Last November we wrote about this subject, noting that the Government had found instances where government contractors were inappropriately billing the cost of health benefits for dependents that were no longer eligible for those benefits under the terms of the contractors’ health benefit plans. Such costs are unallowable under FAR 31.201-6. The reasons for dependent ineligibility include, among other things (i) dependents have reached the age where they no longer qualified as a dependent, (ii) spouses were divorced, or (iii) dependents were covered under another plan as well as the contractor's plan. Our guidance then and now is for contractors to establish procedures that ensure the health care costs for ineligible dependents are excluded from any pricing or billing to the Government.
Evidently this is a bigger issue and perhaps more widespread than we thought at the time. DCAA (Defense Contract Audit Agency) recently supplemented its audit guidance on the matter to instruct auditors on how to maximize recovery when contractors fail to exclude unallowable health benefit costs associated with ineligible dependents. Auditors are now being instructed to find such contractors in noncompliance with CAS 405. Since CAS 405 applies to both "full" and "modified" CAS contracts, it will affect a lot of contractors.
By approaching this as a CAS noncompliance issue, the Government is able to recoup all excess costs, including incurred costs for years that have already been settled. Additionally, CAS noncompliances carry an interest penalty provision which could significantly increase a contractors liability. Contractors that are not CAS covered still have to deal with the costs in open years and the possibility of having penalties applied for having claimed those costs in the first place. Additionally, DCAA will also consider whether an accounting system deficiency is appropriate since the contractors did not have adequate procedures in place to ensure that unallowable costs are not charged to the Government.
Auditors are now designing procedures to specifically address this area so we recommend that contractors design their own procedures to ensure that health benefit costs for ineligible dependents are not passed along to the Government.