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[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Rules and Regulations]
[Pages 73451-73454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29151]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 231

RIN 0750-AH76

Defense Federal Acquisition Regulation Supplement: Unallowable 
Fringe Benefit Costs (DFARS Case 2012-D038)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to explicitly state that 
fringe benefit costs that are contrary to law, employer-employee 
agreement, or an established policy of the contractor are unallowable.

DATES: Effective December 6, 2013.

FOR FURTHER INFORMATION CONTACT: Ms. Susan Williams, telephone 571-372-
6092.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 78 FR 
13606 on February 28, 2013, to revise the DFARS at 231.205-6 to 
implement the Director of Defense Pricing policy memo ``Unallowable 
Costs for Ineligible Dependent Health Care Benefits'', dated February 
17, 2012. This rule adds paragraph 231.205-6(m)(1) to explicitly state 
that fringe benefit costs that are contrary to law, employer-employee 
agreement, or an established policy of the contractor are unallowable.

II. Discussion and Analysis of Public Comments

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made as a result of 
those comments is provided, as follows:

A. Summary of Significant Changes from the Proposed Rule

    After consideration of a public comment, DoD determined that the 
reference to ``incurred or estimated'' within the DFARS text should be 
deleted.

[[Page 73452]]

B. Analysis of Public Comments

    Two respondents submitted comments on the proposed rule.
1. Policy Memo Disagreement
    Comment: One respondent disagreed with the conclusions of the 
Director of Defense Pricing policy memorandum. However, the respondent 
agreed that contractors should monitor healthcare dependent eligibility 
to ensure only proper healthcare charges are included as an element of 
fringe benefit costs.
    Response: The memorandum emphasizes and clarifies existing policies 
but does not create new policies. These existing policies make fringe 
benefit costs unallowable when such costs are unreasonable or conflict 
with law, employer-employee agreement, or an established policy of the 
contractor. DoD shares the respondent's belief that contractors should 
have adequate internal controls to ensure improper healthcare charges 
are excluded from fringe benefit costs. The rule encourages contractors 
to adopt reasonable internal controls to eliminate costs that are 
already unallowable.
2. Broadening the Category of Fringe Benefits
    Comment: One respondent took exception to the rule addressing the 
broad category of fringe benefits when the Director of Defense Pricing 
policy memorandum only addresses the cost of health care benefits for 
ineligible dependents.
    Response: The policy at FAR 31.205-6(m) states, in part, that 
fringe benefit costs are allowable to the extent they are required by 
law, employer-employee agreement, or an established policy of the 
contractor. The DFARS policy memo addressed only the area that has 
experienced recent problems. Reasonable internal controls can 
significantly reduce the amount of ineligible dependent healthcare 
claims that are already unallowable if they fail to meet the conditions 
in FAR 31.205-6(m). The same logic applies to all fringe benefits.
3. Immaterial and No-Impact
    Comment: One respondent asserted that industry-wide ineligible 
dependent costs are immaterial, and thus have no impact on contract 
billing or pricing. The respondent suggested that DoD should review the 
DCAA findings in its policy memo 09-PSP-016(R), dated August 4, 2009, 
before proceeding with further rulemaking.
    Response: Research indicates the rate of ineligible dependent 
claims can represent as much as 3 percent or more of total healthcare 
costs. The overall cost for ineligible dependent claims, which are 
often fraudulent, can be significant for large contractors that spend 
millions of dollars for dependent healthcare. Programs to reduce 
ineligible dependent healthcare claims have been shown to benefit both 
the contractor and its customers. Penalties may be assessed if 
unallowable dependent healthcare costs are contained in a final 
indirect cost rate proposal, or a final statement of costs incurred, or 
estimated to be incurred, under a fixed-price incentive contract.
4. Cost Accounting Standard
    Comment: One respondent asserted that the treatment of ineligible 
fringe benefit costs as expressly unallowable does not comport with 
Cost Accounting Standard (CAS) 405 and its preambles. In the preamble 
of the original publication of CAS 405, the CAS Board explained its use 
of the term ``expressly'' in the definition of ``expressly unallowable 
cost'' as ``. . . that which is in direct and unmistakable terms.'' The 
respondent believed that ``fringe benefit costs . . . contrary to law, 
employer-employee agreement, or an established policy of the 
contractor'' are not direct and unmistakable costs.
    Response: The rule makes fringe benefit costs expressly unallowable 
when such costs are contrary to law, employer-employee agreement, or an 
established policy of the contractor. The Director of Defense Pricing 
Policy determined these conditions are direct and unmistakable.
5. Overlapping Protection
    Comment: One respondent asserted that the rule is unnecessary since 
the FAR cost principles already protect the Government. Contractors are 
currently required to exclude fringe benefit costs that do not meet the 
requirements for reasonableness per FAR 31.201-3.
    Response: The results of the DCAA audits have made it clear that 
coverage is not sufficiently clear. The intent of the rule is to make 
fringe benefit costs expressly unallowable when such costs conflict 
with law, employer-employee agreement, or an established policy of the 
contractor. Unallowable fringe benefit costs, such as ineligible 
dependent healthcare claims, unnecessarily increase the cost of 
Government contracts. Because contractors are already required to 
exclude unallowable costs from final indirect cost rate proposals or a 
final statement or cost incurred, penalties will only accrue to 
contractors that fail to comply with rules that already exist.
6. Relationship to the Application of Penalties
    Comment: One respondent was concerned that the proposed rule does 
not conform to the FAR as it relates to the application of penalties. 
The respondent indicated that FAR 42.709-1 is limited to applying 
penalties only to unallowable costs included in an indirect cost 
proposal. The respondent further stated that there is no language in 
FAR 42.709-1 about ``estimated'' costs and because of this the 
respondent asserted that the reference to estimated costs in the 
proposed rule must be deleted.
    Response: While subsection FAR 42.709-1 does not expressly use the 
term ``estimated'', this subsection does state that the penalties 
discussed in the subsection ``apply to contracts covered by this 
section.'' FAR 42.709, entitled ``Scope,'' specifically covers the 
assessment of penalties for including unallowable indirect costs in 
indirect cost rate proposals, or the ``final statement of costs 
incurred or estimated to be incurred . . .'' (emphasis added). 
Nevertheless, DoD has deleted the phrase ``incurred or estimated'' from 
DFARS 231.205-6(m)(1).
7. Test of Reasonableness
    Comment: One respondent suggested that the costs should be judged 
by the test of reasonableness and not treated as unallowable with the 
associated penalties. The proposed rule would make these costs 
unallowable, thus forcing companies to expend disproportionate sums to 
ensure no claims for costs include ineligible health care costs in 
order to avoid the penalties. According to the respondent, this would 
force companies to behave differently than companies in the commercial 
marketplace or the U.S. Government in managing these costs.
    Response: Ineligible fringe benefit costs are already unallowable 
under existing regulations. Thus, the test for reasonableness does not 
apply because an unallowable cost cannot, by definition be reasonable. 
Per FAR 31.205-6(m), fringe benefit costs are only allowable to the 
extent they are reasonable and are required by law, employer-employee 
agreement, or an established policy of the contractor. The DFARS rule 
only makes expressly unallowable fringe benefit costs that contractors 
are already required to exclude from forward pricing rates, incurred 
cost proposals, and billings. Research indicates nearly 70 percent of 
commercial companies have implemented procedures to detect and 
eliminate ineligible dependent health

[[Page 73453]]

care claims in order to reduce costs and remain competitive. Therefore, 
the effect of the rule is to make the DFARS consistent with current 
commercial practice.
8. Internal Controls
    Comment: One respondent asserted that, if a company's internal 
controls are found to be unreasonable, the Government can cite the 
contractor for a business system deficiency and disallow cost. 
Dependent healthcare costs are allowable until eligibility ceases, so 
the Government should focus on the reasonableness of the company's 
internal controls (i.e., reasonableness test) versus the allowability 
test. A company should not be required to pay penalties if it has 
adequate internal controls to prevent charging the Government for 
ineligible dependent healthcare costs or recover and credit those costs 
back to the Government when they are charged.
    Response: The rule makes ineligible dependent healthcare costs 
expressly unallowable, and subject to penalties, when such costs are 
contained in a final indirect cost rate proposal or a final statement 
of costs incurred, or estimated to be incurred, under a fixed-price 
incentive contract. Penalties may be waived in accordance with FAR 
42.709-5(c).
9. Exceeding the Actual Costs of Ineligible Benefits
    Comment: One respondent asserted that the costs of internal 
controls should not exceed the actual costs of the ineligible benefits. 
Treating the costs for ineligible dependent healthcare costs as 
unallowable is likely to force companies to spend more money than they 
would otherwise, in order to avoid the penalties associated with 
unallowable costs. The result will be increased allowable costs to the 
Government in exchange for little or no value.
    Response: Research indicates the cost of ineligible dependent 
health care claims often far exceeds the cost of dependent verification 
programs. DoD was unable to find any studies or other evidence 
indicating that the cost to detect ineligible claims is higher than the 
cost savings.
10. Possible Disfavor for Those Who Are Fully or Partially Subject to 
CAS
    Comment: One respondent asserted that the proposed rule has the 
effect of discriminating against companies that are fully or partially 
subject to CAS. The respondent asserted that, for those fully subject 
to CAS and those partially subject to CAS, the potential risk for 
liability for claiming unallowable costs is significant, while 
companies that are not subject to CAS have no such liability and do not 
face the possibility of False Claims Act prosecutions, Civil False 
Claims Act damages, qui tam lawsuits or debarment/suspension. A rule 
that allows companies subject to CAS to use a reasonable method for 
dealing with these costs will reduce the cost to the companies and 
reasonably protect the government from paying for the costs of 
ineligible dependent healthcare costs.
    Response: The rule and, thus, the potential liability to incur 
penalties, apply equally to all contractors regardless of whether they 
are subject to CAS. Therefore, the rule does not discriminate against 
companies that are fully or partially subject to CAS. Additionally, the 
assertion that companies not subject to CAS do not face the possibility 
of False Claims Act prosecutions, Civil False Claims Act damages, qui 
tam lawsuits or debarment/suspension is inaccurate.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows: This final rule amends the Defense 
Federal Acquisition Regulation Supplement (DFARS) at 231.205-6 to 
explicitly state that fringe benefit costs incurred or estimated that 
are contrary to law, employer-employee agreement, or an established 
policy of the contractor are unallowable. After consideration of a 
public comment, DoD determined that the reference to ``incurred or 
estimated'' within the DFARS proposed rule text should be deleted.
    The objective of this final rule is to explicitly state that fringe 
benefit costs incurred or estimated that are contrary to law, employer-
employee agreement, or an established policy of the contractor are 
unallowable. Although fringe benefit costs that do not meet these 
criteria are not allowable, the Federal Acquisition Regulation (FAR) 
does not make them expressly unallowable. Specifying these fringe 
benefit costs are expressly unallowable in the DFARS makes the 
penalties at FAR 42.709-1 applicable if a contractor includes such 
unallowable fringe benefit costs in a final indirect cost rate proposal 
or in the final statement of costs incurred under a fixed-price 
incentive contract.
    No comments were filed by the Chief Counsel for Advocacy of the 
Small Business Administration in response to the proposed rule.
    DoD does not expect this final rule to have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this 
rule merely provides clarification of existing policies by expressly 
stating that fringe benefit costs incurred or estimated that are 
contrary to law, employer-employee agreement, or an established policy 
of the contractor are unallowable.
    The final rule imposes no reporting, recordkeeping, or other 
information collection requirements.
    There are no known significant alternatives to the rule. The impact 
of this rule on small business is not expected to be significant.

V. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Part 231

    Government procurement.

Manuel Quinones,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR part 231 is amended as follows:

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 231 continues to read as 
follows:

    Authority:  41 U.S.C. 1303 and CFR chapter 1.

0
2. Section 231.205-6 is amended by adding paragraph (m)(1) to read as 
follows:

[[Page 73454]]

231.205-6  Compensation for personal services.

* * * * *
    (m)(1) Fringe benefit costs that are contrary to law, employer-
employee agreement, or an established policy of the contractor are 
unallowable.

[FR Doc. 2013-29151 Filed 12-5-13; 8:45 am]
BILLING CODE 5001-06-P
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