Update on Unallowable Costs for Ineligible Dependent Health Care Benefit Costs

By: Mary Karen Wills

On February 17, 2012, Shay Assad, the director of Defense Procurement and Acquisition Policy (DPAP), issued a memorandum regarding “Unallowable Costs for Ineligible Dependent Health Care Benefits.” This memo reiterated that costs incurred by contractors for ineligible dependent healthcare are unallowable as they represent invalid claims made by employees. The memo affirmed that DoD would not pursue penalties under FAR 42.709 related to these costs, but that DoD intended to amend the DFARs in this regard to enable it to pursue penalties in the future.

Fast-forward to March 28, 2013: DCAA issues Audit Guidance Memorandum 13-PAC-004(R) transmitting the DPAP guidance to its auditors (http://www.dcaa.mil/mmr/13-PAC-004.pdf). DCAA affirms that auditors should not pursue application of penalties under FAR 42.709 related to questioned ineligible dependent healthcare benefit costs. In addition, DCAA auditors are instructed not to cite contractors for CAS 405 noncompliance when they fail to exclude these costs from Government contracts.

Federal Register 78(40), dated February 28, 2013, includes a proposed DFARS revision related to this issue (http://www.acq.osd.mil/dpap/dars/dfars/changenotice/2013/20130228/fr_2012-D038.pdf). The DFARS proposed rule explicitly states that “fringe benefit costs incurred or estimated that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.”

This proposed rule would reverse the DCAA guidance and would provide DoD with the basis for asserting penalties on this issue.

The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.