Compensation for Personal Services
- (h) Backpay.
- (i) Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions.
- (j) Pension Costs
- (k) Deferred compensation other than pensions.
- (l) Compensation incidental to business acquisitions.
- (m) Fringe Benefits.
- (n) Employee rebate and purchase discount plans.
- (o) Postretirement benefits other than pensions (PRB).
- (p) Limitation on allowability of compensation for certain contractor personnel.
- (q) Employee Stock Ownership Plan (ESOP)
Part 3 – (h) through (m)
Remember how I mentioned compensation costs are for services in the current year? That still holds true – mostly. If you UNDERpay your workers you have to make up for it and the government realizes that. Chalk that up as an exception. Unions also get special treatment under this section, so if the contractor has unionized workers, this would be a good place to take a look when negotiations make changes that result in backpay.
(i) Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions.
First of all, let me say that is the longest section heading I have seen in a while. Next, let me also note that the heading is about as long as the section itself. That being said, any compensation based on calculations or values of corporate securities or dividends are unallowable. Also, payments to an employee in lieu of options, rights, or benefits like those mentioned above would also be unallowable.
(j) Pension Costs
Attention all contractors that do not have CAS-covered contracts! You too must comply with Cost Accounting Standards. This section calls out specifically that contractors must
“allocate the costs of all defined-benefit pension plans and the costs of all defined-contribution pension plans in compliance with 48 C.F.R. 9904.412 —Cost Accounting Standard for Composition and Measurement of Pension Cost, and 48 C.F.R. 9904.413 —Adjustment and Allocation of Pension Cost.”
Welcome to the world of CAS, like it or not. Notwithstanding all of those requirements, the rest of the section goes on to detail the how.
- All pension costs must be paid in a timely manner.
- Unfunded contributions are not allowable in subsequent years.
- Unfunded contributions in excess of costs assigned to that cost accounting period are unallowable.
- Increases in costs based on failure to pay those costs in a timely manner are unallowable.
- Increases in costs associated with transferring from one pension fund to another are unallowable, with exceptions.
- Early retirement incentive costs are allowable, subject to restrictions on how those costs are handled.
(k) Deferred Compensation Other Than Pensions
Deferred compensation awards are allowable in accordance with CAS 415 (ugh, not CAS again!). In all honesty, CAS is not that bad and really not as difficult as it seems. There is just a methodology to it that must be followed. Once the system is up and running and most folks understand it, there is little more to CAS than just tracking and allocating costs based on how you say they are going to be tracked and allocated. But I digress…
The cost of deferred compensation is unallowable, too, if it is in a subsequent period to that of the work being performed for such compensation.
(l) Compensation Incidental to Business Acquisitions
Unallowable costs in this section are for payments to employees in excess of normal severance pay practices upon termination arising from change in control or ownership of the company. Additionally, costs associated with retaining employees in these sorts of situations are also unallowable if they are contingent on the employee remaining for a specified time period.
(m) Fringe Benefits
Most companies maintain a fringe benefit indirect rate. This section lays out the costs that can or cannot be included in such a rate. Generally, the costs of fringe benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor. This section also includes the costs of company-owned vehicles related to personal use by employees – unallowable (regardless of taxability).
The End is near…
This post is part of a larger series on FAR 31.205 found here.