The Service Contract Act (SCA) is a federal statute in the United States that regulates the pay and fringe benefits of prime contractors performing federal service contracts exceeding $2,500. One of the key requirements of the SCA is that contractors provide their service employees with fringe benefits, which includes health insurance. However, with the rising costs of healthcare, many employers are turning to high-deductible health plans (HDHPs) as a way to control premium expenses. Navigating the complexities of the SCA while also managing the realities of high-deductible plans can be a challenging task for contractors. In this article, we’ll take a deep dive into the strategies for balancing these competing demands and discuss potential plan designs that can meet the requirements of the SCA while also addressing the need for cost containment.

Understanding the SCA and Its Impact on Health Benefits

The SCA requires that contractors and subcontractors on prime contracts in excess of $2,500 to pay service employees in the United States no less than the locally prevailing wage and fringe benefits, as determined by the Secretary of Labor, for corresponding classes of service employees employed on similar contracts. The fringe benefit requirement is typically met by providing health insurance coverage. The SCA does not dictate the specific design of the health plan, but it does require that the fringe benefit be equivalent in value to the prevailing fringe benefit for the locality and the type of contract.

The challenge for contractors arises when they attempt to control rising healthcare costs through the use of high-deductible health plans. While HDHPs can be an effective way to reduce premium expenses, they can also increase the out-of-pocket costs for employees. This can create a compliance issue if the value of the fringe benefit provided by the HDHP is less than the prevailing fringe benefit due to the high deductible.

Strategies for Balancing SCA Requirements with High-Deductible Plans

There are several strategies that contractors can use to balance the requirements of the SCA with the need to control costs through the use of high-deductible health plans:

1. Contribute to an HSA: One strategy is to contribute to a Health Savings Account (HSA) on behalf of employees enrolled in the HDHP. HSAs are tax-advantaged accounts that allow employees to set aside money on a tax-free basis to pay for medical expenses. By contributing to an HSA, contractors can increase the value of the fringe benefit provided by the HDHP, which can help ensure compliance with the SCA. The contribution amount will depend on the prevailing fringe benefit for the locality and the type of contract.

2. Provide Additional Fringe Benefits: Another strategy is to provide additional fringe benefits to employees enrolled in the HDHP. This could include benefits like life insurance, disability insurance, or retirement contributions. By providing additional fringe benefits, contractors can increase the overall value of the fringe benefit package, which can offset the impact of the high deductible. Again, the key is to ensure that the total value of the fringe benefit package is equivalent to the prevailing fringe benefit.

3. Offer a Lower-Deductible Option: Contractors could also offer a lower-deductible option alongside the HDHP. This would allow employees to choose between a lower-premium, high-deductible plan or a higher-premium, lower-deductible plan. By offering a choice, contractors can provide a option that complies with the SCA while also giving employees the flexibility to choose the plan that best meets their needs.

4. Reimburse Deductible Expenses: Finally, contractors could reimburse employees for deductible expenses incurred under the HDHP. This could be done through a formal reimbursement arrangement, like a Section 105 medical reimbursement plan. By reimbursing deductible expenses, contractors can reduce the out-of-pocket costs for employees enrolled in the HDHP, which can increase the value of the fringe benefit.

Case Study: Putting the Strategies into Practice

To illustrate how these strategies can work in practice, let’s consider an example. Suppose a federal contractor is performing a service contract in a locality where the prevailing fringe benefit is $5.00 per hour. The contractor wants to offer an HDHP with a deductible of $2,000 to control premium costs. However, the contractor is concerned that the high deductible may reduce the value of the fringe benefit below the prevailing amount.

To address this, the contractor could contribute $1,500 to an HSA on behalf of employees enrolled in the HDHP. This contribution would increase the value of the fringe benefit provided by the HDHP, helping to ensure compliance with the SCA. Alternatively, the contractor could provide an additional fringe benefit, like a life insurance policy with a face value of $25,000, to employees enrolled in the HDHP. This would increase the overall value of the fringe benefit package and offset the impact of the high deductible.

Conclusion

The Service Contract Act presents unique challenges for federal contractors, particularly when it comes to providing health benefits in a rising cost environment. However, by understanding the requirements of the SCA and leveraging available strategies, contractors can design health benefit plans that comply with the SCA while also controlling costs. Whether through contributions to an HSA, the provision of additional fringe benefits, the offer of a lower-deductible option, or the reimbursement of deductible expenses, contractors have several tools at their disposal to balance these competing demands. As the healthcare landscape continues to evolve, it will be important for contractors to stay informed and adapt their benefit strategies as necessary to ensure compliance with the SCA.