Seeking SCA, ACA Harmony: Contractors Should Not Pay Twice

Call it a common-ground mission.

Last month for the first time, this small-town boy ventured to our nation’s capital to meet with the Departments of the Treasury and Labor to help these regulators better understand the dueling health benefits requirements of the Service Contract Act (SCA) and the ACA. I was duly impressed by the big-city regulators’ genuine interest in understanding the issues and finding, not just legal, but administrative solutions to the complex set of problems these conflicting laws have thrust upon government contractors.

I was honored to be invited to this gathering of government, legal, industry, and non-profit representatives to clarify some of the key issues impacting the tens of thousands of employers across a range of industries that provide services to the federal government. Of particular concern are those mid-size companies with 300 to 400 employees, but perhaps with only 75 or so who are government contract workers. These employers face the overlapping obligations of the ACA and SCA (or Davis-Bacon Act for construction contractors) but typically lack the in-house personnel to successfully navigate them.

Both the SCA and ACA seek the same greater good of ensuring that individuals have fair access to affordable health benefits. But the complexity begins when an employer is subject to both laws. The SCA fringe benefit obligation is essentially a “defined contribution” requirement, while the ACA requires that a minimum level of benefits be offered employees or in other words a “defined benefit” requirement.

The employer’s obligation under the SCA is to provide “bona fide fringe benefits,” which may include health insurance and can be satisfied by providing benefits equal to a minimum dollar amount per hour, cash in lieu of benefits, or some combination of the two. But the ACA requires an employer to offer minimum essential coverage to full-time employees or potentially face a shared responsibility assessment of $2,000 per full-time employee for no offer of coverage (the “A” penalty). This penalty is of particular concern if a contractor is paying cash in lieu of benefits to satisfy its SCA fringe benefit obligation.

But for those contractors that offer health coverage to their full-time employees, they may face a $3,000 per employee assessment if that coverage fails to meet the requirements for affordability and minimum value (the “B” penalty). This penalty is also of particular concern to any contractor that has already paid the more than $8,000 in fringe benefit payments required by the SCA.

Long before the ACA was passed, structuring benefits programs to meet the requirements of the SCA (enacted in the mid-1960s) was complicated enough. However, what remains simple is the fact that contractors should not pay twice — once in the form of SCA fringe benefit payments and second in the form of a shared responsibility assessment under the ACA.

Straightening out the tangled intersection of requirements and administrative conflicts to meet the obligations of the two laws is going to take some time, especially as additional issues inevitably bubble to the surface. Until final guidance is issued, employers should be aware: The standard practices they’ve followed for many years to comply with the SCA may not protect them from the ACA’s “A” and “B” penalties going forward.

In the meantime, to get ready for 2015, first determine if you are a government contractor that is subject to the requirements of the SCA or Davis-Bacon. It’s not at all uncommon for a benefits or human resources department to be unaware of government contracts won by individual divisions within the company and, therefore, be unaware of the fringe benefit obligations of these wage and hour laws.

Then, realize that you may need to administer your plans differently so that they don’t trigger ACA penalties. It would be helpful if the regulators will provide additional guidance and craft rules for employers that must comply with both laws. For some employers, that may mean no longer paying cash in lieu of benefits. For others, it may mean restructuring contributions. And if you’re not offering minimum essential coverage today, you’ll need to start soon or you may be unwillingly forced to pay twice unless the regulators respond with a solution.

If you’re bidding on new contracts with the government, stay tuned as it will be important to structure any bids with the expectation that your company may face additional costs to comply with both laws. The costs for delivering your services to the government may increase, and your bids should be adjusted accordingly.

Finally, get some help to sort out your specific situation. Every government contractor has its own unique set of circumstances — there’s not a one-size-fits-all solution, and employers need the expertise of someone who has a deep understanding of these evolving laws.

After our meeting, I returned to the slower pace of Norfolk, Va., more enlightened and certainly more encouraged that those in Washington charged with solving this conundrum are just regular guys and gals, looking to roll up their sleeves and work things out. Consensus in Washington may be hard to come by these days, but there seems to be universal agreement that government contractors should not be subject to redundant health benefits obligations of the SCA and ACA. Exactly how that will get accomplished is yet to be seen.

Richard Keatley
by Richard Keatley

Principal, Mercer

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