Developing Fringe Benefit Rates What Do These Rates Include? MECA/SECA/WECA 2007 Conference on College Cost Accounting Atlanta, Georgia October 4, 2007 Steve Bradley, Maximus Julie Jarvis, University of Illinois, Urbana Darrell Kozuch, University of Virginia

Developing Fringe Benefit Rates What Do These Rates Include? Session Objectives Regulation and Guidance Types of Rates Rate Calculation Process – Who, When, How Audit and Negotiation Process Common Pitfalls and Audit Concerns

Developing Fringe Benefit Rates - What Do These Rates Include? Regulatory/Guidance Framework A-21, 2 CFR 220 Section J.10. Compensation for personal services. J.10.a. General. Compensation for personal services covers all amounts paid currently or accrued by the institution for services of employees rendered during the period of performance under sponsored agreements. Such amounts include salaries, wages, and fringe benefits (see subsection J.10.f of this Appendix).… J.10.f. Fringe benefits. (1) Fringe benefits in the form of regular compensation paid to employees during periods of authorized absences from the job, such as for annual leave, sick leave, military leave, and the like, are allowable, provided such costs are distributed to all institutional activities in proportion to the relative amount of time or effort actually devoted by the employees. See subsection 11.f.(4) for treatment of sabbatical leave. (2) Fringe benefits in the form of employer contributions or expenses for social security, employee insurance, workmen's compensation insurance, tuition or remission of tuition for individual employees are allowable, provided such benefits are granted in accordance with established educational institutional policies, and are distributed to all institutional activities on an equitable basis. Tuition benefits for family members other than the employee are unallowable for fiscal years beginning after September 30, See Section J.45.b, Scholarships and student aid costs, for treatment of tuition remission provided to students.

Developing Fringe Benefit Rates - What Do These Rates Include? Regulatory/Guidance Framework A-21, continued Considerations –Benefits in form of regular compensation paid to employees during absences (e.g., annual/sick) –Benefits in form of employer contributions (e.g., SS, insurance, etc.) –Allowable if: Comply with institutional Policy and; Distributed equitably to all institutional activities –Fringe Benefits may be assigned to cost objectives by: Identifying specific individual Or, allocating on basis of institution-wide salaries & wages –Selective groupings of employees

Developing Fringe Benefit Rates - What Do These Rates Include? Regulatory/Guidance Framework A-21, continued Considerations –Fringe Benefits must be treated in the same manner as the salaries & wages of the employees receiving the benefits Benefits related S&W treated as Direct Costs must be treated as Direct Costs Benefits related S&W treated as F&A Costs must be treated as F&A Costs –Tuition Benefits for family members (unallowable) –Pension Plans –Sabbatical Leave (allowable)

Developing Fringe Benefit Rates - What Do These Rates Include? Regulatory/Guidance Framework HHS DCA Best Practices Manual Section XII. Other Areas, A. Fringe Benefits Fringe benefits include all benefits paid by an organization to, or on behalf of, its employees. Examples include vacation, holiday, sick leave pay, and other paid absences; employee health, life, and disability insurance; postretirement benefits (including pensions); social security taxes; unemployment compensation; worker's compensation, sabbatical leave, child care and tuition remission. (Fringe benefits do not include tuition remission provided to an employee's family or to students. See Step 12. of this section and Section XII.E. for further discussion. Fringe benefits also do not include costs associated with the administration of fringe benefits unless those costs were included as fringe benefits prior to May 1, 1991, before the implementation of the 26% administrative cap.) The nature of the fringe benefit costs review will be governed by the organization's practices for budgeting and charging fringe benefit costs on Federal awards: If the organization uses a fringe benefit rate for both budgeting and charging purposes, the rate will be reviewed annually. During an institution’s base year, the F&A rate and the fringe benefit rate will be reviewed and negotiated concurrently. The review should include an evaluation of the development of the rate as well as an evaluation of major and sensitive cost elements (i.e., the implementation of FASB Statement 106, Employers Accounting for Postretirement Benefits Other Than Pensions). The negotiated rate should be included in the F&A cost negotiation agreement. If the organization budgets and charges fringe benefits based on specific identification of each benefit to individual employees, or uses estimated fringe benefit rates for budgeting purposes but uses specific identification system for determining their actual charges, the review should normally be limited to an evaluation of the organization's fringe benefit policies and its policies and procedures for determining and assigning the costs of the benefits to Federal awards. Primary emphasis should be given to major and sensitive cost elements. If the organization uses a "hybrid" system where certain benefit costs are charged based on a rate and other benefit costs are charged based on specific identification, the costs charged based on a rate will be subject to the review described in the first section above. The costs charged based on specific identification will be limited to the review in the second section above. Fringe benefit costs included in F&A costs will be reviewed as part of the normal review of F&A costs. In order to avoid the necessity of making retroactive adjustments to the fringe benefit costs claimed on individual awards, the rates should be negotiated on a permanent (either predetermined or fixed) basis.

Developing Fringe Benefit Rates - What Do These Rates Include? Regulatory/Guidance Framework HHS DCA Best Practices Manual, continued Types of Fringe Benefits (rates, specific identification, hybrid) Submission of Fringe Proposals “Reasonable” Costs Special Tuition Remission Rates (section XII.E)

Developing Fringe Benefit Rates - What Do These Rates Include? Types of Rates Cost calculations Health, Life, Dental (HLD) –Statewide Plans –University Specific Plans Termination Leave Pay -- Vacation/Sick Leave Others specific to organization Federally established Medicare OASDI Actuarially established Retirement Workers’ Compensation –University Plan –Self-Insured (reserve limits)

Developing Fringe Benefit Rates - What Do These Rates Include? Rate Calculation - Who and When? Who? Varies by institution and by rate –Payroll/Accounting Office normally for HLD –Costing Offices When? Most institutions are on a 2-year cycle (e.g., use final FY2006 data to formulate projected FY2008 rate proposal)

Developing Fringe Benefit Rates - What Do These Rates Include? Rate Calculation Template

Developing Fringe Benefit Rates - What Do These Rates Include? Audit and Negotiation Process Submission of Proposal Timing Issues Review by Cognizant HHS DCA ONR/DCAA Negotiation with Cognizant Predetermined Fixed with Carry Forward

Developing Fringe Benefit Rates - What Do These Rates Include? Common Pitfalls and Audit Concerns Don’t Forget! Calculation of over/under recovery Reconciliation to financials No tuition remission for dependents as benefits Base includes compensation of all employees receiving benefits Remove unallowable costs in rate

Developing Fringe Benefit Rates - What Do These Rates Include? Conclusions and Questions