Strategic Consulting Solutions, Inc.

What constitutes a Fringe Benefit?

Trimming BenefitsAs employees, we all love a good fringe benefit don’t we?  When a company adds a new fringe benefit everyone gets excited and a buzz permeates the building.  Likewise, when some are changed or removed, there can be grumblings heard that sound a bit like Yosemite Sam mumbling under his breath. As accountants in government contracting, do we really know what costs are considered to be fringe benefits and should be segregated into a fringe benefit pool?  Let’s take a look.

Fringe Benefits, by definition, are various types of non-wage compensation provided to employees in addition to their normal wage or salary.  They can be anything from health insurance to sick pay.  Fringe benefits can be a reason an employee joins a company and can also be why they leave one company and move to another.

The following are examples of costs that classify as fringe benefits:  the employer-paid portion of medical, dental and vision insurance premiums, the employer-paid portion of payroll taxes, paid leave (vacation, holiday, sick, etc), any 401(k) or pension plan employer contributions, employer-paid life and/or disability insurance, worker’s compensation expenses and costs associated with the administration of these benefits.

Some government contractors account for their fringe costs separately and some will combine it with their overhead costs.  These typically tend to be smaller contractors who as they grow will likely find it more advantageous to break the fringe benefits out into a separate indirect cost pool.  You may also experience the need to have multiple fringe benefit pools if a contract requires it or accounting for a contract requirement is made simpler by doing so.

What does a typical fringe pool look like?  Since it is essentially calculating a percentage rate for you, it will have two major mathematical components – a numerator and a denominator.  All of the expenses we talked about earlier – vacation, 401(k) match, payroll taxes – make up the numerator.  All of the labor cost, direct and indirect, make up the denominator.  Since the some labor cost for the different types of paid leave are in the numerator, they are not part of the denominator.  So simply put, all non-fringe labor is what will make up the denominator, or pool base.  For example, if all of my fringe costs total $451,357 and I have total non-fringe labor cost of 1,391,458, then my indirect rate for my fringe benefits will be 32.44%  ( 451,357 divided by 1,391,458 ).

So when you’re preparing your indirect rate structure for the next fiscal year and you think it is time to start breaking out the fringe into a separate pool….go ahead.  You have all of the tools.

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