In recent years, the Government has targeted maximum recovery for alleged ineligible dependent healthcare costs. In August 2009, DCAA issued a memorandum declaring that ineligible healthcare costs were expressly unallowable (see 09-PSP-016(R) dated August 4, 2009). DCAA revised that policy on March 28, 2013 when it issued its "Memorandum for Regional Directors;" (13-PAC-004(R)), which directed auditors not to pursue penalties for these costs. This Memorandum transmitted a February 17, 2012 memorandum from the Director of Defense Pricing which stated that such costs were not to be treated as expressly unallowable. However, DoD had published a proposed rule on February 28, 2013, that had concluded that ineligible dependent healthcare costs should be characterized as expressly unallowable. The DoD has now finalized that  rule which amends DFARS 231.205-6 to add language explicitly stating that “[f]ringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.” See DFARS 231.205-6(m)(1); 78 FR 73451 (December 6, 2013). This final rule eliminated language in the proposed rule that had referred to fringe benefit costs that were “incurred or estimated.” The purported intent of the rule is to make it apparent that these healthcare costs are expressly unallowable and, therefore, subject to penalties at FAR 42.709-1. Moreover, the comments in response to various contractor concerns about the rule make it clear that the Government believes that a contractor should have adequate internal controls to ensure improper healthcare charges are excluded from fringe benefit costs. 78 FR 73452. Thus, the rule will impact both cost allowability and accounting system approvals. While the immediate concern was the exclusion of ineligible dependent healthcare claims, the rule uses broader language to ensure that all fringe benefit costs are encompassed within its scope. The comments further note that research indicates that ineligible dependent claims can represent as much as 3 percent or more of total healthcare costs.

In our view, the new rule is short-sighted and impractical. It ignores the significant costs—that the Government will pay—for contractor internal controls, including the engagement of third party entities that specialize in assessing eligibility, that will be necessary to ensure the required eligibility screening and to ensure that a contractor does not receive a significant deficiency that will result in business system inadequacies. It ignores the impact of state privacy laws, which may prevent contractors from probing into personal family affairs. Finally, the new rule ignores the fundamental question of what methodology the government will rely upon to determine an employee’s eligibility. The source of the problem, frankly, is employee dishonesty in identifying an ineligible person as a dependent. Nevertheless, the government’s solution imposes a costly and difficult, if not impossible, burden on the contractor.