Booncast Episode 3: A Deep Dive on the 2022 SCA Fringe Rate

The sharp rise of inflation has caused the 2022 SCA fringe rate to seem more important than ever. We are happy to report that the wait is over — the 2022 SCA fringe benefit rate has been released! On June 23, 2022, the Department of Labor’s Wage and Hour Division issued All Agency Memorandum No. 239 announcing the prevailing health and welfare fringe benefit rate. The 2022 SCA fringe benefit rate has increased to $4.80 per hour from the 2021 rate of $4.60 per hour.

Taylor Boon, President and CEO of Boon, joins Booncast to offer his expert commentary on the 2022 fringe rate and how he anticipates the modest increase will impact the government contracting community. Taylor also shares the solutions that Boon is innovating to meet the current needs of the industry.

• It’s Here! The 2022 Health and Welfare Fringe Benefit Rate
• Booncast Episode 1: The SCA and Why a Fringe Rate Increase is so Important
• The Service Contract Act, Fringe Benefits, and Compliance
• The History of the Fringe

Episode Transcript

Hello and welcome to Booncast, a podcast where we discuss evolving healthcare needs and flexible employee benefit solutions. Join our experts for unique insight into the niche market of fringe administration, solutions to address the needs of the American employer and the hourly worker, compliance concerns, and updates on developing topics in the industry.

Caitlin Kennedy with Booncast: Thank you for joining us for this very special episode of Booncast. The 2022 SCA fringe rate for health and welfare benefits was recently announced by the Department of Labor. Taylor Boon, President and CEO of Boon, is joining us today to share his insight on this highly anticipated release and to shed a little more light on what this increase for the fringe rate means for contractors. Taylor, thank you so much for joining us today.

Taylor Boon: Thank you, Caitlin. Glad to be here.

Caitlin Kennedy: So, for those that may not be aware of the news, can you summarize the changes to the fringe rate for 2022?

Taylor Boon: Happy to do so, and I think the first thing everyone listening should be aware is that this is the time of year — end of June or late July — when the Department of Labor Wage and Hour Division drops the highly anticipated yearly increase or adjustment to the national Health and Welfare fringe rate for federal government contractors working under the Service Contract Act. This year — we’ll touch on it most likely — saw, for the first time, an increase right around 4.26 percent on the predominant health and welfare fringe rate. Which was the highest increase that we’ve had since 2015. So obviously exciting.

There are two fringe rates. For some of you — the operating federal government contracts under Service Contract Act — many of you may have more than that. But the predominant fringe rates for last year were $4.23. For those of you with Executive Order 13706 accompanying your contract, which is easiest to remember, the sick leave requirement. And then $4.60 was last year’s rate for those contracts that were grandfathered or came into existence prior to sick leave requirement and haven’t been updated. And so we saw the $4.23 rate went to $4.41, and the $4.60 rate go to $4.80. So, both good increases. However, you know, we were hoping for a little bit more just because last year’s rate was pretty non-existent and on less than a quarter of a percent increase, and the year before that, a zero percent increase. So we’re still playing catch up. But it was a very welcomed fringe rate increase that was dropped back on June 23 of this year. So does that help, Caitlin?

Caitlin Kennedy: Absolutely. And I’m so glad that you touched on this. You have spoken before, at length, on Episode One of this podcast and elsewhere, that the need for a fringe rate increase in the government contracting space is dire. And now that that fringe rate increase is here, do you believe that it is sufficient to make a difference to government contractors? I know as you said that we’re playing catch up a little bit. But what does this increase do to help?

Taylor Boon: Well, that’s another good question. Contractors are facing two things going on simultaneously, and the first being that wages have increased a lot faster. The private sector has driven wage requirements. You know McDonald’s in some cities are paying $15 and $20 an hour. And contractors are beholden to wage determinations. And those wage determinations are updated periodically, many times yearly, but other times every two, three years. And so with COVID and all the shake out of inflation and wage inflation that we’ve seen over the last few years, wages have increased substantially. Which has put some burden on contractors, SCA contractors, to try to offset some of the salary needs of employees by kind of robbing from the health and welfare benefit. As we know a contractor can, at their discretion, either provide the health and welfare benefit or the wages, or a combination of two.

But what we’re seeing with the health and welfare fringe going from $4.23 — the predominant rate — to $4.41, an 18 cent fringe rate increase. For the most part that’s going to cover (potentially cover) your rise in health insurance costs. I don’t personally believe. For the majority contractors out there and just based on predominant information out there in the market on rising healthcare costs, along with retirement contributions, being a lot of times a percentage of wages. Dental premiums are going up. You’re seeing life premiums take up slowly for the first time in a long time.

And so, yes, there’s a dire need. 4 percent is going to help. But 4 percent most likely won’t cover the average increase that you see in the market and in a benefit package. So what this means for most contractors is, they’re going to have to become a little bit better stewards of their health plan, or they’re going to have to increase deductibles, co-pays, etc, this year again. So it’s helping, it’s just not quite enough to to help contractors sleep well at night, knowing that they’re caught there. Adequate and price adjustments on the contracts will be enough to cover the rising costs and those benefit plans they offer.

Caitlin Kennedy: So in light of all of those factors that you just discussed, what changes do you anticipate will occur in the government contracting space?

Taylor Boon: What I anticipate is, unfortunately, what we’re seeing right now. And that’s contractors having to make a very hard decision on — and we’re seeing them kind of go two ways — right? You’ve got a fixed amount of health and welfare you can spend, and due to the complexity of offering a compliant benefit program, the best way to do it is to either put the health and welfare in an employee’s paycheck, and then allow them to voluntarily opt into medical or benefit package. And that creates tremendous problems. And then in the past, I’ve spoken about adverse selection spiral, which can occur to the price of a health plan when you do that. Your younger folks participate in the plan, those maybe more accelerated in age — which have dependents or health conditions — accept the plan and each year you get less and less people participating. So if the cost of the fringe doesn’t cover the benefit plan, the employer either A) we see that maybe, you know, chooses to go and put the money end up in a paycheck. Which costs them both from a payroll burden perspective and potentially gives them a disadvantage on their future bids. And also creates a selection spiral against their health plan, or they have to back plan plan benefits down.

So you know, we’re seeing kind of a race to the to the top, you could say. You know, it’s really a race to the bottom, on deductibles we’re seeing. Whereas in 2017, 2018, on the 300 to 500 contractors that Boon works with at a given point, they would offer, you know, deductibles that were in $1000 to $2000 range. And you saw, year over year, consistent 5 percent, 6 percent health and welfare fringe increases to cover the rising cost of prescription drugs and medical insurance, in general. And what we’re seeing now is folks have to really just increase deductibles. Hence they’re part of the race to top.

There’s obviously caps, it’s up in the seven thousands now, for the max out of pocket. We’re seeing deductibles, on average, of $4,000 a year or higher for for contractors trying to be able to fit a benefit plan complete (potentially with ancillary, as well) in the fringe. Considering that you’ve got an employee base, predominantly, you know, blue collar white collar, hourly and service jobs covered by the Service Contract Act name. $4000 for deductible, $7000 out of pocket — it can put somebody in some some grave financial conditions if they do have that medical event.

So, you know, we’re trying different things. We’re coming up with some unique plan designs here at Boon and to combat that, but I think most companies out there are trying to do something different than they’ve done in the past. And that usually involves cutting benefits in some way, shape, or form, or certain prescription drugs may not be covered or whatnot, to bring those costs in line. So, you know, the industry is adjusting. But it’s something that contractors are just going to have to factor.

If they want to offer a good benefit plan, and when they’re bidding their contract, it’s to the point where they may have to assume that their benefit plan increases faster than the health and welfare gets adjusted on the contract. And that’s not something that a contractor really had to face; at least, with me doing it since 2004, all the way to 2018. The data really switched in 2019. And that’s when the cost of the benefits started to exceed that of the fringe. And we’ve been kind of upside down since that point.

Caitlin Kennedy: So what advice would you have for contractors looking to take full advantage of the new benefit rate?

Taylor Boon: Be good stewards of your health program. What I mean by that is, you want to remove as much adverse selection against your plan as possible. The average cost of benefits is well, over $650. You know, you may sit there and take the new fringe at $4.41, times by 2080, and divide by 12, to come up with, you know, a monthly available rate of $740 — or, I’m sorry, $764, and say “Taylor, you know. For $764, I can cover the cost that that medical plan you just mentioned.” And I would say you’re right.

However, in most scenarios that I personally run into, and that we run into on a daily basis, the average employee does not clock in and clock out on an automated or electronic time card, exactly 2080 hours a year. In many cases, they’re working closer to 160 average hours a month, which would be 13 hours less, which then gives them you know, $5,200 less than a month and in benefit a lot. What that basically does is it just constricts the ability for the employer to offer that benefit plan they want without hemorrhaging money out of their own pocket. Because the smart contractor provides a benefit plan free of charge for their employees, utilizing the health and welfare fringe. However, the Service Contract Act is very clear that you can’t force a payroll deduction. So you want to be very, very certain that when you design and implement a benefit program for your group of employees, you do so within the confines of what your average employee works in a year. Not 2080 hours divided by 12 and times and the fringe.

We see that mistake a lot. We get calls that say, “Well, I’m spending more than the fringe allotment.” And so I tell people that you’ve got to get ahead of it by a year, because the fringe is always retro, right? All your contracts don’t change on June 23, they change when they renew. And so you should make the tough decision to raise the deductible and try to get a little more aggressive on your pricing sooner than later. So that you’re on the offensive instead of defensive, should you get an abnormal year where you have a 10 or 20 percent increase on your health benefit plan. Because, regardless, it’s going to happen at some point. No insurance broker in the world can save you from that. Shopping isn’t going to do it. So, you just have to be smart. You have to put in plans that benefit plans, and structure your retirement contributions, and things like that in a way that perceives that the rise of those costs are going to exceed the health and welfare. And if your contracts are a one year contract with four additional option years, then you know, set the horizon at five years and really think through giving yourself some padding there. You know, start with a plan that costs less than the fringe and knowing that, over time, it’s gonna catch up.

That’s what I would tell you. We can get into another hour long conversation on designing medical plans with smarter PBM benefits, or telemedicine, or things like that, that can steer costs away from the plan, hopefully giving you better renewals. But that’s kind of a different conversation. For right now, contractors just need to be looking at it as two things: something that can hurt you on your upcoming bids, or something that can help you. If you’re a good steward of your benefit plan, your benefit plan costs will be lower than your competitors. And that will give you a competitive bidding advantage in years to come.

If you go with what appeases the most employees — and I know that’s what our tendency is to do right now in an employee driven market — then that’s going to put you really behind the eight ball in a couple of years, when you’re kind of backwards on your fringe pools and your health and welfare benefit dollars and everything like that dating our competitive programs. So just, you know, we’re here, there’s others here, but we’re here to help if somebody needs that advice, or somebody’s broker needs advice. We’re happy to help the brokerage community to design plans and do that every day.

Caitlin Kennedy: So speaking of plan design — and I think we will have to take you up on that extra hour of chat later on. You know, you’re wealth of knowledge in that regard. So the annual fringe rate announcement is a high holiday here at Boon! How has Boon been preparing to seize the opportunity that comes with this increase behind the scenes, and what makes you excited for that increase and what Boon is doing for its contractor clients?

Taylor Boon: Well, like I said, I was hoping to see it be a little bit higher. We forecasted about where it came in at 4 percent. We were hoping to see something more like six or seven. But the government itself is a follower of rules and order and they have a very defined process in which they come up with this health and welfare fringe and oftentimes work reactively on data, historical data, which unfortunately puts them a little bit behind the ball. But Boon, for the most part, in its 40 year history of working with federal government contractors has taken a proactive stance in the way we look at the programs that we offer for government contractors. We pride ourselves on helping contractors be compliant, first foremost, but also competitive in offerings, as well as on contracts. And so you know, we’ve got the standard benefit programs which you’re going to have.

Medical trend, it’s a real thing. Hospitals charge more. Every time a drug ad runs on TV, and you think you have restless legs or, or psoriasis, or whatever it might be, those drugs are very expensive. Then they’re made more expensive when they’re advertised heavily. But right now we have a prescription drug or PBM pricing problem in the country. Where we have very, very good end of life drugs coming out. We have custom drugs that will be based on your genetics in the near future. We’ve got drugs that can make your life a lot better, if you’re living in pain. But those all cost money because they cost a lot of money to be developed and tested. And so one of the things we’re looking at constantly is designing programs that take into consideration the drug concerns that we have. So we’re utilizing new providers out there, for example, to help find employees cheaper alternatives to very expensive drugs.

Another solution that we’ve come up with is we constantly get asked about dependent programs. The truth of the matter right now is that dependent care or major medical care is outside the reach of many Americans. You know, it can be $1000 to $2000 payroll deduction to add a family and folks may be falling in that kind of “No Man’s Land” of where they can’t get it on an exchange for cheap and they can’t get it from their employer. Because most Service Contract and Davis-Bacon Act covered employers just don’t don’t have the money or resources. Not because they don’t want to, but they don’t have the money or resources to be able to contribute that dependent care. So we spent the last year developing an affordable independent option, for example, that provides a benefit card along with some prescription drug doctor’s visits, x-ray, surgical benefits in that $100 to $200 range per month. So we’re really excited about programs like that.

Unfortunately, most of the things that we’ve been doing — fortunate or unfortunate, however you want to look at it — are really designed at a cost cut. We’re looking at self funding, more so than we have in the past. And you can self fund under an SCA contract. Although the regs, you know, talk about the need to get it approved. there are ways to self fund, and it makes sense in a certain capacity as long as, you know, it’s held in trust and done the right way.

And then, you know, we’re looking at fully insured options and options for part timers and things like that too that are more affordable, so that we can fit them within the fringe for our clients and our brokerage partners that deliver our products throughout the country. So lots of opportunity, as far as innovation. But as you know, the Service Contract Act goes in and a lot of companies that are doing service contracts will also be dabbling in some of the Infrastructure Act as well and so they may be running across Davis-Bacon. And with Davis-Bacon comes another set of prevailing wage and health and welfare benefit requirements. So we’re always here designing new things. And that’s the opportunity that we’re trying to seize here is to create and deliver programs for the government contractor to be competitive and compliant. That’s what we’re here for.

Caitlin Kennedy: And that says it all. We’re coming up on the end of our time, but I did want to get one final piece of insight from you. You had this wonderful quote about the fringe rate always being retro. And I know that looks backward. But I’d like to look forward to the future, let’s say to the 2023 fringe rate announcement. What do you foresee in the industry as we move forward on this path? And what should government contractors be preparing for today?

Taylor Boon: Good question, Caitlin. I’m gonna go optimistic here. I’m gonna go with a glass half full.

Caitlin Kennedy: And we need that.

Taylor Boon: I know! When I said that government looks retroactively, that’s the way they look. So they take a look at employer costs for employee compensation data. That’s published quarterly. They take a look at that data and they extrapolate costs for insurance, retirement, personal time and sick leave, and they poll a couple thousand companies throughout the country, and then take a look at that. Well, the data each year that you look at, like if you look at the data for this year, it’s actually using data from March of last year, through the end of March of this year. Well, if you roll back time, to the fringe late last year, where we got zero percent increase, if you remember, you know, the famous words that I think we all in business, remember, which is, “inflation is transitory.” So at that point, most folks felt like, although the costs were up a little bit, they were transitory.

So they expected costs to remain pretty neutral. And so we had one or two months, it wasn’t really until I would say probably end of July maybe even going into to the fourth quarter of last year where people said, “You know what? I think we’ve got an inflation problem on our hands.” And so the positive, the way I look at it, is next year we’re going to have data for from from March to June. Which we know is pacing at over or close to 8 percent. I shouldn’t say over but close to a percent of increase every month. And we don’t anticipate that slowing for at least for another quarter, probably at best, whoever you read or or listen to. And so we’re going to have three quarters of pretty good inflation data to support next year’s fringe increase. So I’m gonna go bold, and I’m gonna say that we’ve started on a path of increasing fringe rates, and I hope that somebody can prove me right. But I’m going to say it’s going to be over this year, Caitlin, and so that may be welcome news to some folks. I hope I’m right, right?

So anyway, we feel like it’s going to continue at least for 2023, potentially even 2024 with a fringe increase. But, then again, the government could change the way they look at things and throw us a curveball like they did in 2017, when they actually dropped the fringe rate to incorporate a sick leave. Which really, really hurt contractors at that point. But, in the meantime, I think contractors just do, you know, kind of what we talked about, and that’s be proactive, not reactive on your health renewal, and your renewal decisions this year, as far as retirement, your voluntary and ancillary options, as well as your medical insurance. The Boon Group, as we mentioned, has hundreds and hundreds of clients throughout the country. We would be more than welcome through our network of sales representatives throughout the country to work with your broker and look at your health plan to see if we can help you and them develop something that may be a little bit more stable, and or potentially offer a program designed specifically with you in mind. So that’s the advice I’d give. And hopefully, next year, we’ll get that fringe increase.

Caitlin Kennedy: That’s the bright side of benefits, which as you said, is a pretty good place to be. Taylor, thank you so so much for joining us again on Booncast. Thank you for your insight and your expertise and for jumping on this very hot topic that I know listeners are very excited to dive in on. Thank you very much.

Taylor Boon: Thank you, Caitlin. You have a great day and I look forward to talking to you again.

Caitlin Kennedy: Absolutely.

That’s all for this episode of Booncast! Thank you for listening! Visit us on www.boongroup.com for more podcasts, blog posts, and information on Boon’s benefit offerings.