Service Contract Act Cash Fringe Benefits -- Timing Is Everything

“They say, timing is everything. But then they say, there is never a perfect time for anything.” 
― Anthony Liccione

Under the Service Contract Act (“SCA”), employers who choose to pay cash fringe benefits for health and welfare (“H&W”) must make the monetary equivalent payment every payroll period.  And, of course, cash fringe benefit payments are taxable income to the worker, and thus trigger FICA, FUTA, Medicare, SUTA, worker’s comp, and unemployment payroll taxes too. Unlike the employer who furnishes a bona fide fringe benefit plans, the employer cannot pay the cash benefit periodically or lag the work period. On each pay day, the SCA covered employees need to receive the cash equivalent payment.

The requirement to pay in the cash equivalent fringe benefit in the contemporaneous pay period is derived from the DOL regulations. The pertinent regulation can be found at 29 CFR 4.175(d) which states:

However, where the fringe benefit determinations contemplate a fixed contribution on behalf of each employee [i.e., the “odd” numbered WDs], and a contractor exercises his option to make hourly cash equivalent payments or differential payments, such payments must be made promptly on the regular pay day for wages. (See [section] 4.165).

However, the reference to section 4.165(a)(1) creates some ambiguity since it says monetary wages must be paid “promptly and in no event later than one pay period following the end of the pay period in which they are earned.”  

One interpretation is that contractors are only permitted to lag the pay period for “even” numbered so-called average wage determinations (“WDs”), and an employer following the same practice for an “odd” numbered WD may end up in a dispute with the US Department of Labor (“DOL”) about benefit deficiencies due. The difference is the even numbered average fringe benefit WDs are subject to a not less often than quarterly reconciliation. So long as the employer offers fringe benefits that are reasonably calculated to satisfy the SCA requirements, the employer operating under an even numbered WD may reconcile its even numbered plans and pay out any variances in the average fringe benefits after the end of the quarterly reconciliation. This is the case because just because an individual worker didn’t receive his or her benefits doesn’t mean that the H&W average across all workers was insufficient to meet the SCA requirements. 

In the odd number WDs, by contrast, the obligation to reconcile may be more frequent, coming as it does every pay period or at least periodically -- as often as the plan contributions are made, which are usually monthly for third-party health insurance premiums. If a SCA covered employee isn’t individually receiving the odd numbered H&W allotment, DOL wants that deficiency individually paid to the worker in his or her paycheck and may demand that be done more frequently that quarterly.

The reason why we care about this issue is that most service contractors are forced to make some kind of cash catch-up or supplemental fringe benefit contirbution to their workers who are engaged on odd numbered SCA WDs.  Almost all employers have some workers who opt out of the employer sponsored health plan -- because they are covered under a spousal plan, or a government plan, or just don't wish to pay their portion of the plan costs. And employers with voluntary matching 401(K) plans find that many employees do not participate. Thus, there are H&W payment deficiencies built into the payroll, and often a cash component to the fringe benefit compliance process is required to come into compliance.  Indeed many SCA covered workers consider the cash out of the H&W benefit to be some kind of right, albeit that is simply not the case.  

Accordingly, to deal with this problem employers need to understand that the time line for a SCA covered employer to reconcile the H&W benefits potentially depends on the type of WD found in the contract.  There are different rules for different kinds of WDs. SCA covered employers need to know the rules and know what kind of WDs are in their contracts.