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Self-funded health plans and Davis Bacon/Service Contract Acts


Guest erisafried

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Guest erisafried

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Has anyone had any experience dealing with the DOL's wage and hour division to qualify a self-funded health plan as a "bona fide fringe benefit" arrangement under the Davis Bacon Act or Service Contract Act? I have spoken to someone in that office about this issue generally and she said they were willing to work with plan sponsors to deal with this requirement, but I wondered if the reality is different from the PR.

At bottom, the DOL is concerned about the possibility that federal contractors will skim money from self-funded fringe benefit plans and therefore require plan sponsors to prove that these plans can't be used to divert federal money from the employees who are supposed to receive it.

In the absence of a VEBA or taxable trust with non-reversion provisions, my thought was you can satisfy this requirement by showing that the plan satisfies the usual requirements for a welfare plan under ERISA (i.e., that it's not some sort of fly-by-night sort of arrangement) and by including some language in the plan doc/SPD that obligates the plan sponsor to provide the minimum fringe benefit levels required by the DBA or SCA as long as those employees are performing work under a contract governed by these acts (thus creating an enforceable right under ERISA).

From past experience in other areas, I know that "reasonableness" is subjective where the DOL is concerned, and what I think will comply with the regs may not.

Anyone? Buehler?

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I am more aware of the DoL working with the Administrators for the Plan Sponsor, to work out an acceptable plan. However, they do not seem to like to work with many "newbies", it takes too much time and effort to explain the requirements etc.

What do you mean "divert federal money from the employees who are supposed to receive it"? Which federal money is this that the employees are supposed to get?

It is the accepting of a DBRA/SCA contract that obligates "the plan sponsor to provide the minimum fringe benefit levels required by the DBA or SCA" NOT any Plan Document or SPD.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I had the DOL challenge a client's contributions to a cafeteria plan challenged because the employee would forfeit those amounts if he or she didn't incur sufficient medical expenses. Unfortunately, I don't represent that client anymore, so I don't know how it was ultimately resolved.

Kirk Maldonado

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Guest erisafried

GBurns: I realize that the acts themselves require the provision of minimum wage and fringe benefit levels. If, as is the case here, a contractor seeks to provide some/all of the required fringe benefits through a self-funded welfare plan (rather than by simply paying extra amounts to its employees), the wage and hour folks at DOL want some guarantees that the contractor is not merely making an unenforceable, unfunded commitment to provide benefits that are going to disappear once the contract is signed. The regulations on this point contain some general guidance on establishing whether a self-funded plan is or is not a "bona fide fringe benefit arrangement". I can think of all sort of things a contractor could do to make its benefits commitment enforceable by the covered employees, but at bottom, my question is simpler than that.

What I really wondered is whether the DOL takes such a dim view of self-funded plans in this context (at least that aren't funded through a VEBA) that there is effectively no point in trying to convince them that any particular plan is bona fide. I got the impression from talking to one of the staff members in the wage and hour division that it was possible to convince them that a self-funded plan was legitimate. I wondered if anyone has had any practical experience that confirms or rebuts what they told me.

More specifically, I am thinking about including some provisions in the plan document at issue that commit the employer to providing the promised benefits to the covered employees for the duration of the contract or, failing that, to an equivalent amount of additional compensation (all within the limits specified by the SCA). This commitment would then be communicated to the covered employees via an SPD or some other mechanism to create an enforceable right. To me, this along with other circumstantial evidence that shows that the plan is not a sham, would constitute reasonable evidence that the plan is bona fide.

The reason this matters is the employer at issue has a relatively small number of employees covered by the contract, and it would be impractical for it to adopt a VEBA (or a taxable trust, either) just for them. If we can't get there through plan amendments, the employer will simply pay additional compensation to the covered employees.

Kirk: I had heard that the WHD folks looked askance at the use-it-or-lose-it rule. It was just this sort of detachment from reality that made me worry that I wouldn't be able to get a non-VEBA welfare plan past them even if the participants had enforceable rights under ERISA and there was no question about the legitimacy of the plan.

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  • 2 months later...
Guest erisafried

File in the "if anyone cares" folder:

Just received approval for a self-funded health plan under the Service Contract Act. As it turns out, the DOL was completely satisfied with a participant notice and insert for the SPD that created an enforceable right to receive the minimum health benefits required under the applicable prevailing wage determination. You'd want to limit that obligation to the duration of the contract and make sure that it applies only to the employees who are performing work under the contract. Also, you'd want to reserve your right to pay cash in lieu of the benefit if you decide to terminate the plan or otherwise reduce benefits.

The approval process took about a week.

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