Can Service Contract Act Covered Employees Opt-Out of My Fringe Benefit Plan?

“I never look forward. I live for today. And if you think about what's going to happen in a year, in two years, then you begin to plan. And plans never come true.”

--Alexander Ovechkin

It is often the case that Service Contract Act (“SCA”) covered employees prefer cash fringe benefits to the bona fide benefits offered by contractors. They want the cash to meet their rent obligation, alimony, child support, etc., and they don’t have the luxury of taking the benefits tax free. They want the cash on the barrelhead every pay period.  

Other workers may want to cherry pick the fringe benefit plan. For example, they don’t want health insurance since they are covered by their spouse’s plan and it is better. Or they already have health insurance, such as military retirees, and they don’t want to give it up or accept duplicate coverage. Or they just aren’t interested in retirement savings. They want to live for the here and now.  

The conundrum for the employer is that if you permit the worker to opt out, you reduce you plan size (and possibly increase the cost) and you create other administrative expenses. And, even more importantly, you may owe FICA, Medicare, FUTA, SUTA, and worker’s comp payroll taxes on the cashed out fringe benefit. Of course, the cashed out benefit is taxable to the worker, unlike the bona fide fringe benefit contribution.

A client writes me to ask if they can add a proposed provision to their fringe benefit policies telling their Service Contract Act (“SCA”) employees they cannot opt out of benefits plans.  

My answer to them is it may not be accurate. It depends on the plan. 

Under the SCA, if there is a required employee contribution, then they can opt out. You can’t force employees to spend their own money on fringe benefits. While the employer gets to design and choose the fringe benefits being offered, if employee financial participation is required, the individual employee’s consent to the payroll deduction is necessary, unless it is done by collective bargaining (where the ability to contract the consent has been delegated to the union). 

However, if it is an “employer pay all” plan (i.e., no employee financial contribution is required), then the employer can compel employee participation provided they received a real tangible benefit from the plan, and no employee consent is required. The issue of employees who have duplicate Tricare or spousal coverage is one that isn’t directly resolved by the SCA regulations or the FOH guidance. The issue is whether they receive a tangible bona fide benefit if the coverage is mostly duplicative. That dispute has never been resolved, at least as far as I know. I have noted to contractors that if the plan medical policy makes the employer’s plan “primary,” that likely resolves the issue, but if the policy makes the employer’s plan only secondarily liable for any benefit claims, then there is a possible ambiguity and factual dispute as to whether the plan provides a real tangible fringe benefit to that worker.  

Here is what the Field Operations Handbook says:

 (d)             It is the contractor’s responsibility to satisfy the fringe benefit obligations set forth in an SCA wage determination. The contractor may choose the fringe benefits to be provided, whether an employee accepts or refuses the fringe benefits offered. If an employee desires cash payments or benefits other than those chosen by the contractor, that would be a matter for discussion and resolution between the employee and the employer. If the contractor furnished a lesser amount of the fringe benefit called for by the applicable wage determination, the contractor must furnish the employee with the difference between the amount stated in the wage determination and the actual cost of the fringe benefit which the contractor provided. As set forth in 29 CFR 4.175(a)(2), the contractor may make up the difference in cash to the employee, or furnish equivalent benefits, or a combination thereof. See 29 CFR 4.177.

(e)              If participation in the fringe benefit plan requires a contribution from the employee’s wages, whether through payroll deduction or otherwise, the employee’s concurrence is necessary. No contribution toward fringe benefits made by employees, or deducted from their wages, may be included or used by an employer in satisfying any part of any fringe benefit obligation under the Act. See 29 CFR 4.168(a).

FOH 14j00 (emphasis added).

As to what the FOH means when it says alternatives to the employer’s fringe benefit plan are a “matter for discussion and resolution between the employee and the employer” is not elaborated upon. But the FOH clearly requires “concurrence” of the worker if the employer demands an employee contribution towards the benefit.  

Accordingly, the best practice for SCA covered employers is to offer an employer pay all benefit plan which likely do not require any employee concurrence. As long as those plans deliver a real tangible benefit to the workers, the fact that a particular worker doesn’t want the benefit or prefers the cash is likely irrelevant. The employer gets to pick the plan benefits , and if the employer pays for the benefits entirely and they provide real tangible bona fide benefits, that is the end of the story.