The Advantages of Using Fringe Benefit Rates

Introduction – Brad Compton, Executive Director, Uni- versity Accounting & Financial Services, Institutions have a choice of directly charging EKU The benefits by specific identification by individual or using a fringe benefit rate to charge grants The implementation of fringe benefit rates at and contracts for these costs – who knew? Ap- EKU resulted in a decrease in administrative plying and tracking fringe benefit costs on an in- burden for the campus and the simplification Advantages of dividual basis can be one of the more frustrating of accounting for fringe benefits. However, no and maddening activities a research administra- two institutions are the same. What questions tor must deal with in budgeting and charging does a university need to answer in deciding benefits accurately to projects. which type of method to use? First, let’s answer Using Fringe some of the basics. Because the tracking of benefits for each individual employee is complicated, more institu- What is the Difference tions are establishing a fringe benefit rate system Benefit Rates to better manage the process. While such rates between Direct Charging have great potential for simplifying fringe rate and Fringe Benefit Rates? application, reducing errors, and potentially in- By Jim Carter & Kari Kelly Fringe benefits are employee related costs typi- creasing cost recovery, they are actually not suit- cally including: pension plans, contributions to able for all institutions. ■ The more rates you health and life insurance, employment taxes, and Eastern Kentucky University (EKU), as an exam- workman’s compensation. Institutions have two use the smaller the ple, recently implemented fringe benefit rates on choices that can be used to apply fringe benefits its campus with assistance from the Huron Con- to funding sources, including sponsored proj- impact across institution sulting Group. At EKU, the primary goal was to ects. The direct charging method allocates each develop a more efficient methodology for the individual’s specific benefits to each salary funding sources budgeting and charging of fringe benefits across source while fringe benefit rates use an average campus. EKU had other requirements including rate (normally a percentage of salary) for the ability to create an annual budget using groups of employees. The example below shows fringe benefit rates and eliminate the detailed how benefits are charged under each method. processes required by charging benefits on an Under the direct charge there would be 6 en- individual basis. tries, one for each benefit, whereas the fringe benefit rate requires a single line. “EKU’s implementation of fringe benefit rates has helped us solve significant The direct charge methodology for fringe bene- budgeting issues and allowed us to man- fits is often used by institutions. This method age our grants more efficiently.” charges each employee’s specific benefit costs 24 NCURA Magazine to the appropriate funding source. All benefit ■ Institutions that don’t use a fringe rate that includes costs are tied to an individual and are budgeted using each individual’s benefit package. This re- terminal leave in the rate may no longer be able to recover sults in continual fluctuation of fringe benefit costs by employee. One employee may have in- those costs if they use a cash basis to charge accrued leave dividual health insurance verses another employee with family coverage, for example. on termination as a result of the new Uniform Guidance When using the direct charge methodology, many institutions do not always charge restricted funds their share of benefit costs. This ployee benefit costs to determine whether they impact of benefits that were not being equitably is because the tracking, budgeting and charging can be included in the rates. charged and the funding sources that are paying of these costs can be intrusive and complicated. for the benefits. The impacts to key stakeholders Instead, many institutions choose to manage An institution also needs to consider the types of and the communication and transition plan and pay these costs centrally. salaries that should be included in the rate struc- should also be discussed by all decision makers. ture. In addition to employees’ regular salaries, When using the second methodology, a fringe the following costs should be considered when Advantages of benefit rate, the pooled benefit costs are divided developing rates: perquisites, bonuses, student by the total salaries in an assigned employee salaries, and salary caps. Fringe Benefit Rates group. This results in a single rate for each em- There are numerous reasons why large and small ployee group. These rates are then applied to the The defined rate structure, often referred to as institutions are switching to fringe benefit rates. applicable employee salary to represent the as- “employee groups,” can vary drastically across Some of the key reasons are described below. sociated benefits for that type of employee. The institutions. What works at one Institution may key components of a fringe benefit rate calcula- not work at others. Institutions may choose to 1. Increased Efficiency tion are the fringe benefit costs, the salaries, and calculate a single fringe rate or develop more A fringe benefit rate will pool fringe benefit costs the defined rate structure (employee groups). than 10 rates. An institution should develop a rate and distribute costs to the benefiting depart- structure that will group fringe benefit costs and ments and sponsored projects. This will result How do you Calculate align employees with the benefit costs they re- in one charge for fringe benefits instead of mul- a Fringe Benefit Rate? ceive. If an institution chooses to develop multi- tiple charges for individual benefits (FICA, re- ple rates, then it defines an employee group for tirement, health, etc.). The use of a fringe The fringe benefit rate is an average cost of ben- each rate. Each employee group will have an in- efits for all employees within the defined em- benefit will allow for easier recordkeeping and dividual rate calculated and applied. Common less maintenance of benefits and costs of pro- ployee group. The same benefits included criteria used to develop employee groups are under the direct charge methodology are in- grams for employees. A fringe benefit rate will employee type, staff categories, salary bands, and simplify the following processes: the monitoring cluded in the fringe benefit rate methodology. benefits received. Also, one advantage to using a fringe benefit of fringe benefit charges to departments, grants, rate is the ability to include additional fringe Before switching from direct charging to fringe and contracts; billing for grants and contracts; benefits costs in the rate structure. Terminal benefit rates, the institution should fully under- and salary transfers. A fringe benefit rate will leave, paid leave, graduate student insurance, stand the financial and budgeting impacts on the provide consistency in how benefits are negoti- sabbaticals, tuition remission, and other insti- use of fringe rates across the campus. To deter- ated and paid and significantly minimize the tutional specific benefit costs are often included mine the funding impacts, a comparative analysis labor distribution programming. The number in the rate structure. This allows the institution should be completed to compare the differences of transactions required for an individual em- to allocate a fair share of these costs to all fund- by funding sources, departments, and other cri- ployee will significantly decrease. ing sources. It is important to analyze all em- teria. Completing this analysis will highlight the The table below demonstrates how many accounting transaction would be eliminated for an institution with 1,000 employees that each have 6 benefit categories. Category Direct Fringe Reduction in Charging Benefit Transactions 2. Increased Recovery Employees 1,000 1,000 0 A fringe benefit rate will allow an institution to Funding Sources 2 2 0 recover additional costs. Often times, restricted funding sources are not currently charged the Salary Transactions per Month 2,000 2,000 0 full proportion of benefit costs. Some fringe ben- Fringe Transactions per Month 12,000 2,000 10,000 efits are paid centrally within the institution from Annual Fringe Transactions 144,000 24,000 120,000 unrestricted funds. Fringe benefits that are funded by central administration are only par- tially recovered through the Facilities and Admin- OCTOBER/NOVEMBER 2014 25 What’s on my istrative (F&A) indirect cost rates. Fringe benefit rates will allow an institution to fur- ther increase recovery by directly charging full fringe benefit rates to sponsored DESK awards and auxiliary operations. Sponsored awards will be charged their “full” fair share of actual fringe benefit costs, increasing the recovery of fringe benefit costs. 3. Reduced Risk of Non-Compliance Fringe benefit rates are negotiated annually with the institution’s cognizant federal Katie Plum’s Desk agency (Department of Health and Human Services Cost Allocation Services or the Department of Defense Office of Naval Research). An institution will need to inform Because of the clo- their cognizant agency of the change in methodology. The fringe benefit rate structure is required to be recalculated and negotiated on an annual basis. This decreases the sure of a neighbor- opportunities for charging unallowable/unallocable fringe benefits. In addition, the ing department, fringe rates are adjusted annually for any overage/shortage that an institution may my office recently incur from prior base year benefit costs. doubled in 4. Easier Budgeting staffing—now A fringe benefit rate can be used to budget sponsored projects and departmental ex- there are two of penditures. A fringe benefit rate will result in consistency between budgeting and ex- pense practices. The same fringe benefit rate will be used for both budgeting and us!—and I have re- charging purposes, which will improve the budgeting process for all the institution’s ceived the mixed funds and standardize benefit costs across employee groups.

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