Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans. Executive fringes may include such things as free parking, the use of a company-owned auto, life and disability insurance, and memberships in social, dining, or country clubs.
Except as provided otherwise in FAR Part 31.2, the costs of fringe benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor. Fringe benefits that may be unallowable based on other FAR criteria might include memberships in social, dining, or country clubs (see FAR 31.205-14, Entertainment Costs).
That portion of the cost of company furnished automobiles that relates to personal use by employees (including transportation to and from work) is unallowable regardless of whether the cost is reported as taxable income to the employee.
Auditors will sometimes become fixated on particular fringe benefits that they deem unreasonable even though not specifically unallowable. Executives seem to come under closer scrutiny than non-executives. At one time, incentives for employees to utilize public transportation was routinely challenged until the Government came up with its own program to subsidize public transportation costs for Federal workers. Then, those challenges quietly disappeared. We have heard of a couple of cases recently where auditors were challenging free parking provided to some but not all, employees (usually for the company executives).
Auditors frequently misapply the FAR reasonableness criteria but contractors can be better prepared to defend themselves by understanding and applying those criteria. Follow this link for a discussion on reasonableness criteria.
Next: Section (n) - Employee rebate and purchase discount plans.