
millions of dollars for dependent healthcare. Programs to reduce
ineligible dependent healthcare claims have been shown to benefit both
the contractor and its customers. Penalties may be assessed if
unallowable dependent healthcare costs are contained in a final
indirect cost rate proposal, or a final statement of costs incurred, or
estimated to be incurred, under a fixed-price incentive contract.
4. Cost Accounting Standard
Comment: One respondent asserted that the treatment of ineligible
fringe benefit costs as expressly unallowable does not comport with
Cost Accounting Standard (CAS) 405 and its preambles. In the preamble
of the original publication of CAS 405, the CAS Board explained its use
of the term ``expressly'' in the definition of ``expressly unallowable
cost'' as ``. . . that which is in direct and unmistakable terms.'' The
respondent believed that ``fringe benefit costs . . . contrary to law,
employer-employee agreement, or an established policy of the
contractor'' are not direct and unmistakable costs.
Response: The rule makes fringe benefit costs expressly unallowable
when such costs are contrary to law, employer-employee agreement, or an
established policy of the contractor. The Director of Defense Pricing
Policy determined these conditions are direct and unmistakable.
5. Overlapping Protection
Comment: One respondent asserted that the rule is unnecessary since
the FAR cost principles already protect the Government. Contractors are
currently required to exclude fringe benefit costs that do not meet the
requirements for reasonableness per FAR 31.201-3.
Response: The results of the DCAA audits have made it clear that
coverage is not sufficiently clear. The intent of the rule is to make
fringe benefit costs expressly unallowable when such costs conflict
with law, employer-employee agreement, or an established policy of the
contractor. Unallowable fringe benefit costs, such as ineligible
dependent healthcare claims, unnecessarily increase the cost of
Government contracts. Because contractors are already required to
exclude unallowable costs from final indirect cost rate proposals or a
final statement or cost incurred, penalties will only accrue to
contractors that fail to comply with rules that already exist.
6. Relationship to the Application of Penalties
Comment: One respondent was concerned that the proposed rule does
not conform to the FAR as it relates to the application of penalties.
The respondent indicated that FAR 42.709-1 is limited to applying
penalties only to unallowable costs included in an indirect cost
proposal. The respondent further stated that there is no language in
FAR 42.709-1 about ``estimated'' costs and because of this the
respondent asserted that the reference to estimated costs in the
proposed rule must be deleted.
Response: While subsection FAR 42.709-1 does not expressly use the
term ``estimated'', this subsection does state that the penalties
discussed in the subsection ``apply to contracts covered by this
section.'' FAR 42.709, entitled ``Scope,'' specifically covers the
assessment of penalties for including unallowable indirect costs in
indirect cost rate proposals, or the ``final statement of costs
incurred or estimated to be incurred . . .'' (emphasis added).
Nevertheless, DoD has deleted the phrase ``incurred or estimated'' from
DFARS 231.205-6(m)(1).
7. Test of Reasonableness
Comment: One respondent suggested that the costs should be judged
by the test of reasonableness and not treated as unallowable with the
associated penalties. The proposed rule would make these costs
unallowable, thus forcing companies to expend disproportionate sums to
ensure no claims for costs include ineligible health care costs in
order to avoid the penalties. According to the respondent, this would
force companies to behave differently than companies in the commercial
marketplace or the U.S. Government in managing these costs.
Response: Ineligible fringe benefit costs are already unallowable
under existing regulations. Thus, the test for reasonableness does not
apply because an unallowable cost cannot, by definition be reasonable.
Per FAR 31.205-6(m), fringe benefit costs are only allowable to the
extent they are reasonable and are required by law, employer-employee
agreement, or an established policy of the contractor. The DFARS rule
only makes expressly unallowable fringe benefit costs that contractors
are already required to exclude from forward pricing rates, incurred
cost proposals, and billings. Research indicates nearly 70 percent of
commercial companies have implemented procedures to detect and
eliminate ineligible dependent health
[[Page 73453]]
care claims in order to reduce costs and remain competitive. Therefore,
the effect of the rule is to make the DFARS consistent with current
commercial practice.
8. Internal Controls
Comment: One respondent asserted that, if a company's internal
controls are found to be unreasonable, the Government can cite the
contractor for a business system deficiency and disallow cost.
Dependent healthcare costs are allowable until eligibility ceases, so
the Government should focus on the reasonableness of the company's
internal controls (i.e., reasonableness test) versus the allowability
test. A company should not be required to pay penalties if it has
adequate internal controls to prevent charging the Government for
ineligible dependent healthcare costs or recover and credit those costs
back to the Government when they are charged.
Response: The rule makes ineligible dependent healthcare costs
expressly unallowable, and subject to penalties, when such costs are
contained in a final indirect cost rate proposal or a final statement
of costs incurred, or estimated to be incurred, under a fixed-price
incentive contract. Penalties may be waived in accordance with FAR
42.709-5(c).
9. Exceeding the Actual Costs of Ineligible Benefits
Comment: One respondent asserted that the costs of internal
controls should not exceed the actual costs of the ineligible benefits.
Treating the costs for ineligible dependent healthcare costs as
unallowable is likely to force companies to spend more money than they
would otherwise, in order to avoid the penalties associated with
unallowable costs. The result will be increased allowable costs to the
Government in exchange for little or no value.
Response: Research indicates the cost of ineligible dependent
health care claims often far exceeds the cost of dependent verification
programs. DoD was unable to find any studies or other evidence
indicating that the cost to detect ineligible claims is higher than the
cost savings.
10. Possible Disfavor for Those Who Are Fully or Partially Subject to
CAS
Comment: One respondent asserted that the proposed rule has the
effect of discriminating against companies that are fully or partially
subject to CAS. The respondent asserted that, for those fully subject
to CAS and those partially subject to CAS, the potential risk for
liability for claiming unallowable costs is significant, while
companies that are not subject to CAS have no such liability and do not
face the possibility of False Claims Act prosecutions, Civil False
Claims Act damages, qui tam lawsuits or debarment/suspension. A rule
that allows companies subject to CAS to use a reasonable method for
dealing with these costs will reduce the cost to the companies and
reasonably protect the government from paying for the costs of
ineligible dependent healthcare costs.
Response: The rule and, thus, the potential liability to incur
penalties, apply equally to all contractors regardless of whether they
are subject to CAS. Therefore, the rule does not discriminate against
companies that are fully or partially subject to CAS. Additionally, the
assertion that companies not subject to CAS do not face the possibility
of False Claims Act prosecutions, Civil False Claims Act damages, qui
tam lawsuits or debarment/suspension is inaccurate.
III. Executive Orders 12866 and 13563
Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). E.O.
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
This is not a significant regulatory action and, therefore, was not
subject to review under section 6(b) of E.O. 12866, Regulatory Planning
and Review, dated September 30, 1993. This rule is not a major rule
under 5 U.S.C. 804.
IV. Regulatory Flexibility Act
A final regulatory flexibility analysis has been prepared
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq.,
and is summarized as follows: This final rule amends the Defense
Federal Acquisition Regulation Supplement (DFARS) at 231.205-6 to
explicitly state that fringe benefit costs incurred or estimated that
are contrary to law, employer-employee agreement, or an established
policy of the contractor are unallowable. After consideration of a
public comment, DoD determined that the reference to ``incurred or
estimated'' within the DFARS proposed rule text should be deleted.
The objective of this final rule is to explicitly state that fringe
benefit costs incurred or estimated that are contrary to law, employer-
employee agreement, or an established policy of the contractor are
unallowable. Although fringe benefit costs that do not meet these
criteria are not allowable, the Federal Acquisition Regulation (FAR)
does not make them expressly unallowable. Specifying these fringe
benefit costs are expressly unallowable in the DFARS makes the
penalties at FAR 42.709-1 applicable if a contractor includes such
unallowable fringe benefit costs in a final indirect cost rate proposal
or in the final statement of costs incurred under a fixed-price
incentive contract.
No comments were filed by the Chief Counsel for Advocacy of the
Small Business Administration in response to the proposed rule.
DoD does not expect this final rule to have a significant economic
impact on a substantial number of small entities within the meaning of
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this
rule merely provides clarification of existing policies by expressly
stating that fringe benefit costs incurred or estimated that are
contrary to law, employer-employee agreement, or an established policy
of the contractor are unallowable.
The final rule imposes no reporting, recordkeeping, or other
information collection requirements.
There are no known significant alternatives to the rule. The impact
of this rule on small business is not expected to be significant.
V. Paperwork Reduction Act
The rule does not contain any information collection requirements
that require the approval of the Office of Management and Budget under
the Paperwork Reduction Act (44 U.S.C. chapter 35).
List of Subjects in 48 CFR Part 231
Government procurement.
Manuel Quinones,
Editor, Defense Acquisition Regulations System.
Therefore, 48 CFR part 231 is amended as follows:
PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES
0
1. The authority citation for 48 CFR part 231 continues to read as
follows:
Authority: 41 U.S.C. 1303 and CFR chapter 1.
0
2. Section 231.205-6 is amended by adding paragraph (m)(1) to read as
follows:
[[Page 73454]]
231.205-6 Compensation for personal services.
* * * * *
(m)(1) Fringe benefit costs that are contrary to law, employer-
employee agreement, or an established policy of the contractor are
unallowable.
[FR Doc. 2013-29151 Filed 12-5-13; 8:45 am]
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