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Service Contract Act (SCA) Overview for DynCorp Intl. (DI) HRG

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Slide 1

Service Contract Act (SCA) Overviewfor DynCorp Intl. (DI) HRG

Welcome and thank you for joining the DynCorp International SCA overview prepared for HRG. The following presentation will provide an overview of the Service Contract Act and how it impacts your SCA employees and Wage Determination contracts applicable to SCA. 1

Service Contract Act

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Service Contract Act also referred to as SCA 2

What is the Service Contract Act (SCA)?3McNamara-OHara Service Contract Act (SCA) generally provides that non-exempt employees working on service contracts and subcontracts be paid and receive benefits according to the applicable Wage Determination (WD).

SCA applies to services performed in the United States, including U.S. territories.

What is the Service Contract Act or SCA? The McNamara OHara Service Contract Act was established back in 1965. The purpose of this Act is to provide prevailing wage and benefits to employees working on federal service contracts and subcontracts. Prevailing wage is determined by the Wage Determination or Area Wage Determination. SCA applies to contracts performing services in the United States, including U.S. territories. In the U.S. means In the 50 states, District of Columbia, Puerto Rico, Virgin Islands, Outer Continental Shelf, American Samoa, Guam, Wake Island, Johnston Island, Northern Marianas.

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Wage Determinations (WDs)4An SCA wage determination (WD) is a list of minimum wage rates and fringe benefits issued by the DOL based on wage survey data or other information for a locality.

Minimum hourly wage rates are listed by classification of work performed and required fringe benefits are described following the list of classifications.

When incorporated into a federal service contract, a WD requires a Contractor to provide service employees no less than the specified wages and fringe benefits.

There are different types of Wage Determinations one is an Area Wage Determination or Standard wage determination. The Area Wage Determination is generic, issued per locality, reflect locally prevailing wages, locality is county or group of counties, or larger areas. Area WDs may list over 300 classifications. The second is a NON Standard Wage Determination which is applicable to fast food, elevator maintenance, diving, moving household goods, etc. Non standard WDs reflect wages prevailing in a specific industry. A third type of WD is a CBA Wage Determination. These are based on predecessor collective bargaining agreements under SCA. The fourth is a Contract-Specific Wage Determination. These are WDs issued by specific request to DOL for unique (often sole-sourced) contracts, and cannot be used for any other contract.

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Individual vs. Average Contracts5Employees working on Individual, Davis-Bacon and Related Acts(DBRA), and CBA contracts have individual Premium ReserveAccounts (PRAs) within the trust.

Individual Contracts (Odd WDs)Average Contracts (Even WDs)Employees working on Average contracts share a contract-level Premium Reserve Account (PRA), because H&W compliance is measured per contract.

Department of Labor issues two standards WDs for each locality. Odd numbered WDs, also known as Individual, require payment of the health and welfare rate for all hours paid (work time and paid leave time) up to a maximum of 40 hours each week. Employees working on these contracts have Individual Premium Reserve Accounts within the DI Trust.

Even numbered WDs, also known as Average, require a contractor to pay a minimum contribution for benefits costing an average of the health and welfare rate for all hours worked including overtime hours by service employees on the contract. Employees working on these contracts share a contract-level Premium Reserve Account.

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Sample Wage Determination6

If WD ends in odd number = Odd (Individual) WD If WD ends in even number = Even (Average) WD

As mentioned in the previous slide, Odd and Even wage determinations are determined by the number provided on the Wage Determination. This sample reflects an Odd numbered WD which means the accounting for health and welfare contributions will be required on all hours paid excluding overtime per each individual on the contract. SCA Wage determinations will also include information pertaining to fringe benefits such as corresponding fringe rate per hour. 6

Comparison of WDs7* DOL rate as of June 30, 2015

SCA Individual(Odd WD)Davis-Bacon and Related Acts (DBRA)CBASCA Average(Even WD)H&W Rate$4.27 / hr*VariesVaries$4.27 / hr*Applied to Hours Worked or Paid?PaidPaidVariesWorkedMaximum (cap) to Hours?Yes 40 hrs/wkNoVariesNoNew WDs still being issued?YesYesYesNoH&W compliance on individual basis?YesYesYesNo

Now that we have covered the different types of wage determinations, we will discuss how they each vary. In this session we are presenting a brief comparison among these WDs. Hours paid excluding overtime are required on the Individual WD. New WDs are still being issued for Odd numbered WDs. Prevailing wage varies by area for the Davis Bacon and Related Acts (DBRA) contracts. The DBRA contracts are reconciled on an individual basis, with hours paid including overtime. CBA contracts are dictated by regulations established during the bargaining agreement between the employer and the unions. Last is the Average contracts which require contributions on all hours worked including overtime. Compliance is measured on a contract-level basis for Even WDs. 7

Fringe Benefits Compliance8

Fringe Benefits Compliance 8

Fringe Benefits Requirements9An hourly amount for Health and Welfare (H&W rate)- Currently set at $4.27 per hour- Issued nationwide (One rate for all localities, except HI)- Revised every July via DOL All Agency Memorandum

A specified number of paid holidays

A specified number of vacation weeks, depending upon total length of service with the contractor and any predecessors

Under both types of Standard WDs, employers are required to provide fringe benefits to their employees. This includes an hourly amount for health and welfare. There is one rate for all localities with the exception of Hawaii. The fringe rate is currently set at $4.27 per hour, and it is typically revised by Department of Labor annually. Employers are required to provide a specified number of paid holidays and vacation weeks as part of the fringe benefit requirements. 9

H&W Rate Increases10It is the Contracting Officers responsibility to ensure that contractors are notified of these rate increases and that the new rates are paid on the contracts option date(s).

If a contractor decides to pay these new H&W rates based on the effective date on the Memorandums (prior to the option dates), they will not be able to recover the difference on these new rates under Price adjustment.

Salera-GSA Team does not advise contractors to increase wages or fringe benefits unless the Wage Determination, CBA or H&W Memorandum has been modified into their contract by the Contracting Officer, with an effective date.

As mentioned previously, the health and welfare rate generally increases every year. However, it is the contracting officers responsibility to notify their contractors of these rate increases. It is important to note these new rates are paid on the contract option dates or anniversary dates. If the contractor decides to pay these new rates before the contract anniversary date, they will not be able to recover the difference between these rates under price adjustment. Our recommendation to contractors is to increase wages or fringe benefits once it has been modified into their contract with an effective date.

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Fringe Benefit Compliance Methods11Following are the approved methods that are allowable by the DOL (29 CFR 4.175 ) to meet fringe benefit compliance:

Pay cash-in-lieu of benefits

Make retirement plan contributions

Directly pay for qualified benefits

Establish a bona fide Plan or Trust to contribute H&W obligation irrevocably, which in turn pays for qualified benefits

Employers may use multiple methods, as long as the total value of the fringe benefits meets or exceeds the H&W requirement.

There are multiple ways for employers to satisfy or meet their fringe benefit obligation. One method is to pay the fringe to their SCA employees as cash in lieu of benefits, another is to make retirement plan contributions, while yet another is to directly pay for qualified benefits, or establish a bona fide plan or trust to contribute health and welfare obligation which in turn pays for qualified benefits. Contributions allocated into a trust are irrevocable to the employer. Some employers have chosen multiple methods to meet their compliance such as pay for qualified benefits and provide cash in lieu. This is acceptable as long as the total value of the fringe benefits meets or exceeds the health and welfare requirement. 11

Examples of Benefits that Meet H&W Requirement12

Medical / Dental / Vision InsuranceLife / AD&D InsuranceSTD / LTD InsuranceSick Leave Pay (if not required by WD)Employer Contributions to 401(k) Savings PlanEducational Assistance (if not required by job)Paid Time Off in excess of WD requirementJury Duty, Military, Bereavement, and other paid leave in excess of what is required by law

The DOL does not provide a specific list of benefits that meet the H&W Requirement.

There is not an definitive list of benefits that meet the fringe requirements provided by the Department of Labor. In this slide we, list some of the most common benefits employers establish to meet their fringe requirement such as medical, dental, life and ancillary benefits. It is important to note employer may only take credit for paid time off and other paid leave provided in excess of what is required by Federal, state, or local law to include what is contained in the WD. 12

Examples of Benefits that Do NOTSatisfy the H&W Requirement13Benefits required by Wage DeterminationVacation and Holiday Pay

Statutory benefits (if required by federal, state, or local law)FICAUnemployment InsuranceWorkers CompensationPaid Time Off

OtherRelocationIncentive AwardsUniforms (not required by the WD)Professional or club membership dues

There are benefits that do not meet the fringe benefits requirements. For example, vacation and holiday pay benefits that are required by the wage determination do not satisfy this requirement. Other benefits required by federal, state, or local law such as FICA, unemployment insurance, workers compensation and paid time off do not qualify to meet this requirement either. Other benefits in this category are relocation, incentive awards, uniforms, and club membership dues to name a few. 13

Premium Reserve Account (PRA)14

Premium Reserve Account or PRA. In the next few slides we will cover what we mean by the term Premium Reserve Account and how it benefits DynCorp International employees. 14

H&W Compliance Tracking WorkflowEmployees working on Individual contracts have IndividualPremium Reserve Accounts (PRAs) within the Voluntary Employees Beneficiary Association (VEBA) trust.1512345

As we covered earlier during this presentation, employees working on Odd numbered wage determinations have Individual accounts. A premium reserve balance is established for each employee within the voluntary employees beneficiary association or VEBA trust. On a monthly basis, health and welfare contributions, which is your hours paid multiplied by the corresponding health and welfare rate along with payroll deductions withheld, are allocated into DynCorp International employees premium reserve account. Monthly premium payments are submitted to each carrier based on each employees benefit enrollment. The residual balance remains in the employees accounts until it reaches the designated threshold. The threshold is determined by the employer and is unique to each employees enrollment. DynCorp International has elected three (3) months as the premium reserve account threshold. Once an account exceeds the PRA threshold, all excess health and welfare dollars are transferred to the designated account. For example, if an employees monthly premiums total $500, any contributions above $1,500 PRA threshold will be allocated into the surplus account. DynCorp International has set up a retirement account as the designated surplus account. Excess funds are transferred on a quarterly basis. Employees will receive a quarterly statement, including the retirement transfer amount, if applicable. For those employees who are terminated, the funds remaining in their premium reserve account do not revert back to DynCorp International. Instead, these funds are transferred to the employees retirement account. These transfers typically occur at the end of the quarter after termination. 15

Individual Contracts Examples16Employee AEmployee BEmployee CWaive MedicalMedical Employee-onlyMed/Den/Vis FamilyPeriodMonthlyQuarterlyMonthlyQuarterlyMonthlyQuarterlyHours (based on 35 hrs/wk)151.49454.48151.49454.48151.49454.48ContributionsEmployer Contributions ($4.27/hr)$647 $1,941 $647 $1,941 $647 $1,941 Employee Contributions - Medical$0 $0 $0 $0 $900 $2,700 Employee Contributions - Dental $0 $0 $0 $0 $100 $300 Employee Contributions - Vision $0 $0 $0 $0 $30 $90 Sick Paid Leave (in excess of WD)($40)($120)($40)($120)($40)($120)Total Contributions$607 $1,821 $607 $1,821 $1,637 $4,911 Benefits and Other ExpensesMedical$0 $0 $450 $1,350 $1,350 $4,050 Dental$0 $0 $0 $0 $100 $300 Vision$0 $0 $0 $0 $30 $90 Basic Life and AD&D$5 $15 $5 $15 $5 $15 STD and LTD$22 $66 $22 $66 $22 $66 Total Benefits and Other Expenses$27 $81 $477 $1,431 $1,507 $4,521 Premium Reserve SummaryBeginning Balance$0 $0 $0 Contributions$1,821 $1,821 $4,911 Benefits and Other Expenses($81)($1,431)($4,521)Ending Balance Before Surplus Allocation$1,740 $390 $276 Surplus Threshold Setting (months)333Monthly Benefit Costs$27 $477 $1,507 Surplus Threshold$81 $1,431 $4,521 Surplus Allocation (Employee)$1,659 $0 $0

In this slide you will see three sample employees. All three examples show the same amount of hours and employer contributions. The total contributions vary depending on the amount of sick paid leave (in excess of wage determination) each employee took. You will also notice, benefit elections are different. Employee C is enrolled in medical, dental, and vision family coverage, therefore, this employee is contributing into the plan via employee contributions. Employee A opted out of medical, and employee B is enrolled in the employee-only medical plan which is covered by the fringe. Therefore, both of these examples show $0.00 employee contributions. Because employee C has dependent coverage, he must maintain a PRA threshold of $4,521 dollars before any excess is allocated into his retirement account. The other two employees will meet their PRA threshold sooner. 16

H&W Compliance Tracking WorkflowEmployees working on Average contracts share a Contract-LevelPremium Reserve Account (PRA) within the Voluntary Employees Beneficiary Association(VEBA ) trust.171

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As we covered earlier during this presentation, employees working on Even numbered wage determinations share a contract-level premium reserve. The premium reserve balance is established within the voluntary employees beneficiary association or VEBA trust. On a monthly basis, health and welfare contributions which are the hours worked multiplied by the corresponding health and welfare rate along, with any payroll deductions withheld are allocated into DynCorp International employees premium reserve account. Monthly premium payments are submitted to each carrier based on each employees benefit enrollment. The residual balance remains in the account until it reaches the designated threshold. The threshold is determined by the employer and it is based on total monthly benefit costs for all employees within the contract. DynCorp International has elected three (3) months as the premium reserve account threshold. Once the account exceeds the PRA threshold, all excess health and welfare dollars are transferred to the designated account on a pro rata basis, which equals the employees hours worked divided by total hours worked by all employees across the contract. DynCorp International has set up a retirement account as the designated surplus. Excess funds are transferred on a quarterly basis. Employees will receive a letter by mail if they are eligible for a retirement transfer. 17

Average Contracts Example18Contract (1000 EEs)Contract (1000 EEs)Contract (1000 EEs)Q1Q2Q3PeriodMonthlyQuarterlyMonthlyQuarterlyMonthlyQuarterlyHours (based on 35 hrs/wk)151,492454,477151,492454,477151,492.47454,477ContributionsEmployer Contributions ($4.27/hr)$646,871 $1,940,613 $646,871 $1,940,613 $646,871 $1,940,613 Employee Contributions - Medical$0 $0 $0 $0 $0 $0 Employee Contributions - Dental $0 $0 $0 $0 $0 $0 Employee Contributions - Vision $0 $0 $0 $0 $0 $0 Sick Paid Leave (in excess of WD)($40,000)($120,000)($40,000)($120,000)($40,000)($120,000)Total Contributions$606,871 $1,820,613 $606,871 $1,820,613 $606,871 $1,820,613 Benefits and Other ExpensesMedical$360,000 $1,080,000 $360,000 $1,080,000 $360,000 $1,080,000 Dental$10,000 $30,000 $10,000 $30,000 $10,000 $30,000 Vision$3,000 $9,000 $3,000 $9,000 $3,000 $9,000 Basic Life and AD&D$5,000 $15,000 $5,000 $15,000 $5,000 $15,000 STD and LTD$22,000 $66,000 $22,000 $66,000 $22,000 $66,000 Total Benefits and Other Expenses$400,000 $1,200,000 $400,000 $1,200,000 $400,000 $1,200,000 Premium Reserve SummaryBeginning Balance$0 $620,613 $1,200,000 Contributions$1,820,613 $1,820,613 $1,820,613 Benefits and Other Expenses($1,200,000)($1,200,000)($1,200,000)Ending Balance Before Surplus Allocation$620,613 $1,241,226 $1,820,613 Surplus Threshold Setting (months)333Monthly Benefit Costs$400,000 $400,000 $400,000 Surplus Threshold$1,200,000 $1,200,000 $1,200,000 Surplus Allocation (Contract)$0 $41,226 $620,613

In this slide you will see three separate quarters of data. All three quarters show the same amount of hours and employer contributions. The total contributions would vary depending on the amount of sick paid leave (in excess of Wage Determination) all of the employees took in that quarter. Unlike the Individual example, benefits and other expenses total the same amount across all three quarters. The premium reserve balance is calculated on quarterly basis for all 1000 employees. The premium reserve threshold for this contract was met in the second and third quarter. The surplus allocation for this contract is $620,613 for the third quarter. 18

Average Contracts Example19Example Employees Surplus AllocationEnd of 3rd Quarter

Employee AEmployee BEmployee CWaive MedicalMedical Employee-OnlyMed/Den/Vis FamilyEmployee Hours454300480Contract Hours (all Employees)454,477454,477454,477Surplus Allocation - Contract$620,613 $620,613 $620,613Employee Hours as % of Contract Hours0.10%0.07%0.11%Employee Surplus Allocation (Q3)$621 $434 $683

In this slide we show how the third quarter $620,613 surplus allocation is divided among the employees working on the same average contract. Employee A has worked .10% of the overall contract hours. Therefore, his surplus allocation is greater than Employee B who only worked 0.07% of the overall contract hours. Employee C shows the greatest allocation since he worked 0.11% of the overall contract hours. 19

The DOL does not require employers to communicate to employees how they achieve Fringe Benefit compliance.

Employees often misunderstand which hours count towards the employers Fringe Benefit obligation. Example: Individual WD method max of 40 hrs/wk

Employees often misunderstand how the qualified benefits count towards their employers Fringe Benefit obligation.

Best practice for employee communications is to provide regular statements or other communications with the employees specific H&W compliance reconciliation.

Employee Communications 20

Employee communication is a key tool in communicating fringe benefits compliance to your employees, although the Department of Labor does not require employers to communicate to employees how they achieve compliance. Employees often misunderstand which hours count towards the employers fringe benefit obligation. For example, for those working on the Odd-numbered or Individual Wage Determination contract, only hours paid up to 40 hours a week are accounted for in the fringe reconciliation. Employees also misunderstand how the qualified benefits count towards their employers fringe benefit obligation. Therefore, although it is not required, our recommendation is for employers to provide regular statements or other communications with the employees specific health and welfare compliance reconciliation. 20

Employees under the Individual Contract receive Premium Reserve Account (PRA) statements by mail for every quarter.

Employees under the Average Contract receive a Health and Welfare Reconciliation letter by mail for every quarter.

Employee PRA Statements21

Employees working under the Odd numbered or Individual wage determination contracts receive a premium reserve account statement mailed to their homes for every quarter. Employees working under the even numbered or average wage determination contracts receive a health and welfare reconciliation letter by mail for every quarter. The letter is mailed to participants who are eligible for contributions into the retirement plan for that quarter.

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Sample Quarterly PRA Statement for Employee on Individual Contract22

Amount DI has contributed to your 401(k) for the Quarter

Amount of your payroll deductions for the Quarter

Employer H&W Contribution amount

From Contributions Total Above

Amount Allocated to Your Retirement Account

From Benefits and Other Expenses Total Above

Here is a sample of an Individual Premium Reserve Account paper statement. The top section titled Contributions, reflects the hours paid for this quarter. Additionally, the amount DynCorp International has contributed to your 401k for the quarter, the amount of payroll deductions for the quarter labeled Employee Contributions and the employer health and welfare contributions amount made on your behalf for the quarter, labeled Employer Contributions are also shown. The middle section labeled Benefits and Other Expenses shows all the qualified benefits paid based on the employees elections. The last section is the Premium Reserve account balance. This section starts with a beginning PRA balance, the Total Contributions from above made on your behalf, the Benefit Payments and Expenses, and amount allocated to your retirement account, if applicable. We encourage DynCorp International employees to contact Government Service Administrators (GSA) with any questions related to these statements. Our customer support toll-free telephone and email address are included on each statement. 22

Sample Quarterly How to read Guide for Employee on Individual Contract23

Each paper statement includes a How to Read Guide or tutorial. This guide is customized for each contract. The purpose of this tutorial is to assist the employees in better understanding the PRA statements provided by Salera-Government Service Administrators (GSA). 23

Sample Quarterly Letter for Employee on Average Contract24John Doe123 Main StreetAnytown, USA 11348RE: Q1 2016 Health and Welfare ReconciliationDear John:GSA recently concluded the reconciliation of the DynCorps Q1 2016 Service Contract Act (SCA) Health and Welfare (H&W) contributions against the cost of employee benefits for your SCA contract. DynCorps H&W contribution obligation is based on all employee hours worked, and the total cost of benefits includes Medical, Dental, Vision, Basic and Supplemental Life, Basic and Supplemental AD&D, Short Term Disability, and Long Term Disability. DynCorps H&W obligation for this period exceeded the cost of benefits, therefore surplus contributions, if you are eligible, have been deposited into your T. Rowe Price 401(k) account. Your T. Rowe Price 401(k) deposit amount of $500 is based on your number of hours worked, relative to the total hours worked for all employees on your SCA contract. Please note that you are ineligible for surplus contributions if you did not work any hours for pay dates from December 2015 to February 2016. If you do not have an existing 401(k) account with T. Rowe Price, one will automatically be set up in your name. You may contact T. Rowe Price at 1-800-922-9945 or www.troweprice.com.If you have questions regarding this H&W calculation, please contact GSA at 1-800-250-2741 or [email protected] Thank you,Government Service Administrators

As mentioned previously, those employees working on even numbered or average wage determination contracts receive a Health and Welfare Reconciliation Letter mailed to their homes on a quarterly basis. Here is a sample of the letter. The letter is mailed to participants who are eligible for contributions into the retirement plan for that quarter.

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Contact Information25Thank you for taking the time to view this presentation!

Please direct employees with any questions to contact GSA. They can be reached under:Phone: 1-800-250-2741 Email: [email protected]

Thank you for taking the time to view this presentation. Please direct employees with any questions to contact GSA. They can be reached toll-free at 1-800-250-2741 or via email at [email protected] 25