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Federal Contractors: ACA Mandated Group Health Plan Coverage May Not Qualify as Fringe Benefits under Service Contract Act

The Employer Shared Responsibility provision of the Affordable Care Act (“ACA”) requires large employers (i.e., those employing at least 50 full-time and full-time equivalent employees) to offer group health plan coverage to their full-time employees.  As many federal contractors know, the McNamara-O’Hara Service Contract Act (the “Service Contract Act” or “SCA”) requires federal contractors to pay prevailing wage rates and fringe benefits to service employees employed on contracts to provide services to the federal government.

Contractors (and subcontractors) subject to the SCA typically have the right to choose how they satisfy the fringe benefit requirements.  The contractor may choose to provide bona fide fringe benefits in kind, e.g., group health benefits, additional sick leave days, or pension/retirement benefits. Alternatively, contractors may discharge their fringe benefit obligations through payment of additional cash wages “in lieu of” benefits.  Yet, fringe benefit payments required by Federal or state law (“mandated benefits”) may not be used to satisfy the employer’s fringe benefit obligations.

The question for contractors, then, is whether the “mandated benefits” exception applies to the ACA’s Employer Shared Responsibility requirements, such that group health plan coverage provided to employees would not count toward the fringe benefit obligation.  Although the U.S. Department of Labor has not decided this particular issue, it had previously determined that employer contributions that are made to satisfy the employers’ obligations under the Hawaii-mandated prepaid Health Care Act may not be credited toward meeting the contractor’s obligations under SCA.  Thus, following this earlier logic, the DOL is likely to conclude that a large employer’s obligation to provide group health insurance coverage under the ACA would not count toward the SCA’s fringe benefit requirements.  

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