Health Care Benefits Paid to/for Ineligible Dependents

We've discussed the topic of Government contractors paying for health care benefits (or health care costs) for ineligible dependents. In many cases, dependents who once received health benefits become ineligible because of divorce, because children "age out" of their parent's plans, because they are no longer students, or any number of other factors, depending upon the contractors' plans.

Such costs have always been considered unallowable but in 2009, DCAA (Defense Contract Audit Agency) upped the ante and began calling such costs not only unallowable but unallowable subject to penalties. Specifically, the 2009 guidance on dependent health care costs stated that costs that do not meet the "expressed requirements" for allowability are "expressly unallowable".  DCAA audits revealed some large contractors who inappropriately charged the Government for health benefit costs for dependents that were no longer eligible for such benefits under the contractors' plans. The guidance required that penalties should be assessed on any such benefit payments passed on to the Government.

That audit guidance ignored the second part of the definition of "expressly unallowable" cost which required that for a particular cost to be expressly unallowable, it must be specifically named and stated to be unallowable. As DCAA tried to apply the guidance, considerable uproar among contractors ensued. Finally in 2012, the Director of Defense Pricing had enough and reversed the DCAA position. In reversing the position however, the Director stated that he would pursue a DFARS change to make such payments expressly unallowable. That happened in December 2013 when DFARS 231.205-l(m)(1) was amended to explicitly state that fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.

We would have thought that the issue of whether benefits paid to ineligible dependents being subject to penalties would have been resolved. But the issue still comes up from time to time during audits. There is no question that such costs incurred today, if claimed, are subject to penalty. However, the DFARS provision applies to contracts awarded after the effective date of the standard, in this case December 6, 2013. So, those penalties would not apply to any fringe benefit costs paid to ineligible dependents prior to that date although the costs would still be unallowable. But because DCAA is still winnowing away its backlog of over-aged incurred cost submissions from periods prior to the DFARS change, some auditors are not making the connection between the years under audit and the effective date of the standard.

We would guess that most contractors by now have set up internal controls to ensure that they are notified when there is a change is dependency status. More than a few contractors have initiated an annual survey to make certain that employees have not overlooked their responsibilities of notifying HR whenever there is a change in status.