Selected Costs Series, Part 4-4 (FAR 31.205-6)

Compensation for Personal Services

payrollThis section covers A LOT of topics, so it spans multiple posts for easy digestion; this is what’s left to discuss:

  • (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 4 – (n) through (q) – The End

(n) Employee Rebate and Purchase Discount Plans

I took it easy on myself this time and started with an easy one – unallowable.

(o) Postretirement Benefits Other Than Pensions (PRB)

Costs of these retirement benefits can be allowable as long as they meet certain criteria and are documented.  They must be incurred pursuant to law, employer-employee agreement, or established (documented) policy.  Pay-as-you-go costs should be assigned to the period in which the benefits are provided or are paid to an insurer, provider, or other recipient for current benefits.  Lump-sum (so-called terminal funding plans) costs are amortized over 15 years.  Accrued plan costs are measured and assigned either in accordance with GAAP or Internal Revenue Code.  I have always found the discussion around postretirement benefits and pensions to be tantamount to a lecture in undergrad with a room full of 100+ students – no one really pays attention until the test.  As a former DCAA auditor, I know we used to always try to dig a little during incurred cost audits to see how the benefits were really being set up and managed.

(p) Limitation on Allowability of compensation for Certain Contractor Personnel

As a government contractor, the Government gets to tell you how much “allowable” compensation there is at the top of the food chain in your company.  OFPP established a benchmark for the top-level executive compensation and publishes it in the Federal Register.  The most recent determination allows for up to $763,029 in compensation for “senior executives.”

The best part is the terminology used here to define what is “compensation” and what is a “senior executive.”  Compensation is basically everything – wages, salary, bonuses, compensation-restrictionsdeferred compensation, and contributions to defined contribution plans.  Although not mentioned, this also has been construed to included company-owned vehicles and other fringe benefits paid that would directly or indirectly benefit the executive.  This can be a wide-reaching cost limitation depending on who is reviewing it.

This only applies to “senior executives” though.  Thankfully, the definition is simple.  “[T]he five most highly compensated employees in management positions at each home office and each segment of the contractor, whether or not the home office or segment reports directly to the contractor’s headquarters.”  Top-5 is the key.  Once you have done a calculation of the top-5 across the entire company, the rest can be easy if the bottom of the top 5 doesn’t break that threshold.  However, you will still be asked to provide or at least justify why you don’t need to provide the rest.

(q) Employee Stock Ownership Plans (ESOP)

Finally, the end is here.  It only took us 4 weeks to get through this “gem” of a Selected Cost, but Compensation is like that.  ESOPs are allowable as long as CAS 415 is followed, Internal Revenue Code is adhered to, and other limitations on the form of the contributions made.  Given the timing of this post, I guess I could just refer to the canned response for most advice at this time of year…


“As with all advice, this information is made for specific circumstances or generalized to show the overall affect it would have on a given situation.  Ask your tax adviser how these decisions could affect your particular situation.


Next up is FAR 31.205-7 and 31.205-8, Contingencies and Contributions.

About Marty Herbert

With 13 years of government contract administration, analysis, finance, and audit experience, I have established a firm baseline in ethics and a specialization in government contracts that has prepared me to become a subject matter expert in my field. I am currently working on enhancing government contracts management and compliance through workflow tools and product offerings - attempting to make the process proactive as opposed to reactive.
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