Defense Federal Acquisition Regulation Supplement: Unallowable Fringe Benefit Costs (DFARS Case 2012-D038), 73451-73454 [2013-29151]

Download as PDF Federal Register / Vol. 78, No. 235 / Friday, December 6, 2013 / Rules and Regulations the letter of offer and acceptance for a foreign military sales program that will require an acquisition. No respondents submitted public comments in response to the proposed rule. There are no changes from the proposed rule in the final rule. maindgalligan on DSK5TPTVN1PROD with RULES II. Executive Orders 12866 and 13563 Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804. III. Regulatory Flexibility Act A final regulatory flexibility analysis has been prepared consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., and is summarized as follows: This action is necessary because the directions to the contracting officer at PGI 225.7302 may have impact on prospective contractors, and therefore require relocation to the DFARS. The objective of this rule is to provide direction to the contracting officer on actions required to work with the prospective contractor to assist the DoD implementing activity in preparing the letter of offer and acceptance for a foreign military sales program that requires an acquisition. There were no comments in response to the initial regulatory flexibility analysis. The Chief Counsel for Advocacy of the Small Business Administration did not file any comments. The rule will apply to approximately 380 small entities, based on the FPDS data for FY 2011 of the number of noncompetitive contract awards to small business entities that exceed $10,000 and use FMS funds. There is no required reporting or recordkeeping. The rule requires the contracting officer to communicate with a prospective FMS contractor in order to assist the DoD implementing agency in preparation of the letter of offer and acceptance. The contracting officer may request information on price, delivery, and other relevant factors, and provide VerDate Mar<15>2010 16:51 Dec 05, 2013 Jkt 232001 information to the prospective contractor with regard to the FMS customer. DoD does not expect the rule will have a significant economic impact on a significant number of small entities. No significant alternatives were identified that would accomplish the objectives of the rule. IV. Paperwork Reduction Act The rule does not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35). List of Subjects in 48 CFR Part 225 Manuel Quinones, Editor, Defense Acquisition Regulations System. Therefore, 48 CFR Part 225 is amended as follows: PART 225—FOREIGN ACQUISITION 1. The authority citation for 48 CFR Part 225 continues to read as follows: ■ Authority: 41 U.S.C. 1303 and 48 CFR chapter 1. 2. Section 225.7302 is revised to read as follows: ■ 225.7302 Preparation of letter of offer and acceptance. For FMS programs that will require an acquisition, the contracting officer shall assist the DoD implementing agency responsible for preparing the Letter of Offer and Acceptance (LOA) by— (1) Working with prospective contractors to— (i) Identify, in advance of the LOA, any unusual provisions or deviations (such as those requirements for Pseudo LOAs identified at PGI 225.7301); (ii) Advise the contractor if the DoD implementing agency expands, modifies, or does not accept any key elements of the prospective contractor’s proposal; (iii) Identify any logistics support necessary to perform the contract (such as those requirements identified at PGI 225.7301); and (iv) For noncompetitive acquisitions over $10,000, ask the prospective contractor for information on price, delivery, and other relevant factors. The request for information shall identify the fact that the information is for a potential foreign military sale and shall identify the foreign customer; and (2) Working with the DoD implementing agency responsible for Frm 00073 Fmt 4700 Sfmt 4700 preparing the LOA, as specified in PGI 225.7302. [FR Doc. 2013–29153 Filed 12–5–13; 8:45 am] BILLING CODE 5001–06–P DEPARTMENT OF DEFENSE Defense Acquisition Regulations System 48 CFR Part 231 RIN 0750–AH76 Defense Federal Acquisition Regulation Supplement: Unallowable Fringe Benefit Costs (DFARS Case 2012–D038) Defense Acquisition Regulations System, Department of Defense (DoD). ACTION: Final rule. AGENCY: Government procurement. PO 00000 73451 DoD is issuing a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to explicitly state that fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. DATES: Effective December 6, 2013. FOR FURTHER INFORMATION CONTACT: Ms. Susan Williams, telephone 571–372– 6092. SUMMARY: SUPPLEMENTARY INFORMATION: I. Background DoD published a proposed rule in the Federal Register at 78 FR 13606 on February 28, 2013, to revise the DFARS at 231.205–6 to implement the Director of Defense Pricing policy memo ‘‘Unallowable Costs for Ineligible Dependent Health Care Benefits’’, dated February 17, 2012. This rule adds paragraph 231.205–6(m)(1) to explicitly state that fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. II. Discussion and Analysis of Public Comments DoD reviewed the public comments in the development of the final rule. A discussion of the comments and the changes made as a result of those comments is provided, as follows: A. Summary of Significant Changes from the Proposed Rule After consideration of a public comment, DoD determined that the reference to ‘‘incurred or estimated’’ within the DFARS text should be deleted. E:\FR\FM\06DER1.SGM 06DER1 73452 Federal Register / Vol. 78, No. 235 / Friday, December 6, 2013 / Rules and Regulations B. Analysis of Public Comments Two respondents submitted comments on the proposed rule. 1. Policy Memo Disagreement Comment: One respondent disagreed with the conclusions of the Director of Defense Pricing policy memorandum. However, the respondent agreed that contractors should monitor healthcare dependent eligibility to ensure only proper healthcare charges are included as an element of fringe benefit costs. Response: The memorandum emphasizes and clarifies existing policies but does not create new policies. These existing policies make fringe benefit costs unallowable when such costs are unreasonable or conflict with law, employer-employee agreement, or an established policy of the contractor. DoD shares the respondent’s belief that contractors should have adequate internal controls to ensure improper healthcare charges are excluded from fringe benefit costs. The rule encourages contractors to adopt reasonable internal controls to eliminate costs that are already unallowable. maindgalligan on DSK5TPTVN1PROD with RULES 2. Broadening the Category of Fringe Benefits Comment: One respondent took exception to the rule addressing the broad category of fringe benefits when the Director of Defense Pricing policy memorandum only addresses the cost of health care benefits for ineligible dependents. Response: The policy at FAR 31.205– 6(m) states, in part, that fringe benefit costs are allowable to the extent they are required by law, employer-employee agreement, or an established policy of the contractor. The DFARS policy memo addressed only the area that has experienced recent problems. Reasonable internal controls can significantly reduce the amount of ineligible dependent healthcare claims that are already unallowable if they fail to meet the conditions in FAR 31.205– 6(m). The same logic applies to all fringe benefits. 3. Immaterial and No-Impact Comment: One respondent asserted that industry-wide ineligible dependent costs are immaterial, and thus have no impact on contract billing or pricing. The respondent suggested that DoD should review the DCAA findings in its policy memo 09–PSP–016(R), dated August 4, 2009, before proceeding with further rulemaking. Response: Research indicates the rate of ineligible dependent claims can represent as much as 3 percent or more VerDate Mar<15>2010 16:51 Dec 05, 2013 Jkt 232001 of total healthcare costs. The overall cost for ineligible dependent claims, which are often fraudulent, can be significant for large contractors that spend millions of dollars for dependent healthcare. Programs to reduce ineligible dependent healthcare claims have been shown to benefit both the contractor and its customers. Penalties may be assessed if unallowable dependent healthcare costs are contained in a final indirect cost rate proposal, or a final statement of costs incurred, or estimated to be incurred, under a fixed-price incentive contract. 4. Cost Accounting Standard Comment: One respondent asserted that the treatment of ineligible fringe benefit costs as expressly unallowable does not comport with Cost Accounting Standard (CAS) 405 and its preambles. In the preamble of the original publication of CAS 405, the CAS Board explained its use of the term ‘‘expressly’’ in the definition of ‘‘expressly unallowable cost’’ as ‘‘. . . that which is in direct and unmistakable terms.’’ The respondent believed that ‘‘fringe benefit costs . . . contrary to law, employer-employee agreement, or an established policy of the contractor’’ are not direct and unmistakable costs. Response: The rule makes fringe benefit costs expressly unallowable when such costs are contrary to law, employer-employee agreement, or an established policy of the contractor. The Director of Defense Pricing Policy determined these conditions are direct and unmistakable. 5. Overlapping Protection Comment: One respondent asserted that the rule is unnecessary since the FAR cost principles already protect the Government. Contractors are currently required to exclude fringe benefit costs that do not meet the requirements for reasonableness per FAR 31.201–3. Response: The results of the DCAA audits have made it clear that coverage is not sufficiently clear. The intent of the rule is to make fringe benefit costs expressly unallowable when such costs conflict with law, employer-employee agreement, or an established policy of the contractor. Unallowable fringe benefit costs, such as ineligible dependent healthcare claims, unnecessarily increase the cost of Government contracts. Because contractors are already required to exclude unallowable costs from final indirect cost rate proposals or a final statement or cost incurred, penalties will only accrue to contractors that fail to comply with rules that already exist. PO 00000 Frm 00074 Fmt 4700 Sfmt 4700 6. Relationship to the Application of Penalties Comment: One respondent was concerned that the proposed rule does not conform to the FAR as it relates to the application of penalties. The respondent indicated that FAR 42.709– 1 is limited to applying penalties only to unallowable costs included in an indirect cost proposal. The respondent further stated that there is no language in FAR 42.709–1 about ‘‘estimated’’ costs and because of this the respondent asserted that the reference to estimated costs in the proposed rule must be deleted. Response: While subsection FAR 42.709–1 does not expressly use the term ‘‘estimated’’, this subsection does state that the penalties discussed in the subsection ‘‘apply to contracts covered by this section.’’ FAR 42.709, entitled ‘‘Scope,’’ specifically covers the assessment of penalties for including unallowable indirect costs in indirect cost rate proposals, or the ‘‘final statement of costs incurred or estimated to be incurred . . .’’ (emphasis added). Nevertheless, DoD has deleted the phrase ‘‘incurred or estimated’’ from DFARS 231.205–6(m)(1). 7. Test of Reasonableness Comment: One respondent suggested that the costs should be judged by the test of reasonableness and not treated as unallowable with the associated penalties. The proposed rule would make these costs unallowable, thus forcing companies to expend disproportionate sums to ensure no claims for costs include ineligible health care costs in order to avoid the penalties. According to the respondent, this would force companies to behave differently than companies in the commercial marketplace or the U.S. Government in managing these costs. Response: Ineligible fringe benefit costs are already unallowable under existing regulations. Thus, the test for reasonableness does not apply because an unallowable cost cannot, by definition be reasonable. Per FAR 31.205–6(m), fringe benefit costs are only allowable to the extent they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor. The DFARS rule only makes expressly unallowable fringe benefit costs that contractors are already required to exclude from forward pricing rates, incurred cost proposals, and billings. Research indicates nearly 70 percent of commercial companies have implemented procedures to detect and eliminate ineligible dependent health E:\FR\FM\06DER1.SGM 06DER1 Federal Register / Vol. 78, No. 235 / Friday, December 6, 2013 / Rules and Regulations care claims in order to reduce costs and remain competitive. Therefore, the effect of the rule is to make the DFARS consistent with current commercial practice. 8. Internal Controls Comment: One respondent asserted that, if a company’s internal controls are found to be unreasonable, the Government can cite the contractor for a business system deficiency and disallow cost. Dependent healthcare costs are allowable until eligibility ceases, so the Government should focus on the reasonableness of the company’s internal controls (i.e., reasonableness test) versus the allowability test. A company should not be required to pay penalties if it has adequate internal controls to prevent charging the Government for ineligible dependent healthcare costs or recover and credit those costs back to the Government when they are charged. Response: The rule makes ineligible dependent healthcare costs expressly unallowable, and subject to penalties, when such costs are contained in a final indirect cost rate proposal or a final statement of costs incurred, or estimated to be incurred, under a fixed-price incentive contract. Penalties may be waived in accordance with FAR 42.709– 5(c). maindgalligan on DSK5TPTVN1PROD with RULES 9. Exceeding the Actual Costs of Ineligible Benefits Comment: One respondent asserted that the costs of internal controls should not exceed the actual costs of the ineligible benefits. Treating the costs for ineligible dependent healthcare costs as unallowable is likely to force companies to spend more money than they would otherwise, in order to avoid the penalties associated with unallowable costs. The result will be increased allowable costs to the Government in exchange for little or no value. Response: Research indicates the cost of ineligible dependent health care claims often far exceeds the cost of dependent verification programs. DoD was unable to find any studies or other evidence indicating that the cost to detect ineligible claims is higher than the cost savings. 10. Possible Disfavor for Those Who Are Fully or Partially Subject to CAS Comment: One respondent asserted that the proposed rule has the effect of discriminating against companies that are fully or partially subject to CAS. The respondent asserted that, for those fully subject to CAS and those partially subject to CAS, the potential risk for liability for claiming unallowable costs VerDate Mar<15>2010 16:51 Dec 05, 2013 Jkt 232001 is significant, while companies that are not subject to CAS have no such liability and do not face the possibility of False Claims Act prosecutions, Civil False Claims Act damages, qui tam lawsuits or debarment/suspension. A rule that allows companies subject to CAS to use a reasonable method for dealing with these costs will reduce the cost to the companies and reasonably protect the government from paying for the costs of ineligible dependent healthcare costs. Response: The rule and, thus, the potential liability to incur penalties, apply equally to all contractors regardless of whether they are subject to CAS. Therefore, the rule does not discriminate against companies that are fully or partially subject to CAS. Additionally, the assertion that companies not subject to CAS do not face the possibility of False Claims Act prosecutions, Civil False Claims Act damages, qui tam lawsuits or debarment/suspension is inaccurate. III. Executive Orders 12866 and 13563 Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804. IV. Regulatory Flexibility Act A final regulatory flexibility analysis has been prepared consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., and is summarized as follows: This final rule amends the Defense Federal Acquisition Regulation Supplement (DFARS) at 231.205–6 to explicitly state that fringe benefit costs incurred or estimated that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. After consideration of a public comment, DoD determined that the reference to ‘‘incurred or estimated’’ within the DFARS proposed rule text should be deleted. The objective of this final rule is to explicitly state that fringe benefit costs PO 00000 Frm 00075 Fmt 4700 Sfmt 4700 73453 incurred or estimated that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. Although fringe benefit costs that do not meet these criteria are not allowable, the Federal Acquisition Regulation (FAR) does not make them expressly unallowable. Specifying these fringe benefit costs are expressly unallowable in the DFARS makes the penalties at FAR 42.709–1 applicable if a contractor includes such unallowable fringe benefit costs in a final indirect cost rate proposal or in the final statement of costs incurred under a fixed-price incentive contract. No comments were filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule. DoD does not expect this final rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this rule merely provides clarification of existing policies by expressly stating that fringe benefit costs incurred or estimated that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. The final rule imposes no reporting, recordkeeping, or other information collection requirements. There are no known significant alternatives to the rule. The impact of this rule on small business is not expected to be significant. V. Paperwork Reduction Act The rule does not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35). List of Subjects in 48 CFR Part 231 Government procurement. Manuel Quinones, Editor, Defense Acquisition Regulations System. Therefore, 48 CFR part 231 is amended as follows: PART 231—CONTRACT COST PRINCIPLES AND PROCEDURES 1. The authority citation for 48 CFR part 231 continues to read as follows: ■ Authority: 41 U.S.C. 1303 and CFR chapter 1. 2. Section 231.205–6 is amended by adding paragraph (m)(1) to read as follows: ■ E:\FR\FM\06DER1.SGM 06DER1 73454 231.205–6 services. Federal Register / Vol. 78, No. 235 / Friday, December 6, 2013 / Rules and Regulations Compensation for personal * * * * * (m)(1) Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable. [FR Doc. 2013–29151 Filed 12–5–13; 8:45 am] BILLING CODE 5001–06–P DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 679 [Docket No. 120918468–3111–02] RIN 0648–XC976 Fisheries of the Exclusive Economic Zone Off Alaska; Reallocation of Pacific Cod in the Central Regulatory Area of the Gulf of Alaska Management Area National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Temporary rule; reallocation. AGENCY: NMFS is reallocating the projected unused amount of Pacific cod from catcher vessels using trawl gear to catcher/processors using trawl gear in the Central Regulatory Area of the Gulf of Alaska management area (GOA). This action is necessary to allow the 2013 total allowable catch of Pacific cod in the Central Regulatory Area of the GOA to be harvested. DATES: Effective December 3, 2013, through 2400 hours, Alaska local time (A.l.t.), December 31, 2013. FOR FURTHER INFORMATION CONTACT: Obren Davis, 907–586–7228. SUPPLEMENTARY INFORMATION: NMFS manages the groundfish fishery in the Gulf of Alaska exclusive economic zone according to the Fishery Management Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the MagnusonStevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679. Regulations governing sideboard protections for GOA groundfish fisheries appear at subpart B of 50 CFR part 680. The 2013 Pacific cod total allowable catch specified for catcher vessels using trawl gear in the Central Regulatory maindgalligan on DSK5TPTVN1PROD with RULES SUMMARY: VerDate Mar<15>2010 16:51 Dec 05, 2013 Jkt 232001 Area of the GOA is 15,065 metric tons (mt) as established by the final 2013 and 2014 harvest specifications for groundfish in the GOA (78 FR 13162, February 26, 2013). The Administrator, Alaska Region (Regional Administrator) has determined that catcher vessels using trawl gear will not be able to harvest 1,000 mt of the 2013 Pacific cod TAC allocated to those vessels under § 679.20(a)(12)(i)(B). In accordance with § 679.20(a)(12)(ii)(B), the Regional Administrator has also determined that catcher/processors using trawl gear currently have the capacity to harvest this excess allocation and reallocates 1,000 mt to catcher/processors using trawl gear. The harvest specifications for Pacific cod in the Central Regulatory Area of the GOA included in the final 2013 harvest specifications for groundfish in the GOA (78 FR 13162, February 26, 2013) is revised as follows: 14,065 mt for catcher vessels using trawl gear, and 2,521 mt to catcher/processors using trawl gear. This action responds to the best available information recently obtained from the fishery. The Assistant Administrator for Fisheries, NOAA (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay the reallocation of Pacific cod specified from catcher vessels using trawl gear to catcher/processors using trawl gear. Since the fishery is currently ongoing, it is important to immediately inform the industry as to the revised allocations. Immediate notification is necessary to allow for the orderly conduct and efficient operation of this fishery, to allow the industry to plan for the fishing season, and to avoid potential disruption to the fishing fleet as well as processors. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of December 2, 2013. The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment. Frm 00076 Fmt 4700 Authority: 16 U.S.C. 1801 et seq. Dated: December 3, 2013. Sean F. Corson, Acting Deputy Director, Office of Sustainable Fisheries, National Marine Fisheries Service. [FR Doc. 2013–29165 Filed 12–3–13; 4:15 pm] BILLING CODE 3510–22–P DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 679 [Docket No. 120918468–3111–02] RIN 0648–XC975 Fisheries of the Exclusive Economic Zone Off Alaska; Reallocation of Pacific Cod in the Western Regulatory Area of the Gulf of Alaska Management Area National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Temporary rule; reallocation. AGENCY: Classification PO 00000 This action is required by § 679.20 and is exempt from review under Executive Order 12866. Sfmt 4700 NMFS is reallocating the projected unused amount of Pacific cod from catcher vessels using trawl gear to catcher vessels using hook-and-line gear and vessels using pot gear in the Western Regulatory Area of the Gulf of Alaska management area (GOA). This action is necessary to allow the 2013 total allowable catch of Pacific cod in the Western Regulatory Area of the GOA to be harvested. DATES: Effective December 3, 2013, through 2400 hours, Alaska local time (A.l.t.), December 31, 2013. FOR FURTHER INFORMATION CONTACT: Obren Davis, 907–586–7228. SUPPLEMENTARY INFORMATION: NMFS manages the groundfish fishery in the Gulf of Alaska exclusive economic zone according to the Fishery Management Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the MagnusonStevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679. Regulations governing sideboard protections for GOA groundfish fisheries appear at subpart B of 50 CFR part 680. The 2013 Pacific cod total allowable catch specified for catcher vessels using SUMMARY: E:\FR\FM\06DER1.SGM 06DER1

Agencies

[Federal Register Volume 78, Number 235 (Friday, December 6, 2013)]
[Rules and Regulations]
[Pages 73451-73454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29151]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 231

RIN 0750-AH76


Defense Federal Acquisition Regulation Supplement: Unallowable 
Fringe Benefit Costs (DFARS Case 2012-D038)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to explicitly state that 
fringe benefit costs that are contrary to law, employer-employee 
agreement, or an established policy of the contractor are unallowable.

DATES: Effective December 6, 2013.

FOR FURTHER INFORMATION CONTACT: Ms. Susan Williams, telephone 571-372-
6092.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 78 FR 
13606 on February 28, 2013, to revise the DFARS at 231.205-6 to 
implement the Director of Defense Pricing policy memo ``Unallowable 
Costs for Ineligible Dependent Health Care Benefits'', dated February 
17, 2012. This rule adds paragraph 231.205-6(m)(1) to explicitly state 
that fringe benefit costs that are contrary to law, employer-employee 
agreement, or an established policy of the contractor are unallowable.

II. Discussion and Analysis of Public Comments

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made as a result of 
those comments is provided, as follows:

A. Summary of Significant Changes from the Proposed Rule

    After consideration of a public comment, DoD determined that the 
reference to ``incurred or estimated'' within the DFARS text should be 
deleted.

[[Page 73452]]

B. Analysis of Public Comments

    Two respondents submitted comments on the proposed rule.
1. Policy Memo Disagreement
    Comment: One respondent disagreed with the conclusions of the 
Director of Defense Pricing policy memorandum. However, the respondent 
agreed that contractors should monitor healthcare dependent eligibility 
to ensure only proper healthcare charges are included as an element of 
fringe benefit costs.
    Response: The memorandum emphasizes and clarifies existing policies 
but does not create new policies. These existing policies make fringe 
benefit costs unallowable when such costs are unreasonable or conflict 
with law, employer-employee agreement, or an established policy of the 
contractor. DoD shares the respondent's belief that contractors should 
have adequate internal controls to ensure improper healthcare charges 
are excluded from fringe benefit costs. The rule encourages contractors 
to adopt reasonable internal controls to eliminate costs that are 
already unallowable.
2. Broadening the Category of Fringe Benefits
    Comment: One respondent took exception to the rule addressing the 
broad category of fringe benefits when the Director of Defense Pricing 
policy memorandum only addresses the cost of health care benefits for 
ineligible dependents.
    Response: The policy at FAR 31.205-6(m) states, in part, that 
fringe benefit costs are allowable to the extent they are required by 
law, employer-employee agreement, or an established policy of the 
contractor. The DFARS policy memo addressed only the area that has 
experienced recent problems. Reasonable internal controls can 
significantly reduce the amount of ineligible dependent healthcare 
claims that are already unallowable if they fail to meet the conditions 
in FAR 31.205-6(m). The same logic applies to all fringe benefits.
3. Immaterial and No-Impact
    Comment: One respondent asserted that industry-wide ineligible 
dependent costs are immaterial, and thus have no impact on contract 
billing or pricing. The respondent suggested that DoD should review the 
DCAA findings in its policy memo 09-PSP-016(R), dated August 4, 2009, 
before proceeding with further rulemaking.
    Response: Research indicates the rate of ineligible dependent 
claims can represent as much as 3 percent or more of total healthcare 
costs. The overall cost for ineligible dependent claims, which are 
often fraudulent, can be significant for large contractors that spend 
millions of dollars for dependent healthcare. Programs to reduce 
ineligible dependent healthcare claims have been shown to benefit both 
the contractor and its customers. Penalties may be assessed if 
unallowable dependent healthcare costs are contained in a final 
indirect cost rate proposal, or a final statement of costs incurred, or 
estimated to be incurred, under a fixed-price incentive contract.
4. Cost Accounting Standard
    Comment: One respondent asserted that the treatment of ineligible 
fringe benefit costs as expressly unallowable does not comport with 
Cost Accounting Standard (CAS) 405 and its preambles. In the preamble 
of the original publication of CAS 405, the CAS Board explained its use 
of the term ``expressly'' in the definition of ``expressly unallowable 
cost'' as ``. . . that which is in direct and unmistakable terms.'' The 
respondent believed that ``fringe benefit costs . . . contrary to law, 
employer-employee agreement, or an established policy of the 
contractor'' are not direct and unmistakable costs.
    Response: The rule makes fringe benefit costs expressly unallowable 
when such costs are contrary to law, employer-employee agreement, or an 
established policy of the contractor. The Director of Defense Pricing 
Policy determined these conditions are direct and unmistakable.
5. Overlapping Protection
    Comment: One respondent asserted that the rule is unnecessary since 
the FAR cost principles already protect the Government. Contractors are 
currently required to exclude fringe benefit costs that do not meet the 
requirements for reasonableness per FAR 31.201-3.
    Response: The results of the DCAA audits have made it clear that 
coverage is not sufficiently clear. The intent of the rule is to make 
fringe benefit costs expressly unallowable when such costs conflict 
with law, employer-employee agreement, or an established policy of the 
contractor. Unallowable fringe benefit costs, such as ineligible 
dependent healthcare claims, unnecessarily increase the cost of 
Government contracts. Because contractors are already required to 
exclude unallowable costs from final indirect cost rate proposals or a 
final statement or cost incurred, penalties will only accrue to 
contractors that fail to comply with rules that already exist.
6. Relationship to the Application of Penalties
    Comment: One respondent was concerned that the proposed rule does 
not conform to the FAR as it relates to the application of penalties. 
The respondent indicated that FAR 42.709-1 is limited to applying 
penalties only to unallowable costs included in an indirect cost 
proposal. The respondent further stated that there is no language in 
FAR 42.709-1 about ``estimated'' costs and because of this the 
respondent asserted that the reference to estimated costs in the 
proposed rule must be deleted.
    Response: While subsection FAR 42.709-1 does not expressly use the 
term ``estimated'', this subsection does state that the penalties 
discussed in the subsection ``apply to contracts covered by this 
section.'' FAR 42.709, entitled ``Scope,'' specifically covers the 
assessment of penalties for including unallowable indirect costs in 
indirect cost rate proposals, or the ``final statement of costs 
incurred or estimated to be incurred . . .'' (emphasis added). 
Nevertheless, DoD has deleted the phrase ``incurred or estimated'' from 
DFARS 231.205-6(m)(1).
7. Test of Reasonableness
    Comment: One respondent suggested that the costs should be judged 
by the test of reasonableness and not treated as unallowable with the 
associated penalties. The proposed rule would make these costs 
unallowable, thus forcing companies to expend disproportionate sums to 
ensure no claims for costs include ineligible health care costs in 
order to avoid the penalties. According to the respondent, this would 
force companies to behave differently than companies in the commercial 
marketplace or the U.S. Government in managing these costs.
    Response: Ineligible fringe benefit costs are already unallowable 
under existing regulations. Thus, the test for reasonableness does not 
apply because an unallowable cost cannot, by definition be reasonable. 
Per FAR 31.205-6(m), fringe benefit costs are only allowable to the 
extent they are reasonable and are required by law, employer-employee 
agreement, or an established policy of the contractor. The DFARS rule 
only makes expressly unallowable fringe benefit costs that contractors 
are already required to exclude from forward pricing rates, incurred 
cost proposals, and billings. Research indicates nearly 70 percent of 
commercial companies have implemented procedures to detect and 
eliminate ineligible dependent health

[[Page 73453]]

care claims in order to reduce costs and remain competitive. Therefore, 
the effect of the rule is to make the DFARS consistent with current 
commercial practice.
8. Internal Controls
    Comment: One respondent asserted that, if a company's internal 
controls are found to be unreasonable, the Government can cite the 
contractor for a business system deficiency and disallow cost. 
Dependent healthcare costs are allowable until eligibility ceases, so 
the Government should focus on the reasonableness of the company's 
internal controls (i.e., reasonableness test) versus the allowability 
test. A company should not be required to pay penalties if it has 
adequate internal controls to prevent charging the Government for 
ineligible dependent healthcare costs or recover and credit those costs 
back to the Government when they are charged.
    Response: The rule makes ineligible dependent healthcare costs 
expressly unallowable, and subject to penalties, when such costs are 
contained in a final indirect cost rate proposal or a final statement 
of costs incurred, or estimated to be incurred, under a fixed-price 
incentive contract. Penalties may be waived in accordance with FAR 
42.709-5(c).
9. Exceeding the Actual Costs of Ineligible Benefits
    Comment: One respondent asserted that the costs of internal 
controls should not exceed the actual costs of the ineligible benefits. 
Treating the costs for ineligible dependent healthcare costs as 
unallowable is likely to force companies to spend more money than they 
would otherwise, in order to avoid the penalties associated with 
unallowable costs. The result will be increased allowable costs to the 
Government in exchange for little or no value.
    Response: Research indicates the cost of ineligible dependent 
health care claims often far exceeds the cost of dependent verification 
programs. DoD was unable to find any studies or other evidence 
indicating that the cost to detect ineligible claims is higher than the 
cost savings.
10. Possible Disfavor for Those Who Are Fully or Partially Subject to 
CAS
    Comment: One respondent asserted that the proposed rule has the 
effect of discriminating against companies that are fully or partially 
subject to CAS. The respondent asserted that, for those fully subject 
to CAS and those partially subject to CAS, the potential risk for 
liability for claiming unallowable costs is significant, while 
companies that are not subject to CAS have no such liability and do not 
face the possibility of False Claims Act prosecutions, Civil False 
Claims Act damages, qui tam lawsuits or debarment/suspension. A rule 
that allows companies subject to CAS to use a reasonable method for 
dealing with these costs will reduce the cost to the companies and 
reasonably protect the government from paying for the costs of 
ineligible dependent healthcare costs.
    Response: The rule and, thus, the potential liability to incur 
penalties, apply equally to all contractors regardless of whether they 
are subject to CAS. Therefore, the rule does not discriminate against 
companies that are fully or partially subject to CAS. Additionally, the 
assertion that companies not subject to CAS do not face the possibility 
of False Claims Act prosecutions, Civil False Claims Act damages, qui 
tam lawsuits or debarment/suspension is inaccurate.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows: This final rule amends the Defense 
Federal Acquisition Regulation Supplement (DFARS) at 231.205-6 to 
explicitly state that fringe benefit costs incurred or estimated that 
are contrary to law, employer-employee agreement, or an established 
policy of the contractor are unallowable. After consideration of a 
public comment, DoD determined that the reference to ``incurred or 
estimated'' within the DFARS proposed rule text should be deleted.
    The objective of this final rule is to explicitly state that fringe 
benefit costs incurred or estimated that are contrary to law, employer-
employee agreement, or an established policy of the contractor are 
unallowable. Although fringe benefit costs that do not meet these 
criteria are not allowable, the Federal Acquisition Regulation (FAR) 
does not make them expressly unallowable. Specifying these fringe 
benefit costs are expressly unallowable in the DFARS makes the 
penalties at FAR 42.709-1 applicable if a contractor includes such 
unallowable fringe benefit costs in a final indirect cost rate proposal 
or in the final statement of costs incurred under a fixed-price 
incentive contract.
    No comments were filed by the Chief Counsel for Advocacy of the 
Small Business Administration in response to the proposed rule.
    DoD does not expect this final rule to have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because this 
rule merely provides clarification of existing policies by expressly 
stating that fringe benefit costs incurred or estimated that are 
contrary to law, employer-employee agreement, or an established policy 
of the contractor are unallowable.
    The final rule imposes no reporting, recordkeeping, or other 
information collection requirements.
    There are no known significant alternatives to the rule. The impact 
of this rule on small business is not expected to be significant.

V. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Part 231

    Government procurement.

Manuel Quinones,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR part 231 is amended as follows:

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 231 continues to read as 
follows:


    Authority:  41 U.S.C. 1303 and CFR chapter 1.

0
2. Section 231.205-6 is amended by adding paragraph (m)(1) to read as 
follows:

[[Page 73454]]

231.205-6  Compensation for personal services.

* * * * *
    (m)(1) Fringe benefit costs that are contrary to law, employer-
employee agreement, or an established policy of the contractor are 
unallowable.

[FR Doc. 2013-29151 Filed 12-5-13; 8:45 am]
BILLING CODE 5001-06-P