There is a common misconception, often repeated by so called “experts” in our field, that is preventing many federal contractors from maximizing cost effectiveness in the allocation of H&W dollars on SCA contracts. A recent article written by nationally recognized attorney, author and speaker Walter W. Miller explains how contractors can better leverage H&W dollar spending for the good of both employees and employer. The key fringe benefit provided by federal contractors under the Service Contract Act (SCA) is medical coverage. Many federal contractors choose to avoid the additional ancillary costs of providing medical coverage to an insurance policy by providing the benefits on a self-insured basis. The self-insured arrangement is permitted under the SCA regulations, provided that the contractor’s fringe benefit contributions are paid irrevocably to a trustee or third person pursuant trust or other funded arrangement. 29 CFR §4.175(b). Federal contractors that choose to self-insure the medical benefits for SCA employees should not overlook the advantages of risk pooling, and would be wise to consider funding the claims of the contractor’s non-SCA employees through the same risk pool maintained under the SCA trust. Any notion that the risk pooling is not permitted is false. The SCA fringe benefit regulations require that a plan describes a definite formula for determining the benefits for each of the covered SCA employees, and, as stated above, be held in a trust fund that precludes a contractor from recapturing any of the contributions paid to the trust or diverting the trust funds for its own use. The SCA regulations do not require that the trust fund be maintained solely for the payment of benefits for SCA employees, and in fact, contemplate the payment of benefits for non-SCA employees (such as those who are temporarily not performing work on an SCA contract). Funding the benefit claims of both SCA and non-SCA employees is similar to, and offers the same risk pooling advantages as, claims funded through a paid insurance policy. These advantages include the following: A claims pooling arrangement can provide better security for covered employees through the spreading of financial risk and economies of scale; The claims pooling arrangement also provides greater portability of benefits and eligibility for employees who move from SCA to non-SCA positions; Reporting under the Affordable Care Act can be simplified through a pooling arrangement; With a greater number of covered individuals for whom claims are paid, benefit and administrative costs can be better stabilized; Experienced trustees and administrators specializing in benefit plan operations can be retained on a more cost-effective basis; and The scope of ERISA fiduciary responsibilities can be narrowed by the delegation to a more limited number of advisers. A pooling of claims does not alleviate the contractor’s general obligations under the SCA. A contractor must maintain records evidencing SCA hours, and if applicable, segregating the period for hours spent on non-covered work. The contractor must also maintain appropriate records separately showing amounts paid for wages and amounts paid for SCA fringe benefits. An SCA fringe benefit trust managed by professional administrators provides security to covered employees. A contractor that chooses to self-insure its medical fringe benefits for SCA employees should consider extending the trust to include the funding of the benefits to non-SCA employees. This pooling of claims to a common trust will result in benefits to the contractor and covered employees from the economies of scale and the spreading of financial risk. This article was written by Walter W. Miller. Walter helps employers to comply with the myriad of laws governing retirement plans and other employee benefit programs. A primary focus of Mr. Miller’s current practice is the Affordable Care Act, including the employer “play-or-pay” mandates. He works with clients to evaluate the effect of the new law on their group health plans, and offers advice as to the manner of addressing the new rules. He is listed both in The Best Lawyers in America and SuperLawyers as being among the top attorneys in the field of employee benefits. He has also been elected as a Fellow of the American College of Employee Benefits Counsel, which is regarded as the preeminent professional association for employee benefits attorneys. Please feel free to share your comments and/or questions below. This blog is moderated by an SCA subject-matter specialist.