Fringe Benefits and Federal Services Contracts – Why Are They So Important?

Earlier this month, The Boon Group attended the National 8(a) Association Summer Conference in Anchorage, Alaska, where our Director of Sales, Taylor Boon, was a featured speaker. Below is an excerpt from his talk, “Fringe Benefits and Federal Services Contracts – Why Are Benefits So Important?”

If you are a federal contractor, you already know how important complying with state and federal regulations is for your business. This is especially true for federal services contractors, who should also be concerned with fringe benefits for a number of reasons.

What is a fringe rate?
In general, service contractors must be paid minimum hourly rates for both wages and benefits. These are often discussed using terms like “prevailing wage” or “health and welfare (H&W).” The hourly benefit requirement is called a fringe rate. Because benefits are accrued on an hourly basis, and must be tracked on an hourly basis, complications can arise when trying to fit a traditionally priced monthly benefit plan into the hourly requirement on a government contract.

The fringe benefit obligation is subject to several requirements:

  • Fringe benefits must be furnished separately from—and in addition to—specified wages.
  • Fringe rates may be paid in the form of benefits of equivalent value or in the form of cash in lieu of benefits.
  • Wages must be paid in excess of the employee’s wage determination (WD); the minimum prevailing wage requirement cannot offset the fringe requirement.
  • Benefits must be “bona fide” as defined in 29 CFR Part 4 Section 171.
  • Payments must be segregated and paid as benefits, not as wages.
  • The current fringe rate is $4.02 per hour.

Are all employees working for a government contractor subject to an hourly fringe?
Most hourly employees who are working on a government services-related contract are subject to the Service Contract Act (now called the Service Contract Labor Standards) and are therefore entitled to fringe benefits. The FLSA (Fair Labor Standards Act) is the law that classifies employees as exempt or non-exempt from overtime standards. Examples of employees who may be exempt from an hourly benefit requirement include employees who are subject to the executive, administrative (managerial), professional, or computer professional ($27.62 per hour or more) exemptions. Recent trends indicate that the SCA is expanding to require fringe benefits for labor categories that are exempt under the FLSA.

How do fringe benefits help or hurt your business?
In a low-bid environment, less than one percent typically separates a winning bid from the runner-up.

Removing cash as an option and requiring that fringe dollars be spent on bona fide fringe benefits can lower overall contract costs by as much as two percent.

Proactively containing fringe costs is important. Many contractors with SCA-covered employees still spend more than the $4.02 allotted on a services contract. Employer benefit plans can be complicated by inherited benefit plan designs, sick leave administration, retirement contribution matches, employee expectations, dependent costs, ancillary benefit plans and variable-hour employees. If any of these issues cause your fringe expenditure to exceed the current rate of $4.02, your business is losing money.

Create long-term competitiveness by offering fringe benefits
Data suggests that single level health insurance premiums are increasing each year at a higher percentage than the fringe benefit allocation. Start making plans today to draw down benefits to a more competitive level.

SCA contractors are starting to take notice of Affordable Care Act (ACA) requirements and change fringe benefit offerings to be ACA-compliant. The biggest challenge to contractors under the ACA is the employer mandate. In order to use fringe benefit dollars to provide affordable coverage to the full-time employee population, satisfying the employer mandate, a contractor should remove “cash in lieu” as an option. When the employer provides an employee with the choice between cash in lieu or health benefits, the employee is in constructive receipt of fringe dollars. Then the fringe is considered to be employee money and the benefit election becomes a payroll deduction, which does not satisfy the employer mandate. Fringe dollars are only considered to be the employer’s dollars when the plan is employer-paid.

To structure a compliant plan using fringe dollars, employees should be required to participate in the employer-sponsored health plan unless they have a valid waiver (proof of other ACA-compliant coverage). Or, the contractor could offer a defined contribution-style plan, where an employee can choose from a selection of benefits and opt for the benefit that would be most useful to them. However, cash in lieu is not an option for defined contribution-style plans.

A contractor can offer cash in lieu of benefits under limited circumstances. Underspent fringe leading to cash in lieu of benefits is permissible as long as the employee is required to participate and shows proof of other coverage in order to waive coverage under the contractor’s health plan. However, offering cash in lieu is generally not recommended.

So how do contractors position themselves correctly while keeping up employee expectations?
Think long-term! Health insurance costs are rising faster than the fringe rate is increasing, and making tough decisions today can pay dividends in the future. Below are a few methods contractors may want to consider.

  • Spending no more than the fringe amount available. Remember that under SCA guidelines, contractors cannot force an employee to pay for fringe benefits from their wages. Therefore, if a contractor requires an employee to participate in its benefit plan, costs have to be contained within the fringe or the cost becomes a liability to the contractor.
  • Eliminating all cash payments in lieu of benefits. By paying cash in lieu of benefits, contractors take on an additional payroll tax burden. Consider retirement, supplemental health or ancillary-only plans for part-time employees.
  • Reducing or eliminating employer contributions toward dependent coverage.
  • Reducing or eliminating any sick leave or vacation time provided beyond what is required by the contract.
  • Taking steps today to correctly classify employees into distinct classes of full- and part-time employees for planning purposes. If employees vary in hours worked, employers may benefit from choosing a lower-cost health option to ensure that costs do not exceed the fringe available each month.

Taylor Boon is Director of Sales for The Boon Group. He can be reached at

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