DOL Is Putting Service Contract Act Fringe Benefit Plan Administrative Costs Under the Microscope

Pressure, pushing down on me
Pressing down on you, no man ask for
Under pressure, that burns a building down
Splits a family in two
Puts people on streets

-- Under Pressure, by David Bowie 

Under the Service Contract Act (“SCA”), an issue sometimes arises with the employer’s own administrative costs with respect to the fringe benefit plan. The Department of Labor (“DOL”) has a regulation has meant to deny government contractors any credit for their cost to cover their own administrative expenses in providing the benefits. That regulation states:  

No deduction from the specified amount may be made to cover any administrative costs which may be incurred by the contractor in providing the benefits, as such costs are properly a business expense of the employer. 

29 C.F.R. 4.172. Obviously, this bar includes the contractor’s own staff hired to do benefits work, as well as human resources and other internal costs incurred by the contractor. They are deemed the business expenses of the contractor. 

This bar, however, does not extend to the business expenses or administrative cost incurred by the plan or trust itself. Every benefit plan or trust has administrative costs. When a government contractor hires, for example, Fidelity to run its 401K plan, Fidelity provides all the plan administrative services. Of course, Fidelity has administrative costs and expenses. But those are plan expenses, not the contractor’s expenses, and thus outside the ambit of the DOL regulations. Similarly, when a government contractor hires a health insurer like Aetna or Cigna, and pays them for all the plan services, there are administrative expenses, overhead, G&A and profit (especially profit!) buried in those premium payments. But the DOL regulation is not intended to prohibit those administrative expenses.  

The SCA DOL Field of Operations Handbook (“FOH”) Chapter 14, section 14j00(a) specifically confirms this analysis and provides the following: 

1) Any administrative costs (e.g., recordkeeping costs associated with payroll administration) incurred by a contractor directly in providing fringe benefit 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 fringe benefit obligations of the applicable wage determination. See 29 CFR 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 fringe benefit obligations under an SCA wage determination. 

As you can see, the administrative costs in question in the FOH are the contractor’s own payroll recordkeping costs. Where the government contractor has paid its own payroll costs and payroll personnel, none of that is chargeable to the SCA benefits. But where the plan pays its own administrative costs, particularly indirectly through a trust, that charge is the plan’s own cost. And every plan has those costs. 

Sometimes DOL fails to keep this distinction in mind and goes after the government contractor’s plan expenses and tries to collect additional back wages for what they call improper deductions. In those circumstances, it falls on the contractor to push back. Don’ be afraid to seek the advice of counsel and assert your rights.