“He who pays the piper calls the tune.” –Perhaps from The Pied Piper of Hamelin.

Under the Service Contract Act (“SCA”) and the Davis-Bacon Act (“DBA”) contractors are required to offer employees certain fringe benefits specified in the prevailing wage determination. To do that many contractors hire a third-party plan administrator (“TPA”) to run their benefit plans. The SCA and DBA both provide that payments of plan expenses are not deemed to be bona fide fringe benefits.

For example, the compensation paid to a contractor’s in-house human resource 401(K) benefit plan coordinator would not count towards satisfying the SCA health and welfare (“H&W”) benefit requirement.  Indeed, the DBA Field Operations Handbook (“FOH”) provision says that: “The administrative expenses incurred by a contractor or subcontractor in connection with the administration of a ‘bona fide’ fringe benefit plan are not creditable towards the prevailing wage….” FOH 15f17. The same principle is applied to the SCA.

However, note that a distinction is made between the employer’s own administrative expense, and the expenses of the bona fide third-party plan. For example, the expense to administer a 401(K) plan borne by the plan does not make the employer’s contribution to the plan partially non-creditable. It is a plan expense, not an employer expense. Of course, the bona fide ERISA qualified plan has expenses. It must make a tax filing and keep abreast of the US Department of Labor regulatory requirements. To do this it needs advice and outside assistance, etc. Accordingly, the employer’s contribution to a bona fide plan is still a bona fide fringe benefit, even if it is used defray plan expenses rather than pay benefits to the workers.  

And, of course, the TPA wants to earn a fee or profit for its work. Provided that TPA fee is paid for by the plan, and not the employer directly, it is just a plan expense. Plans have expenses, just like insurance companies do. And insurance companies make a profit, so why can’t TPA also do the same?  Thus, next time you hear that administrative expenses are not bona fide SCA or DBA fringe benefits, remember that truism applies to the employer’s own administrative expense, but does not extend to the insurance company, plan or TPA expenses. This rule doesn’t affect the validity of the employer’s contribution when the plan pays the expense.