Healthcare Costs for Ineligible Dependents Now Subject to Penalty

DoD published a final rule last Friday, adding Part 232.205-6(m)(1) to the DoD FAR Supplement (DFARS) as follows:

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

Now that might not seem like such a big deal. Its almost common sense. But what we have here is the health care for ineligible dependents issue that's been causing a lot of grief for the contractor community. The amendment doesn't mention health care for ineligible dependents but when one reads the promulgation comments, its pretty clear that this is what its about.

We've discussed this issue several times on this blog (e.g. here and here and here). DCAA (Defense Contract Audit Agency) has been pretty aggressive on this issue and not only where they questioning the costs but were also classifying them as expressly unallowable subject to penalty. In February 2012, DoD told the Agency to knock off the expressly unallowable business until such time as it could modify the DFARS. Well, the DFARS has not been modified and any medical benefits paid to or for ineligible dependents are not only unallowable but are expressly unallowable and subject to penalties.

What's more, the generalized nature of the new DFARS provision will make it more likely that DCAA and contracting officers are going to use it for all manner of questioned costs - even those that haven't yet been thought of.

Since this is a DFARS matter, it applies to only DoD contracts. That alone is going to require some complex calculations if the auditors find health care payments to ineligible dependents at contractors with a mix of DoD and non-DoD Government contracts. In fact, it might be worth the cost of admission just to watch the auditors fumble around with these calculations.

Tomorrow we are going to look at some of the comments received on the proposed regulation that preceded this final rule and DoD's response to those comments. It seems like DoD was going through a formality by requesting comments because they gave short shrift to everyone's concerns and published anyway.