Creating Trusts to Skirt Self-insured Unfunded Fringe Benefit Plans SCA Problems
“Trust but verify.”
– Ronald Reagan.
Quick question: I have heard that Service Contract Act (“SCA”) health and welfare (“H&W”) compliance is tricky with self-insured medical plans. It’s clear that with fully-insured plans contractors are allowed to count the full amount of the premium paid to the insurance company as a H&W cost. But with self-insurance there is only a small premium for stop-loss insurance, which I guess can be counted as H&W. After stop-loss, I’m told that only real claims can be used to meet H&W. Thus, if a SCA covered worker is healthy, and doesn’t have a claim, then essentially the self-insured contractor hasn’t provided them a benefit above the stop-loss. Is that true because we are considering self-insurance, but we have hundreds of SCA staff. Please advise.
Quick question, but long answer. Yes, this is all largely true and very well-stated.
Here are my caveats. The issue is only relevant for your SCA worker force. Your exempt or commercial workers are not a problem. Also, your analysis applies only to the odd numbered SCA wage determinations ("WD") that are found in most government contracts. They required a true up on not less often than a quarterly basis (and perhaps more frequently) for the H&W fringe benefits paid each individual worker for all hours paid up to 40 hours per week. Each worker must individually get the H&W benefit, currently $4.53 an hour in new contracts, and the problem is that the self-insured plan cannot satisfy that benefit level very well because some workers have no claims, and thus you will underrun the individual benefit, and other workers will get very sick, and thus you will pay them too much in benefits. Employers can end up getting in trouble under the SCA. You only get credit for the stop loss component, the out of pocket claims payment, and you probably can't claim the cost to administer the plan.
If you have an even numbered SCA WD, however, that is an average benefit level, and then you can average out all the claims for all the covered workers on a quarterly basis. Thus, the analysis is different for those WDS.
And under the SCA, here is what the Department of Labor’s Field Operations Handbook (“FOH”) says:
14j01 “Bona fide” FB plans.
(a) To be considered “bona fide” for SCA purposes, a FB plan, fund, or program must constitute
a legally enforceable obligation which meets certain criteria. The plan, fund, or program must
be compliant with the Employment Retirement Income Security Act (ERISA), laws and
regulations enforced by the IRS, and State insurance laws, and contributions must be made
irrevocably to a trustee or third person pursuant to an insurance agreement, trust, or other
funded arrangement. (See29 C.F.R. 4.171(a).)
(b) The primary purpose of a FB plan under the SCA must be to provide systematically for the
payment of benefits to employees on account of death, disability, advanced age, retirement,
illness, medical expenses, hospitalization, supplemental employment benefits, and the like.
(See 29 C.F.R. 4.171(a)(2).) While not specifically enumerated in the regulations,
supplemental unemployment plans and prepaid legal plans are considered “bona fide” FBs
for purposes of the Act.
(c) Unfunded, self-insured FB plans under which a contractor allegedly makes “out of pocket”
payments to provide benefits for employees as costs are incurred, rather than making
irrevocable contributions to a trust or other funded arrangements, are not normally considered “bona fide” plans or equivalent benefits except for plans to provide paid vacation and holiday FBs. (See 29 C.F.R. 4.171(b)(1).)
(1) Under certain conditions, a contractor may request approval by the Administrator of
an unfunded self-insured plan in order to allow credit for payments under such a plan
in meeting the FB requirements of the Act. The purpose of seeking advance approval
is to avoid situations involving unfunded plans where monies allegedly allocated by a
contractor to provide FBs are used for other purposes or are recouped without
actually furnishing any benefits. This procedure is not intended to prohibit self-
insured plans where irrevocable payments are made pursuant to a trust or other
funded arrangement and other conditions are met. (See 29 C.F.R. 4.171(b)(2).)
(2) “Stop loss” insurance payments that provide coverage in the event that claims paid
from an unfunded self-insured plan exceed specified limits both in the individual and
the aggregate can be credited against the FB obligations of the applicable WD.
(d) Contractors may not take credit for any benefit required by Federal, State, or local law such as workers’ compensation, unemployment compensation, and Social Security contributions. (See 29 C.F.R. 4.171(c).)
FIELD OPERATIONS HANDBOOK 14j01. Thus, the SCA imposes some limits on unfunded self-insured plans.
The FOH also makes it hard to get any benefit credits for administrative costs incurred by such plans:
14j00 General provisions.
(a) The FBs that an employer is required to furnish employees performing on a covered contract
will be specified in the applicable WD included in the contract documents.
(1) Any administrative costs (e.g., recordkeeping costs associated with payroll
administration) incurred by a contractor directly in providing FB plans are considered
business expenses of the firm and not contributions made on behalf of the employees.
Such administrative costs cannot be credited toward meeting the FB obligations of
the applicable WD. (See 29 C.F.R. 4.172.)
(2) The cost incurred by a Government contractor’s insurance carrier (or third party trust
fund) in its administration and delivery of benefits to service employees can be
credited toward the contractor’s FB obligations under an SCA WD.
FIELD OPERATIONS HANDBOOK 14j00.
However, I am not saying you can’t have a self-insured plan. Something like 400 or more of the Fortune 500 companies self-insure. There is a fix to the problem. The problem is caused by the unfunded, self-insured nature of the plan. Most self-insured plans are pay as you go plans. It is the pay as you go method, rather than the self-insured aspect, that is most problematic under the SCA. Employers only get fringe benefit credits under the SCA for what they pay.
But if you are willing to set up a trust (like a VEBA trust), and you agree to irrevocably pay an actuarially estimated premium monthly into the trust for each SCA covered worker, you can likely solve the problem. Ordinarily, the plan is funded monthly. A premium equivalent is paid irrevocably for each SCA covered worker into a trust, and thus is isn't deemed to be an unfunded. It is a funded trust plan, albeit self-insured. There is a monthly dollar payment per worker that you can point to when DOL shows up to prove compliance with the SCA. You make the payment irrevocably, meaning it cannot be recaptured. If there is a surplus in the trust, of course, you can reduce the payment in the future to erase the surplus, although then you may not be making the full SCA H&W benefit for that future period unless you add some other new benefit for the SCA covered workers. A trust is a bona fide health plan. Employers usually hire a third-party administrator (“TPA”) to run the plan and offer a healthcare network of doctors and hospitals and other providers, so it looks no different to the workers. The trust pays the administrative costs, not the employer, and thus those costs are allowable too.
Accordingly, employers need not be afraid to institute a self-insured plan for SCA covered employees working on “odd” numbered WDs. They just need to fund it monthly by actuarial premium equivalents, set it up with a trust "wrapper", and make it a fully funded health plan. An ERISA lawyer should be able to arrange affairs so you can do it even on government service contracts with SCA coverage and odd numbered WDs.
If you want more insight into this subject, CBIZ has a well-done article posted on their website: https://www.cbiz.com/insights-resources/details/articleid/7216/the-use-of-self-insured-plans-as-%E2%80%98bona-fide%E2%80%99-fringe-benefits-under-the-service-contract-act-article.