Indirect Costs and Fringe Benefit Cost Recovery Manual

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The purpose of this manual is to provide all state agencies with a basic reference source for the subject of indirect costs as they relate to federally and privately sponsored programs. It is not, however, intended to replace any federal circular, statute, regulation, etc., which shall prevail in the event of any conflict with the contents of this manual.




1.1 Definitions

Indirect Costs may best be understood in relation to Direct Costs:

1.1.1 Direct Costs

Direct costs are those which are incurred for, and can be identified with, the specific projects, programs, or activities of an agency or institution and can be charged directly to such activities with a reasonable degree of accuracy and without an excessive amount of accounting effort. Examples include such costs as the salary and fringe benefits of an individual working on a specific project, travel costs for the purpose of a program, or computer time billed to a project.

1.1.2 Indirect Costs

Indirect costs in contrast, are those that have been incurred for purposes common to a number or to all of the specific projects, programs, or activities of an agency or institution, but which cannot be identified and charged directly to such projects, programs, or activities with a reasonable degree of accuracy and/or without an unreasonable amount of accounting effort.

Typically, indirect costs will consist of the following types of support activities:

1. Central Service Agency costs as allocated in the Statewide Cost Allocation Plan (SWCAP),

2. Central Office Costs - Commissioners and their staffs, planning, fiscal, and other services supporting the overall functioning of the department.

Many Central Offices also contain units which provide direct program services, both federally and state funded. These functions must be considered direct costs, not indirect costs.

3. Division, Institutional, or Agency Administrative Costs:

a. Commissioners (departments without central offices), Superintendents, Division Directors and their immediate support staffs.

b. Business Office costs, including accounting, purchasing, payroll, personnel, etc

4. Physical plant costs including plant operations (utilities, rent, sewage treatment), maintenance, repairs, housekeeping, security, fire protection, etc

5. Building and equipment depreciation or use allowance

6. Worker's Compensation Costs

7. Accrued Vacation and Sick Leave at Termination or Retirement

8. Library Services (educational institutions)

Because of the diversity in state agency operations and types of federal programs, the above, is intended as a guide only and must be adapted to the particular situation, especially where some or all of the above costs can be or are budgeted and charged as direct costs to federal programs.

1.2 Indirect Cost Rates and Cost Allocation Plans

The federal government allows for two basic methods of determining the amount of indirect costs attributable to a particular program. For most state agencies that mechanism is the indirect cost rate, calculated in an Indirect Cost Proposal. The other, a more limited method used by state agencies operating "public assistance" programs involves the use of a Cost Allocation Plan

1.2.1 Indirect Cost Rates

Since by their nature indirect costs cannot be easily computed or identified as relating to a specific project or activity, the federal government has approved a method of estimating the amount of indirect costs which a specific project will incur and to allow the charging of this estimated amount to federally sponsored programs as part of the cost of such programs. The approved method relies on the principle of averaging. The indirect costs of any agency are deemed to accrue to each program or project in direct proportion to the relative size of each project. If specific project "A" accounts for 18% of the direct program activity of an agency, it may equitably be assigned 18% of the agency's total indirect costs.

The application of this method involves three basic steps.

1. Select a base for measuring the relative size of programs or projects.

The acceptable bases commonly used are:

a. Direct Salaries and Wages


b. Modified Total Direct Costs (generally excluding capital costs and major subcontracts).

2. Compute the ratio between the total indirect cost of the agency and the total direct cost expenditures in the base for all programs and activities, regardless of the source of funding. This is the indirect cost "rate".

3. Apply this rate to the expenditures in the base for a specific project to determine the indirect costs to be allocated to the specific project.

Simplified Example

An agency's costs for 20X1-X2 are broken down as follows:
Indirect Costs $ 10,000
Direct Costs 100,000
Total Costs $110,000
Indirect Cost Rate = 10,000 total indirect costs = 10%
100,000 total direct costs
Indirect Costs for program "A": $18,000 (direct costs of
program "A")  X 10% = $1,800.


1.2.2. Cost Allocation Plans

state agencies administering "public assistance programs" must develop a cost allocation plan under current federal regulations. A cost allocation plan is a narrative description of the procedures that will be used to identify, measure, and allocate all administrative costs (both direct and indirect) to all programs administered by the state agency. All administrative costs are charged to federal awards by implementing the cost allocation plan. Major federally-financed public assistance programs include: Temporary Assistance to Needy Families, Medicaid, Food Stamps, Child Support Enforcement, Adoption Assistance and Foster Care, and Social Services Block Grant.



2.1 State Agencies other than Colleges and Universities

2.1.1 Department of Health and Human Services' Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government (ASMB C-10)

Agencies other than Colleges or Universities should prepare their indirect cost proposals and/or cost allocation plans in accordance with the Department of Health and Human Services' ASMB C-10. Incorporated by reference in this document is the Office of Management and Budget (OMB) Circular A-87 Cost Principles for state and Local and Indian Tribal Governments. Agencies requiring copies of these publications should refer to Attachment A - References Section of this manual for the source of this material.

2.1.2 Single Rate Method

A single indirect cost rate may be computed applicable to all programs in the agency. This is appropriate for those agencies where the indirect cost rate for the various divisions, bureaus, institutions, etc., making up the agency are approximately the same or where it can otherwise be shown that no inequity will result to the federal government. This method recognizes as indirect costs (a) central service agency costs (Comptroller, Treasurer, etc.) allocated in the Statewide Cost Allocation Plan, (b) costs of the agency's own central administrative offices or divisions, (c) administrative or other indirect costs which may be incurred at the operating division or institution level, and (d) certain agency-wide indirect costs such as building and equipment depreciation or use allowance.

2.1.3 Multiple Rate Methods

This method computes separate indirect costs for each division, bureau, or major functional unit within an agency. Multiple rates are required where significant differences in the rates of different divisions, bureaus, or functional unit can be expected and where these differences will materially affect potential recoveries of indirect costs from federal programs. This computation recognizes the same indirect costs as listed above for the single rate method. Where it differs from the single rate method is the way indirect costs are allocated to the divisions or bureaus. A separate allocation to each division, bureau, or functional unit is made for each element of central service agency, the agency's own central administrative unit or agency-wide indirect costs, using whatever base most accurately measures the benefits derived. For example, Human Resources Division costs would therefore be allocated based on number of employees in each division, building occupancy costs based on square feet occupied, etc.

2.1.4 Special Rates

Special circumstances may require rates to be developed that do not fit the descriptions above. Examples of special rates are central office rates and multiple off-site rates for agencies with a central office and out-lying district offices and/or institutions or restricted rates imposed by federal programs that limit indirect cost.

2.1.5 Indirect Cost Bases

As noted in Section 1.2.1 (page 2), the indirect cost base is a measure of the relative size of projects and, therefore, of their absorption of indirect services. One of two "bases" is generally used.

1. Direct Salaries and Wages (S&W) - This base is comprised of the total salaries and wages (major object 01) paid by an agency or division to employees whose functions may be categorized as "direct". Salaries paid to employees performing "indirect" functions are not to be included in the base; they are part of indirect costs.

A common misconception is that only state General Fund costs are to be included in the base in determining an indirect cost rate. Actually all salaries for "direct" program purposes, regardless of source of funding, must be included in the base to obtain a correct indirect cost rate. Thus, salaries paid from Federal, Agency, Working Capital, and Other Funds must be considered when computing the base.

2. Modified Total Direct Costs (MTDC) - In most respects Modified Total Direct Costs, for the purpose of arriving at an indirect cost base, is computed according to the same criteria as Direct Salaries & Wages except that total charges (salaries, contractual services, commodities, etc.) to direct program functions are included, rather than only salaries and wages. There are, however, two major differences:

a. Exclusions - As the purpose of the base is to provide a measure of the relative size of programs and thereby, their generation of indirect costs, certain expenditures are not considered as being direct costs for the purpose of establishing the rate:

1. Capital Expenditures

a. Land (08-XXX)

b. Equipment (09-XXX)

c. Buildings & Improvements (10-XXX)

2. Sub-Grants and Contracts

a. Transfers of Grants (05-330, 05-340)

b. state Aid Grants (07-XXX)

c. Major subcontracts paid as contractual services (02-XXX)

3. Assistance Payments to Beneficiaries

4. Payment to providers of services to beneficiaries

5. Revenue Refunds (04-XXX)

6. Indirect Costs Charged (05-110)

These costs are excluded either because they tend to generate far less in overhead per dollar of expenditure than, for example, salary and wage expenditures or because they are not true direct costs. To avoid distortion these charges are not considered either in computing an indirect cost rate or in applying the rate to a grant program.

The effect of excluding the above expenditures from the indirect cost base is to produce a somewhat higher indirect cost rate which will be applied to a correspondingly smaller base when the indirect costs of a program are computed. The total amount of indirect costs allocated to programs is unaffected; rather, it is the allocation between programs which is affected, hopefully resulting in a more accurate assessment of indirect costs.

Additions - Under our current state accounting system, certain direct costs are charged to programs and projects only if they are funded from other than the than the General Fund, a primary example being fringe benefits. If, as stated previously, the purpose of the base is to measure the relative size of programs and projects, then it follows that these costs must be added to the non-reimbursable programs so as to avoid distortion in representing the size of programs (reimbursable vs. non-reimbursable).

3. Selecting an Indirect Cost Base

Direct Salaries and Wages should be used whenever possible because:

a. It is generally the best measure of the generation of indirect costs.

b. It is easier to compute and apply than Modified Total Direct Costs (due to exclusions and additions).

c. It lends itself to recovery directly on the payroll along with fringe benefits.

d. It is the base preferred by the federal government, unless it can be demonstrated that Modified Total Direct Costs would be more equitable in a particular agency's situation.

Agencies preparing their first indirect cost proposal(s) are directed to use a Direct Salaries and Wage base; agencies having current indirect cost agreements using a base other than salaries and wages are directed to negotiate with their cognizant federal agency for a change to Salaries and Wages at the earliest possible date.

2.1.6 Types of Indirect Cost Agreements

OMB Circular A-87 defines four possible types of indirect cost rates. However, the first two of these types are calculated separately but used in conjunction with each other.

1. A provisional rate is based on projected or budgeted costs. It is a temporary rate subject to retroactive adjustment once actual costs are known (see final rate).

2. A final rate is used in conjunction with the provisional rate. It is calculated based on actual costs and is used to adjust a provisional rate. This method requires substantial administrative effort and is not recommended for use except in special situations. Adjustment for the underpayment of indirect costs is subject to availability of funds, whereas overpayments must be returned to the federal government.

3. A fixed rate is also based on projected or estimated costs. It differs from the provisional rate in that the adjustment between estimated and actual costs is carried forward to future rates. This is the recommended type of rate to be negotiated. (See Attachment C - Sample Indirect Cost Proposal)

4. A predetermined rate is agreed to in advance, based on estimated future costs, but is not subject to adjustment. This rate is intended to be used long-term over a period of two to four years and in situations where there is high degree of stability and no expectation that the rate would exceed the rate based on actual cost. A predetermined rate cannot be used by agencies with federal contracts. (See Attachment C - Sample Indirect Cost Proposal)

2.2 State Colleges and Universities

2.2.1 Office of Budget and Management Circular No. A-21

Office of Management and Budget Circular No. A-21, Cost Principles for Educational Institutions establishes the principles for determining costs (direct and indirect) applicable to federal grants, contracts, and other sponsored agreements with educational institutions.

2.2.2 Facilities and Administrative Costs

Costs incurred for common or joint objectives that cannot be readily assigned to a particular program or activity are identified as Facilities and Administrative (F&A) costs. F & A costs are synonymous with indirect costs.

Facilities is defined as depreciation and use allowances, interest on debt associated with certain buildings, equipment and capital improvements, operation and maintenance expenses, and library expenses. Administration is defined as general administration and general expenses, departmental administration, sponsored projects administration, student administration and services, and all other types of expenditures not listed specifically under one of the subcategories of Facilities.

2.2.3 Facilities And Administration Rates

1. Simplified Method for Small Institutions

Approved for institutions receiving relatively small amounts of federal funds (under ten million dollars in direct costs annually), this method produces a single indirect cost rate applicable to all direct activities of the institution (instruction, research, etc.).

2. Cost Finding for Larger Institutions

Institutions with over ten million dollars in direct costs on federal programs are required to develop separate indirect cost rates for instruction, organized research, other sponsored activities, and other institutional activities. The method revolves

around the allocation of indirect costs to direct cost centers using appropriate (sq. feet, number of employees, etc.), resulting in separate indirect cost "pools" for each separate activity.

2.2.4 F & A Cost Bases and Types of Agreements

The approved distribution base for F & A costs is modified total direct cost and the four types of agreements mentioned previously for all other state agencies apply.

2.3 Selected Items of Cost

2.3.1 State-Wide Cost Allocation Plan (SWCAP)

The state-Wide Cost Allocation Plan (See Attachment B - Sample State-Wide Cost Allocation Plan) is prepared annually by the Comptroller and consists of two parts:

1. Section I: Costs Distributed Through State-Wide Cost Allocations

These costs represent central service costs benefiting state agencies for which no billings are made; the costs are therefore allocated to the line agencies using the most appropriate available distribution bases. Agencies will then incorporate the costs allocated into their indirect cost proposals as indirect costs, as provided by OMB Circular A-87. As the allocations represent actual costs for a prior period, it is recommended that agencies utilize the most recent approved plan when performing the rate computation so as to keep the time lag between the incurring of costs by central service agencies and their incorporation into cost proposals by agencies at a minimum. However, the actual "fixed" SWCAP allocation must be used in the carry-forward computation. Refer to 2.1.6, Fixed with Carry-Forward Adjustment, for a specific example.

2. Section II: Costs Distributed Through Billing Mechanisms

This contains central service costs which may be billed as direct costs to federal grants and contracts, including the approved rates.

2.3.2 Fringe Benefits

Fringe benefits are to be charged as direct costs to federally sponsored and other reimbursable programs in accordance with the second section of this manual.

In the preparation of indirect cost studies the following should be noted:

1. Fringe benefits must be added to the indirect cost pool for salaries which have been classified as indirect and,

2. For agencies using Modified Total Direct Costs as a base, fringe benefits must be added to state-funded activities which do not have fringe benefits included in their costs (See Additions, page 7).

In both 1 and 2, fringe benefit costs are computed by applying the approved rates contained in the applicable year's SWCAP against those personal services involved. These rates are strictly defined by the particular character and object code to which the personal services expenditure is charged. Note: The rates are contained in the yearly Comptroller's SWCAP memorandum.

2.3.3 Worker's Compensation Costs

Cost of providing Worker's Compensation benefits to an agency or unit's employees is an allowable indirect cost. The total annual cost of worker's compensation benefits paid on behalf of the agency must be added to the agency's expenditures as an indirect cost. The appropriate annual cost will be published in the annual statewide Cost Allocation Plan memorandum.

2.3.4 Depreciation and Use Allowances

Agencies occupying Public Works' maintained buildings have their space costs distributed within the SWCAP.

Since the SWCAP is one year behind in allocating costs, agencies moving from Public Works' buildings, or vice-versa, should make appropriate adjustments to ensure that building occupancy costs are neither duplicated nor omitted.

Depreciation on buildings and equipment is an allowable indirect cost for grantee agencies. Standard depreciation schedules must be maintained and no charges may be made once an asset is fully depreciated.

In lieu of depreciation, a use allowance equal to 2% of the acquisition cost of the buildings and improvements and 6.67% of the acquisition cost of capital equipment may be considered as an indirect cost. Records must be maintained supporting the acquisition costs claimed.

Neither depreciation nor use allowance may be claimed on assets or portions of assets acquired directly or indirectly with federal funds or on idle or excess facilities and equipment.

2.3.5 Plant Maintenance and Building Occupancy Costs

The costs of maintenance, utilities, security, rent, etc., for buildings occupied by an agency are allowable indirect costs.

Agencies paying for building occupancy costs from their own appropriations should identify these expenditures through appropriate use of function and activity codings.

2.3.6 Division Level Administrative Costs

Only to be used for Multiple Rate Methods. Agencies should make every effort to identify administrative costs at the division, bureau, or department level so these costs may be included in indirect rather than direct costs.

Typically, these will consist of Directors, Assistant Directors, etc., and their secretary and/or other immediate staff.

Time and effort allocations may be required from these individuals when they are performing both administrative and direct program tasks. These allocations should be documented by reports signed by the individuals involved.

2.3.7 Accrued Sick and Vacation Leave at Retirement or Termination

Effective July 1, 1999 the payment of accrued leave either vacation or sick leave cannot be charged directly to a federal program. All expenditures to an expenditure object for accrued leave payments and the fringe benefit cost associated with that Personal Service expenditure should be treated as an indirect cost. See Comptroller's Memorandum No. 99-4 for details.

2.4 Content of Indirect Cost Proposals

According to the OMB Circular A-87, all indirect cost proposals must be supported at minimum by the following documentation:

1. The rate(s) proposed, including all supporting worksheets and relevant data. This must be cross-referenced and reconciled to the financial statements.

2. The summary of allocated central service costs, Exhibit A of the Comptroller's annual State-wide Cost Allocation Plan memorandum.

3. A copy of the financial statements and other financial data upon which the rate is based.

4. The total amount of direct salaries and wages and/or other direct costs incurred under federal grants and contracts that are included in the direct cost base for rate calculation purposes.

5. A chart showing the organizational structure of the agency during the period for which the proposal applies, along with a functional statement(s) noting the duties and/or responsibilities of all units that comprise the agency. This should be accompanied by a narrative statement regarding functions that are performed by component units in sufficient detail that would allow the reader to determine levels of benefit provided and received by the component units.

2.4.1 Certification

Indirect cost rates must be certified by government department or unit that the proposal has been prepared in accordance with applicable policies and procedures. The form of the certification is set forth in the Sample Certification (See Attachment D) and must be signed by an individual no lower than the agency's chief financial officer.

2.5 Requirement for Preparation and Submission of Proposals

All state agencies are required to prepare indirect cost proposals unless a written exemption is obtained from the state Comptroller. Exemptions will generally be granted only when an agency receives no federal or other funding to which an indirect cost rate can be applied.

2.5.1 Submission

1. Office of the Comptroller

All state agencies submitting an indirect cost proposal or a cost allocation plan for the first time must have the format and methodology approved by the State Comptroller prior to submission to the federal government. In succeeding years unless a substantive change is contemplated, such as indirect cost base, type of agreement, inclusion or exclusion of major elements of indirect cost and their allocation, etc., the proposal or plan does not need prior approval of the Comptroller.

Each year a complete copy of the indirect cost proposal and final negotiated agreement must be forwarded to the Comptroller's Budget and Financial Analysis Division. Cost allocation plans do not require re-submission annually, only upon revision.

2. Federal Cognizant Agency

Under OMB Circular A-87, indirect cost proposals are submitted to a single federal agency for approval. Upon receipt of approval, the plan is considered binding on all other federal agencies whose programs come under the Circular. The approval will be in the form of a "Negotiation Agreement" from the federal cognizant agency. Generally, cognizance is assigned to the federal department which has the greater dollar involvement with a state agency. Questions from an agency concerning cognizance should be directed to such federal agency or to the Financial Management Branch, Office of Management and Budget, Washington, D.C. 20503.

2.5.2 Due Dates

Indirect cost proposals must be submitted to the cognizant federal agency within six months after the close of the fiscal year. An extension of time to submit a proposal may be requested by writing to the cognizant federal agency.

2.5.3 Chronological Summary

Generally, due to the nature of indirect cost rate computations, a rate is projected two years forward from the base year actual costs utilized in the rate computation. That is, the 2001-02 rate is based upon 1999-2000 actual costs; the 2002-03 rate is based on the 2000-01 actual costs. Following is a chronological summary for the preparation and negotiation of an indirect cost plan.

June 30, 2000 Fiscal Year ends.
July 1, 2000-  December 31, 2000 The 2001-02 plan is developed and submitted to the federal cognizant agency for approval.
Note: An extension of time may be sought prior and obtained prior to the December 31 due date
January 1, 2001-June 30, 2001 Negotiation agreement approving theplan should be forthcoming from the federal cognizant agency.
July 1, 2001 - June 30, 2002 The 2001-02 rate is applied against applicable programs.

2.5.4 Assistance

Agencies are encouraged to seek the advice and assistance of the Cost Unit of the Budget and Financial Analysis Division of the Office of the Comptroller in the preparation and negotiation of indirect cost plans.



3.1 Grant Budgets

The development of an indirect cost rate simplifies the calculation of indirect costs to be included in grant proposal budgets.

If any agency has an indirect cost rate of 25% of salaries and wages, the amount of indirect costs to be included in any grant budget submitted by that agency will be equal to 25% of the total included for salaries in the grant budget.

3.2 Recoveries

Indirect costs must be charged periodically (at least annually) to each eligible grant or program.

Agencies should periodically complete and submit a Cost Recovery Report, Form CO-826, showing the indirect costs to be charged for the current period. See Attachment E Sample Co 826. The period chosen will generally coincide with federal reporting requirements, but must be at least annually. Cost Recovery Reports are to be forwarded to the Office of the state Comptroller, Management Services Division.

In those instances where the indirect cost recovery is made by a direct deposit, Form CO-39, or on a Transfer Certificate, Form CO-607, the revenue MUST be credited to Standard Account 94060, Indirect Overhead - Federal and Other Projects.

Under the above procedures, the expenditure object for the indirect cost portion of any recovery shall be 05-110, Indirect Overhead - Federal and Other Projects.

3.3 Grants Spanning Two or More Fiscal Years

When federal grant periods do not coincide with the state's fiscal year, indirect costs must be charged at the appropriate rate for the fiscal year in which the direct expenditures are actually made, which may result in two or more rates being applied to a grant during its lifetime.



4.1 Provision for Indirect Costs

state agencies are directed to include a provision for indirect costs in all federal and private grant budget proposals and to aggressively negotiate their acceptance as part of the costs of such grants or projects.

Agencies are reminded that OMB Circular A-87 requires that federally assisted programs bear their fair share of indirect costs except where specifically restricted or prohibited by program legislation. Unless specifically required by federal statute, the policies and procedures included within OMB Circular A-87 has the force and effect of law.

4.2 Requests for Variances

Requests for variances must be submitted in writing by the agency head and include full justification for the agency's inability to include indirect costs in the particular program.

If a variance is requested because the federal grant or agency will not approve the inclusion of indirect costs in the grant budget, submission of a full set of correspondence with the federal agency showing attempts by the state agency to gain approval is required.

No variance can be granted for the sole reason that a state agency failed to request the inclusion of indirect costs because their inclusion might reduce the amount of direct program funds available.

4.3 In-Kind Match

Use of indirect costs applicable to federal funds as in-kind matching or cost sharing is not acceptable. Indirect costs attributed to state General Fund direct costs, however, may be utilized as an added cost for state matching and agencies are encouraged to do so.

4.4 Submission of Variances

All requests for Variances requested only for the reason of limitations imposed by the grantor can be submitted for approval to the Office of the State Comptroller, Budget and Financial Analysis Division. All requests for variances for other reasons must be directed to the agency budget examiner at the Office of Policy and Management.



5.1 Fringe Benefits Defined

Fringe benefit costs included in the Fringe Benefit Cost Recovery Rate are the employer's share of the costs of providing one or more of the benefits listed below.

1. Retirement Contributions and Retirees' Medical Insurance Premium for

  1. State Employees Retirement System (SERS) - Regular Employees
  2. State Employees Retirement System (SERS) - Hazardous Duty Employees
  3. Alternate Retirement Program (ARP)
  4. Teachers' Retirement System
  5. Judges and Compensation Commissioners Retirement System

2. Unemployment Compensation

3. Group Life Insurance.

4. FICA - Social Security and Medicare Tax

5. Medical Insurance Fringe benefit costs are direct costs to be recognized as such in all computations.

5.2 Purpose of the Fringe Benefit Cost Recovery Rate

The initial payment of all the benefits included in the recovery rate are paid out of General Fund budgeted appropriations no matter what funding source paid an employee's salary and wage. The recovery rate is the mechanism used to reimburse the General Fund for the costs of the benefits paid to employees whose salaries and wages are paid from funding sources other than General Fund budgeted appropriations.

5.3 Fringe Benefit Reimbursable Accounts

Fringe benefit costs are direct costs which should be billed as a line item to applicable programs by applying the current approved rate to gross payrolls. Fringe benefit reimbursable accounts include:

1. Federal grant payrolls - SID 400's, 500's, 800's and 900's.

2. Private grant payrolls - SID 300-349; Certain 350-399.

3. Other than General Fund payrolls - Special Revenue Funds, Capital Project Funds, Internal Service Funds, Enterprise Funds, Agency Funds, and Trust Funds.

4. Non-state agencies as part of the total billed cost pool when personal services have been rendered. For example, Agency X provides instructors to a private school. The school should be billed for all incurred costs. These include fringe benefits and indirect costs along with salaries and other miscellaneous expenses.

5.4 Fringe Benefit Cost Recovery Rate Calculation

5.4.1 Fringe Benefit Cost Recovery Rate Components

Individual rates are calculated for each of the various types of fringe benefits provided, including separate rates for each retirement plan. The rates are average rates calculated as a percentage of salary and wage. The rate is determined by dividing the cost of each benefit, including the administrative cost, by the total amount of salaries and wages paid to employees receiving the benefit.

5.4.2 Fringe Benefit Cost Recovery Rate Composition

Various fringe benefit cost recovery rates are established for each personal service expenditure object based on the benefits received by the employees whose salary and wage payments are properly charged to that expenditure object. The different fringe benefit rates are determined by adding the individual fringe benefit component rates of the fringe benefits that a particular class of employee is eligible to receive.

5.5 Application of the Rate

The appropriate rate to be applied to the personal service expenditure to calculate the fringe benefit cost is determined by the expenditure object code to which the personal service expenditure is charged. Each personal service minor expenditure object is assigned a fringe benefit rate, that rate is multiplied by the amount of the personal service expenditure to calculate the amount of fringe benefit cost.

5.5.1 Statewide Rate

A statewide or full-time is established based on the benefits a full-time member of the regular State Employees Retirement System would be eligible to receive. The statewide rate is used for all expenditure object codes not listed as exempt or for which no specific rate has been established.

5.5.2 Exempt Expenditure Objects

Some personal service expenditure object codes have no fringe benefits attached and reimbursement of fringe benefit costs is not required when expenditures from non-budgeted General Fund accounts and Funds other than the General Fund are charged to those expenditure objects.

The expenditure object codes that are exempt from the fringe benefit reimbursement process are:

1. 01-040 Student Labor

2. 01-050 Fees

3. 01-130 Salaries and Wages - Patient or Inmate Workers

4. 01-220 Accrued Sick Leave at Death or Disability Retirement - excluded from FICA

5. 01-390 Teachers' Retirement - Accrued Sick Leave, Excluded from FICA

6. 01-490 Teachers' Retirement - Accrued Sick Leave, FICA-Medicare

7. 01-590 ARP - Accrued Sick Leave, Excluded from FICA

8. 01-790 ARP - Accrued Sick Leave, FICA-Medicare Only

9. 01-860 Federal College Work-Study (CSU)

10. 01-870 Federal College Work-Study Match (CSU)

11. 01-900 Student/Graduate Interns (CSU)

12. 01-920 Interest Penalty - Payroll Awards

13. 01-950 Buy Back Option

14. 01-970 Graduate Assistants (CSU)

5.5.3 Special Rates

In addition to the character-object codes which are exempt from fringe benefit recoveries, separate rates have been developed for the following personal service codes:

1. 01-020 Salaries and Wages - Temporary

2. 01-030 Salaries and Wages - Contractual

3. 01-090 Accrued Sick Leave at Normal Retirement - Subject to FICA

4. 01-150 Graduate Assistants

5. 01-180 Overtime - Temporary

6. 01-240 Allowances/Reportable Payments - Alternative Retirement Plan Without FICA

7. 01-250 Allowances/Reportable Payments - Alternative Retirement Plan With FICA

8. 01-260 Allowances/Reportable Payments-Teachers Retirement Without FICA

9. 01-270 Allowances/Reportable Payments - Teachers Retirement With FICA

10. 01-300 and 400 Series Teachers' Retirement

11. 01-500, 600 and 700 Series Alternate Retirement Plan (ARP)

12. 01-800 thru 01-850 Lecturers (CSU)

13. 01-880 Summer Workers (CSU)

14. 01-890 Co-operative Ed Students (CSU)

15. 01-930 Durational Employees-No Benefits (UCONN)

16. 01-960 Foreign Nationals with F-1 or J-1 Visa

Refer to the annual Comptroller's memorandum or the statewide Cost Allocation Plan which defines each year's fringe benefit rate by expenditure object code.

5.5.4 Special Retirement Plan Rates

Two special fringe benefit rates have been established for employees covered by the Hazardous Duty Retirement Plan of the State Employees Retirement System and one for members of the Judges and Compensation Commissioners' Retirement System. The two Hazardous Duty rates distinguish between the classes of Hazardous Duty employees with FICA coverage and those with no FICA coverage. Application of these rates is based on the membership of the employee in either one of these retirement plans, not on the expenditure object to which their salary payments are charged. Because of limitations of the accounting system the assignment of expenditure object codes cannot be made for each type of personal service expenditure for members of these retirement plans. A fringe benefit variance will be required in order for the correct rate to be applied to personal service expenditures of members of the Hazardous Duty and the Judges and Compensation Commissioners' Retirement Plans charged directly on payroll to reimbursable accounts.

5.6 In-Kind Match

Under no circumstances are fringe benefit costs attributed to federal salaries to be used for in-kind matching. Fringe benefit costs attributed to General Fund positions may be utilized as an added cost for state matching.

5.7 Procedure For Reimbursement Of Fringe Benefit Cost

5.7.1 Recovery on Payroll

Every payroll that contains personal services expenditures for fringe benefit reimbursable accounts will be automatically charged for the cost of fringe benefits applicable to those personal services expenditures. The amount of fringe benefit costs to be reimbursed will be included on the Expenditure Certificate, CO-19, and the Detailed Analysis of Expenditures, CO-678.

Two copies of the Reimbursable Cost Recovery Form, CO-826, are automatically produced with the payroll. A copy of the CO-826 is forwarded to the agency with the payroll. A second copy is forwarded, with the amount of fringe benefits being reimbursed, to the Management Services Division, Office of the State Comptroller.

5.7.2 Recovery by Check

Agencies depositing checks, representing recovery of Fringe Benefit Costs directly to the 7032 Fund, are to follow the standard procedure for the deposit of checks.

Prepare one copy (photocopy) of the Form CO-39 with the percentage used to calculate the fringe benefit cost reimbursement clearly shown in the "Description" column on the line used to record the deposit to the 7032 Fund. Send this copy to the Office of the State Comptroller, Management Services Division.

5.7.3 Recovery of fringe benefit costs for personal services recorded by other than payroll procedure

Under certain conditions such as interim financing and correcting expenditure miscodings, personal services costs are recorded by other than payroll procedures.

1. Temporary financing of personal services within an agency

It may become necessary to temporarily finance personal services costs with General Fund resources to pay for positions that should be funded by federal, Private, or other than General Fund accounts. Fringe benefits are not to be recovered when the charge is made to the General Fund. The fringe benefit recovery is to be made at the time the General Fund is reimbursed and the expenditure is transferred to the proper federal, Private, or other than General Fund account.

When temporarily financing from the General Fund, a receivable account should be set up internally to account for the amount of the advance. Records should be maintained indicating the full coding of the original expenditure through major-minor coding to facilitate the reimbursement process.

Once monies are available in the federal, Private, or other than General Fund accounts, proceed with the reimbursement to the General Fund and the fringe benefit recovery by processing an Agency Correction/Adjustment Report, CO-604, and a Reimbursable Cost Recovery Form, CO-826.

a. Agency Correction/Adjustment Report, CO-604

  1. For current year expenditures use document type ET. See Attachment E, Exhibit 1 - Form CO-604
  2. For prior year expenditures used document type ST. See Attachment E, Exhibit 1A - Form CO-604

b. Report total personal services and the applicable fringe benefit rates on a separate Form CO-826. See Attachment E, Exhibit 1B - Form CO-826

Forward Forms CO-604 and CO-826 to the Management Services Division Office of the State Comptroller for reimbursement to the proper fringe benefit components.

2. Transfers of personal service expenditures between agencies

When billing another agency for personal services rendered, or when requesting the transfer of monies where personal services expenditures occur, the following procedures apply:

a. The creditor agency will charge for personal services on the Transfer Invoice, Form CO-608, and transmit to the debtor agency in accordance with the state Accounting Manual.

b. The debtor agency should then verify the charges and reimburse for fringe benefit costs if the source of funding is from Federal, Private, or other than General Fund accounts.

c. If the reimbursement is from budgeted General Fund accounts, no fringe benefits are due. If reimbursement is from Federal or Private Grants or other than General Fund accounts, fringe benefit reimbursement is necessary.

d. If a variance to the rate is in effect, indicate the approved variance rate and pay only that amount.

e. When billing another agency for personal services rendered, three (3) conditions may exist:

(1) The creditor agency bills the debtor agency for GENERAL FUND services. The debtor agency pays from Federal and Private Grants or other than General Fund accounts.

Two (2) separate transfer invoices are prepared.

(a) A transfer invoice for Personal Services is prepared by the creditor agency and is sent to the debtor agency. The debtor agency verifies the charges and returns the completed transfer invoice to the creditor agency for processing. See Attachment E, Exhibits 2 - Form CO-607 and 2A - Form CO-608.

(b) The debtor agency prepares the Reimbursable Cost Recovery Report, Form CO-826, reporting total personal services and the applicable fringe benefit rate and fringe benefit costs to be reimbursed. A copy is forwarded to the Management Services Division, Office of the State Comptroller.  See Attachment E, Exhibit 2B - Form CO-826.

(2) The creditor agency bills the debtor agency for services originally paid from Federal or Private Grants or other than General Fund accounts. The debtor agency pays from the GENERAL FUND.

Two separate invoices are prepared by the creditor agency.

(a) A transfer invoice for Personal Services is prepared by the creditor agency and is sent to the debtor agency. The debtor agency verifies the charges and returns the completed transfer invoice to the creditor agency for processing. See Attachment E, Exhibits 3 - Form CO-607 and 3A - Form CO-608.

(b) The creditor prepares a Form CO-826, reporting total wages, the applicable fringe benefit rate, and the total amount of fringe benefit cost to be recovered as a credit and forwards a copy to the Management Services Division, Office of the State Comptroller. See Attachment E, Exhibit 3B - Form CO-826.

(3) The creditor agency bills the debtor agency for federal or Private Grants or funds other than General Fund for services. The debtor agency pays from Federal or Private Grants or other than General Fund accounts.

(a) A transfer invoice for both personal services and fringe benefits is sent to the debtor agency. See Attachment E, Exhibits 4 - Form CO-607 and 4A - Form CO-608.

(b) No notification is sent to the Management Services Div.

3. Corrections

For corrections affecting fringe benefit recoveries only, prepare a separate Form CO-826 and send directly to the Management Services Division. Check the box marked "other" under "Method of Remittance" and explain the correction being made.

4. Credits

All credits adjusting previous fringe benefit charges should be detailed on a separate Form CO-826 and sent directly to the Comptroller's Management Services Division. Check the box marked "other" under "Method of Remittance" and provide complete documentation supporting the credit adjustment.

5.8 Variances To Fringe Benefit Cost Recovery At The Approved Rate

A variance to the approved fringe benefit rate may be necessary for personal services charged to the accounts normally subject to fringe benefit recoveries; i.e., federal grants, grants other than federal, and other than General Fund accounts (see page 16).

5.8.1 Acceptable Basis for Granting Variances

Only those programs that limit the amount of fringe benefit cost recovery by statute or regulation will be granted a variance. A variance would also be granted for inter-agency transfers involving programs that are originally funded from the sponsored agency's General Fund appropriation but later charged to a fringe benefit reimbursable account. Please provide documentation showing that this was a General Fund Budgeted Appropriation prior to agency transfer.

No variance can be granted for the sole reason that a state agency failed to provide for the inclusion of fringe benefits in their grant budget requests.

5.8.2 Request for Variance

All requests for variance must be made in writing, signed by the agency head or his authorized representative, and must include:

1. the amended rate requested and reason for variance. Provide documentation.

2. the funding source of the personal services and the full expenditure string to which the personal services will be charged.

Direct all correspondence to:

Office of the State Comptroller
Cost Unit - Budget and Financial Analysis Division
55 Elm Street
Hartford, Connecticut 06106

5.8.3 Notification of the Status

Notification of the status of the variance request will be provided by the Comptroller's Budget and Financial Analysis Division, Cost Unit on Form CO-863, Fringe Benefit Variance. See Attachment E, Exhibit 5 - Form CO-863.

5.8.4 Effective Dates

Any variance granted will be for a single fiscal year only. Requests received prior to the start of the fiscal year will be in effect from the first pay-date of the fiscal year to the last pay-date in that year. Requests received after the beginning of the fiscal year can be effective retroactively to the beginning of the fiscal year, but will not take effect on the payroll system until the next pay-date following the date of approval. Any retroactive adjustment for the return of fringe benefit reimbursement taken in error prior to the approval of the variance will have to be computed by the expending agency and recovered on a CO-826, Fringe Benefit Cost Recovery Form.

5.8.5 Expenditure Coding

The application of a variance on the payroll system relies on matching expenditure coding used on the employee's payroll master record with that on an external table created from the data provided with the variance request. Any differences between the two coding strings can result in the application of something other than the rate approved on the variance.

5.8.6 Questions

Direct all questions concerning fringe benefits to the Cost Unit - Budget and Financial Analysis Division at (860) 702-3364.



6.1 Worker's Compensation Cost Defined

The cost of providing Workman Compensation benefits to employee's with job-related injuries. Total Worker's Compensation costs includes payments for indemnity (compensation for lost wages or lump sum awards), medical benefits (physician services, medicine's or prosthetic devices) and expenses (investigators, medical second opinions, etc).

6.2 Reimbursement Processes

Two separate reimbursement processes have been established for Worker's Compensation costs, one for federal programs and one for private contributions and Funds other than the General Fund.

6.2.1 Federal Programs

The cost of Worker's Compensation for employees paid from federal programs is recovered as an indirect cost. See Section 2.3.3 for details.

6.2.2 Private Contributions and Funds Other Than The General Fund

The cost of Worker's Compensation for employees paid from Private Contributions or Funds other than the General Fund is recovered through the application of a special fringe benefit rate. A series of Worker's Compensation Cost Recovery Rates are established for each fiscal year. A separate rate is set for each of the six agency specific Worker's Compensation appropriations and one for the general government appropriation. The appropriate rate to apply is dependent on which appropriation would pay an employee's Worker's Compensation benefits.

The Worker's Compensation rate applies to all personal service expenditures except those coded to expenditure objects that are exempt from fringe benefit reimbursement. See Section 5.5.2 for a list of exempt expenditure objects.

Reimbursements are to be transferred to the General Fund using either a Transfer Invoice, CO-608, or a Reimbursable Cost Recovery Form, CO-826. Use Expenditure Object 05-320, Employee Fringe Benefit Costs. The amount of the personal service expenditure and the rate used in the calculation of the reimbursement amount must be shown on the transfer document. Completed forms are to be sent to the Office of the Comptroller, Management Services for processing. Please forward a copy of all Worker's Compensation cost recovery transfer documents to the Cost Unit, Budget and Financial Analysis Division,

Reimbursements must be processed at least quarterly.

Reimbursement for employees whose coverage would be paid out of the Transportation Fund's Workers' Compensation appropriation is to be deposited into that appropriation.

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