Service Contract Act (SCA) Overview

for DynCorp Intl. (DI) HRG

Service Contract Act

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What is the Service Contract Act (SCA)?

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McNamara-O’Hara 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.

Wage Determinations (WDs)

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An 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.

Individual vs. Average Contracts

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Employees 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.

Sample Wage Determination

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

Comparison of WDs

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* DOL rate as of June 30, 2015

SCA Individual(Odd WD)

Davis-Bacon and Related Acts

(DBRA)

CBA SCA Average(Even WD)

H&W Rate $4.27 / hr* Varies Varies $4.27 / hr*

Applied to Hours Worked or Paid? Paid Paid Varies Worked

Maximum (cap) to Hours?

Yes 40 hrs/wk No Varies No

New WDs still being issued? Yes Yes Yes No

H&W compliance on individual basis? Yes Yes Yes No

Fringe Benefits Compliance

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Fringe Benefits Requirements

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An 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

H&W Rate Increases

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It is the Contracting Officer’s 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.

Fringe Benefit Compliance Methods

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Following are the approved methods that are allowable by the DOL

(29 CFR 4.175 ) to meet fringe benefit compliance:

1) Pay cash-in-lieu of benefits

2) Make retirement plan contributions

3) Directly pay for qualified benefits

4) 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.

Examples of Benefits that Meet H&W Requirement

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Medical / Dental / Vision Insurance Life / AD&D Insurance STD / LTD Insurance Sick Leave Pay (if not required by WD) Employer Contributions to 401(k) Savings Plan Educational Assistance (if not required by job) Paid Time Off in excess of WD requirement Jury 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.

Examples of Benefits that Do NOTSatisfy the H&W Requirement

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Benefits required by Wage Determination Vacation and Holiday Pay

Statutory benefits (if required by federal, state, or local law) FICA Unemployment Insurance Worker’s Compensation Paid Time Off

Other Relocation Incentive Awards Uniforms (not required by the WD) Professional or club membership dues

Premium Reserve Account (PRA)

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H&W Compliance Tracking WorkflowEmployees working on Individual contracts have Individual

“Premium Reserve Accounts” (PRAs) within the Voluntary Employees Beneficiary Association (VEBA) trust.

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H&W fringe benefit contributions (hours x H&W rate) and payroll deduction amounts are allocated into an employee’s PRA on a monthly basis.

Premium Deductions (Fully Insured and Fully Insured Equivalent) are made from PRAs to pay the benefit costs associated with the employee’s benefit enrollment.

Remaining H&W balances accumulate until PRA reaches its designated 3 months threshold. The threshold is determined by the employer and unique to each employee’s enrollment.

Once an account exceeds the PRA threshold, all excess H&W dollars are transferred to the designated surplus account, in DI’s case the Retirement Account, on a quarterly basis. Surplus account and transfer frequency is determined by the employer. Employees will receive a quarterly statement including the retirement transfer amount, if applicable.

Upon termination, any remaining PRA funds are transferred to the employees’ retirement account (approx. at end of quarter after termination).

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Individual Contracts Examples

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Employee A Employee B Employee CWaive Medical Medical Employee-only Med/Den/Vis Family

Period Monthly Quarterly Monthly Quarterly Monthly QuarterlyHours (based on 35 hrs/wk) 151.49 454.48 151.49 454.48 151.49 454.48

ContributionsEmployer 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) 3 3 3Monthly Benefit Costs $27 $477 $1,507 Surplus Threshold $81 $1,431 $4,521

Surplus Allocation (Employee) $1,659 $0 $0

H&W Compliance Tracking WorkflowEmployees working on Average contracts share a Contract-Level

“Premium Reserve Account” (PRA) within the Voluntary Employees Beneficiary Association(VEBA ) trust.

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H&W fringe benefit contributions (hours x H&W rate) and payroll deduction amounts are allocated into the contract’s PRA on a monthly basis.

Premium Deductions (Fully Insured and Fully Insured Equivalent) are made from PRA to pay the benefit costs associated with all of the employees’ benefit enrollments.

Remaining H&W dollars accumulate until the contract PRA reaches its designated 3 months threshold. The threshold is determined by the employer and based on total monthly benefit costs for all employees within the contract.

Once an account exceeds the PRA threshold, all excess H&W dollars are transferred quarterly to the employees’ Retirement Account, on a pro rata basis (Employee hours worked divided by total hours worked by all employees across contract). Employees will receive a quarterly letter by mail if they are eligible for a retirement transfer.

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Average Contracts Example

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Contract (1000 EEs) Contract (1000 EEs) Contract (1000 EEs)Q1 Q2 Q3

Period Monthly Quarterly Monthly Quarterly Monthly QuarterlyHours (based on 35 hrs/wk) 151,492 454,477 151,492 454,477 151,492.47 454,477

ContributionsEmployer 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) 3 3 3Monthly 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

Average Contracts Example

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Example Employees Surplus AllocationEnd of 3rd Quarter

Employee A Employee B Employee CWaive Medical Medical Employee-Only Med/Den/Vis Family

Employee Hours 454 300 480Contract Hours (all Employees) 454,477 454,477 454,477

Surplus Allocation - Contract $620,613 $620,613 $620,613Employee Hours as % of Contract Hours 0.10% 0.07% 0.11%

Employee Surplus Allocation (Q3) $621 $434 $683

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

Employees often misunderstand which hours count towards the employer’s Fringe Benefit obligation. o Example: Individual WD method – max of 40 hrs/wk

Employees often misunderstand how the qualified benefits count towards their employer’s Fringe Benefit obligation.

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

Employee Communications

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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 Statements

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Sample Quarterly PRA Statement for Employee on Individual Contract

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Amount DI has contributed to your 401(k) for the QuarterAmount of your payroll deductions for the QuarterEmployer H&W Contribution amount

From Contributions Total Above

Amount Allocated to Your Retirement AccountFrom Benefits and Other Expenses Total Above

Sample Quarterly How to read Guide for Employee on Individual Contract

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Sample Quarterly Letter for Employee on Average Contract

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John Doe123 Main StreetAnytown, USA 11348 RE: Q1 2016 Health and Welfare Reconciliation Dear John: GSA recently concluded the reconciliation of the DynCorp’s Q1 2016 Service Contract Act (SCA) Health and Welfare (H&W) contributions against the cost of employee benefits for your SCA contract. DynCorp’s 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. DynCorp’s 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 customersupport@gsanational.com. Thank you,

Government Service Administrators

Contact Information

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Thank 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: customersupport@gsanational.com