What to do when SCA Employees
don’t want Fringe Benefits?

Employers with a population of Service Contract Act (SCA) employees face a unique challenge when it comes to offering employee benefits. For an SCA employee, a certain dollar amount for every hour worked must be set aside for their fringe rate—money allotted to health and welfare benefits for that employee. 

Challenges 

While some SCA employees happily accept the fringe benefits offered, the employer can allow SCA employees to waive coverage if they already have qualified group benefits via a spouse (and can provide documentation), Tricare, retired government etc. (Individual Health Plans should not be a valid waiver). This creates a problem for the employer, because that money accrued for an employee’s fringe rate still has to be allocated appropriately to an employee who opts out of employer fringe benefits offered. When an SCA employee opts out of benefits, the employer is left with a pile of money to that employee’s name that MUST be used for specific benefits.  

Another scenario that can create challenges for employers is the employment of seasonal SCA employees. Since this population is perpetually coming off and on payroll, they would also be continually coming off and on the benefit plans offered.  

Solutions 

What choice does an employer have, then, for SCA employees who choose to opt out of the employer-offered fringe benefits, or for seasonal SCA employees? Many employers look to solve the problem by offering cash in lieu of benefits, but for various reasons, we do not recommend the approach of handing your SCA employees a lump sum of funds to use however they please. Also, the Affordable Care Act mandates that employees with 50 or more employees offer health benefits or face fines. While this can be a tricky population to handle regarding laws and requirements for benefits, you do have some options outside of cash-in-lieu. Here’s what I recommend: 

1. SCA employees who opt out of employer-offered fringe benefits
   The employer has the discretion to decide how the fringe benefit is allocated to the employee. As the employer, you are the executor of the funds, and you have the discretion to decide how the fringe benefit is allocated to employees. One solution rather than cash in lieu is to designate fringe benefit amounts to a separate 401k or 401a for those employees who opt out of traditional fringe dollar allocations. To keep things simple—don’t give employees a choice in this matter. If an employee chooses to opt out of the offered medical plan, then the money from the fringe benefits is automatically allocated and distributed via a separate, employer-set-up retirement account. 
2. Seasonal SCA employees coming on and off of payroll/benefit plans
   When it pertains to seasonal employees, the employer can setup an Individual Premium Reserve (IPR) that deposits a small portion of the fringe rate as a reserve. This small fringe amount set aside allows employees who are seasonal/not working to pay for their benefits through the IPR, rather than allowing employees to bounce on and off the employer-sponsored health plan. It should be noted that the IPR is generally only an effective solution if the seasonal work stoppage is a short period of time and that the employees will typically come back to work. 

If you employ SCA employees, whether full-time or seasonal, it’s paramount that you have a clear, consistent policy surrounding the handling of fringe benefit funds. If you have questions about fringe requirements for your SCA population, or you need help implementing creative solutions for allocating your fringe benefit funds to SCA employees, please reach out to me at kwilliams@psafinancial.com.