Lake County Economic Opportunity Council, Inc., DAB No. 502 (1984)

GAB Decision 502
Docket No. 83-132

January 31, 1984

Lake County Economic Opportunity Council, Inc.;
Balland, Judith A.; Teitz; Alexander G. Garrett, Donald F.


Lake County Economic Opportunity Council, Inc. (Grantee) appealed a
decision by the Office of Human Development Services (Agency)
disallowing $4,711 charged as pension plan costs to its Headstart grant
for the year ended January 31, 1982.The costs were disallowed on the
ground that Grantee did not make its contribution to the pension plan
within six months after the end of the year, as required by OMB Circular
A-122, Attachment B., 6(g)(1). As discussed below, we reverse the
disallowance on the grounds that OMB Circular A-122 was not applicable
during the period in question, and that the Agency has not shown that
Grantee failed to comply with the regulations then in effect.

Background

On March 27, 1978, Grantee's board of directors approved a pension
plan covering substantially all its full-time employees. Under the
plan, sponsored by an insurance company, the employer's contributions
were to be deposited with the trustees named in the pension plan
document and used to purchase annuity contracts for the employees.
Grantee charged pension costs for the year ended December 31, 1981 to
its Headstart grant for the year ended January 31, 1982 (also Grantee's
fiscal year). /1/ However, a report on the audit of the grant, dated
October 6, 1982, stated that no contribution for the year in question
had been made to the pension plan. (Audit Control No. 01-35103, pp.
10-11) Subsequent to the date of the audit report (but within nine
months of the end of the grant year), Grantee deposited its contribution
with the trustees. According to Grantee, no contribution was made
earlier because the trustees were dissatisfied with the insurance
company and were in the process of transferring the plan to another
insurance company. Grantee contended, however, that it at all times
kept the pension funds segregated on its books and records and that,
although it was not required to pay any benefits pursuant to the plan
during the year ended January 31, 1982, it did pay a terminated employee
for his vested interest in the plan. (Grantee's letter dated November
23, 1983, p. 2) /2/

(2) OMB Circular A-122

As indicated above, the disallowance rested on a requirement in OMB
Circular A-122 that pension plan costs be funded within six months after
the end of a grantee's fiscal year. /3/ Grantee's pension plan
contribution was deposited with the trustees over eight months after the
end of the year. We find, however, that this is not an appropriate
basis for disallowing the costs since the Circular was not applicable to
Grantee during the grant year ended January 31, 1982.


The Department of Health and Human Services (HHS) implemented the
Circular in a regulation the effective date of which was July 9, 1981.
(46 Fed. Reg. 30500, June 9, 1981) The regulation stated that "(the)
changes affecting cost principles for nonprofit organizations apply as
of the start of an organization's first fiscal year beginning after July
9, 1981." The regulation also stated that "early or delayed
implementation is permitted by mutual agreement between a nonprofit
organization and the cognizant federal agency designated under OMB
Circular A-122." The Agency stated that there was no agreement to apply
the Circular at an earlier date than the time specified in the
regulation. (Confirmation of Telephone Conference Call dated December
22, 1983, p. 2) Since Grantee's first fiscal year beginning after July
9, 1981 was the year beginning February 1, 1982 and ending January 31,
1983, the six-month requirement in OMB Circular A-122 did not apply to
Grantee during the prior year at issue here.

The Agency argued that the Circular was applicable during the year in
question since it was published as a final policy by the Office of
Management and Budget on July 8, 1980. (Confirmation of Telephone
Conference Call, dated December 22, 1983, p. 2) However, the Circular as
published by OMB was not directly applicable to Grantee since it was
published as a notice addressed to "Heads of Executive Departments and
Establishments." Furthermore, while the Circular stated that its (3)
provisions were "effective immediately," it also stated that
"implementation shall be phased in by incorporating the provisions into
new awards made after the start of the organization's next fiscal year"
(with the same provision for early application found in HHS's
implementing regulation). (45 Fed. Reg. 46024) Grantee's notice of
grant award for the year ended January 31, 1982 did not refer to the
Circular. (Confirmation of Telephone Conference Call, dated December
22, 1983, p. 2) As discussed above, when HHS eventually implemented the
Circular, it was by regulation which did not make the Circular
applicable until after the period in question. /4/


The Agency further stated that the rule in OMB Circular A-122
requiring that pension costs be funded within six months was contained
in the HEW Grants Administration Manual (GAM) as well. The Agency
asserted that the HEW GAM was made applicable to Grantee by the OHD
(Office of Human Development Services) Grants Administration Manual
(GAM), of which Grantee conceded it had notice. (Confirmation of
Telephone Conference Call, dated December 22, 1983, pp. 2-3) However,
the OHD GAM merely lists an order of precedence in the event that there
is a conflict among applicable requirements, and includes the HEW GAM on
the list. (OHD GAM, 42 Fed. Reg. 21047, April 22, 1977) There is no
indication in the OHD GAM that the items listed are necessarily
requirements applicable to all OHDS grants.The HEW GAM itself states in
the Introduction that it is an instruction to agency officials and does
not purport to be directly applicable to grantees.

The Agency also noted that there had been no dispute between the
parties that the Circular applied. (Confirmation of Telephone
Conference Call, dated December 22, 1983, p. 2) However, Grantee may not
be held to a requirement which was not legally binding on it merely
because there was a mistaken assumption that it applied.

Accordingly, we conclude that the Agency improperly disallowed the
costs based on OMB Circular A-122 since it was not applicable during the
grant year in question.

Other Application Requirements

Grantee's notice of grant award for the year ended January 31, 1982
incorporated by reference 45 CFR Part 74 (1978), the Department-wide
regulation for the administration of grants, which included at (4)
Appendix F cost principles for non-profit organizations such as Grantee.
(Confirmation of Telephone Conference Call, dated December 22, 1983, p.
2) In response to the Board's inquiry, the Agency contended that there
were several bases in Appendix F for disallowing the costs in question.
Below we discuss each of the grounds indicated by the Agency, and
conclude that none is adequate to sustain the disallowance. /5/


1. Paid Pursuant to Established Plan

Appendix F provided at G.6(e)(4)(b)(iii) that deferred compensation
(including contributions to pension plans) is allowable to the extent
that --

it is paid pursuant to an agreement entered into in good faith
between the institution and its employees before the services are
rendered, or pursuant to an established plan followed by the institution
so consistently as to imply, in effect, an agreement to make such
payments.

The Agency asserted that there was no evidence that Grantee entered
into an agreement with its employees regarding pension plans, and argued
that in any event there was no established plan followed by Grantee
during the period in question. (Agency's brief dated December 27, 1983,
p. 5) Grantee asserted, however, that it followed the plan originally
set up with the insurer. (Grantee's letter dated January 5, 1984,
enclosure) Although we agree with the Agency that there is no evidence
of any employer-employee agreement regarding pension plans, we find that
the pension plan adopted by Grantee in 1978 was an established plan
consistently followed by Grantee within the meaning of the regulation.

The plan adopted by Grantee in 1978 was developed by The Equitable
Life Assurance Society. The same "prototype" plan, which included
several elective provisions, was apparently used by a number of
employers who chose Equitable as their sponsor. (Grantee's letter dated
November 23, 1983, (5) enclosed letter dated January 26, 1978, from
Chief, Employee Plans, Technical Branch, IRS, to The Equitable Life
Assurance Society) The plan provided that the employer's contributions
would be deposited with the trustees of the plan (Article VI, 6.1) and
that a portion of the contributions would be used to purchase annuity
contracts issued by Equitable (Article II, 2.11; Article V, 5.1).
However, the plan does not appear to require that the employer deal with
Equitable. The plan was signed by Grantee's Executive Director and
three trustees of the plan, not identified as Equitable employees.
Thus, the plan did not take the form of an agreement with Equitable.
Moreover, plan provisions indicate that it was contemplated that the
plan could continue in effect as an "individually designed plan" absent
Equitable's sponsorship. (Article X, 10.2) The Agency did not allege
that the trustees failed to purchase annuity contracts from some source
other than Equitable or that any assets held by Equitable were not
returned to the trustees if appropriate when the association with
Equitable ended. Thus, we see no basis for not accepting Grantee's
assertion that the plan originally set up with Equitable was the plan in
effect both during the year to which the costs were charged and the
following year, when the contribution was made to the trustees.

Moreover, even if the pension plan set up with the original insurer
was not followed to the letter, this does not prove that the plan was
not "followed . . . so consistently as to imply . . . an agreement to
make . . . payments." The Agency alleged that Grantee violated the plan
by failing to make contributions within the time specified in the plan,
to obtain IRS approval of amendments, and to hold annual meetings of
trustees. /6/ (Agency's brief dated December 27, 1983, p. 3) However,
these violations all related to technical details of plan administration
and not to substantive plan provisions such as those concerning who was
covered by the plan or what benefits were to be paid. There is no
evidence that any of the violations impaired the right of any employee
to receive a pension in accordance with the terms of the plan. Thus, we
find that the pension costs were paid pursuant to an established plan
within the meaning of Appendix F.


(6) 2. Internal Revenue Service Criteria and Standards

Appendix F provided at G.6(e)(4)(b)(vi) that deferred compensation is
allowable to the extent that --

for a plan which is subject to approval by the Internal Revenue
Service, if falls within the criteria and standards of the Internal
Revenue Code and the regulations of the Internal Revenue Service.

The Agency contended that Grantee violated "a number of the statutory
and regulatory requirements imposed by the IRS." (Agency's brief dated
December 27, 1983, p. 5) However, the regulation by its terms applies
only to those plans which are subject to approval by the IRS. Grantee
stated that IRS approval of its plan had not been obtained. (Grantee's
letter dated January 5, 1984, enclosure) Since there is no support for
the Agency's assumption that the plan was subject to IRS approval in the
first instance, we cannot conclude that the pension costs were
unallowable because the plan failed to fall within IRS standards and
criteria.

3. Allocability

Appendix F at B.2. provided that one of the factors affecting the
allowability of costs is allocability. Appendix F, B.4, provided that
--

(a) cost is assignable or chargeable to a particular cost objective,
such as a grant/contract . . . in accordance with the relative benefits
received or other equitable relationship. Subject to the foregoing, a
cost is allocable to a Government grant/contract if it:

(a) Is incurred specifically for the grant/contract. . . .

The Agency argued that for the pension costs to be allocable, "the
grantee should have made the pension fund contributions under the
grant/contract for the program year ending in January 1982." The Agency
further stated that "(the) grantee's contribution payments . . . after
the expiration of the grant/contract fails to connect the payment with
the grant/contract and thus fails to meet the standard that it is
incurred for the grant/contract." (Agency's brief dated December 27,
1983, pp. 3-4)

(7) We find no merit in the Agency's argument. The pension costs
were based on employees' service during a period roughly corresponding
to the grant year to which the costs were charged. The costs thus
clearly were related to that grant year. Since the costs accrued during
that year, they may be charged to that year although the contribution
was made after the end of the year. See, New Bedford Area Center for
Human Services, Inc., Decision No. 479, November 28, 1983, p. 2, where
the Board rejected the Agency's argument that audit-related costs
incurred after the end of the grant audited were not allocable to the
grant. Indeed, the six-month funding rule originally relied on by the
Agency clearly contemplates that pension costs will be incurred up to
six months after the close of the year to which they are assigned.
Accordingly, we find that the disallowance cannot be sustained on the
ground that the costs were not allocable to the grant.

4. Reasonableness

Appendix F provided at B.2. that one factor to be considered in
determining the allowability of individual items of cost is
reasonableness. It further provided at B.4. that "(a) cost is
reasonable if, in its nature or amount, it does not exceed that which
would be incurred by an ordinarily prudent person in the conduct of
competitive business." The Agency argued that this standard was not met
viewing the case in either of two ways.The Agency first took the
position that no pension plan was in effect during the year in question
since Grantee failed to make any contribution to the insurance company
which administered the plan. It then argued that the costs were
unreasonable since Grantee "had no guidelines to follow, no trustees who
were responsible for the plan and no means of demonstrating that a valid
plan was in effect for its employees." In the alternative, the Agency
argued that, even if the plan was in effect, the costs were unreasonable
because Grantee violated several plan provisions. (Agency's brief dated
December 27, 1983, p. 3)

We are not persuaded that any of the foregoing demonstrates that the
costs were unreasonable.As discussed in 1. above, we disagree that there
was no pension plan in effect. The Agency did not state specifically
why, if there was a plan, the alleged plan violations would render the
pension costs unreasonable. As noted in 1. above, the plan violations
related only to technical details of plan administration and do not on
their face demonstrate that the pension costs charged to the grant were
unreasonable in nature or amount.

(8) Conclusion

For the foregoing reasons, we reverse the disallowance in the amount
of $4,711. /1/ Grantee stated that there was a one-month lag between
the year the pension costs were accrued (ended December 31,
1981) and the grant year to which the costs were charged (ended January
31, 1982) since pension contributions were made on a calendar year
basis. (Confirmation of Telephone Conference Call, dated December 22,
1983, p.

entitled to 40% of employer contributions at the end of two years of
service and 20% per year thereafter. /3/ Attachment B, 6(g)(1)
of the Circular provides that -- "(costs) of the organization's pension
plan which are incurred in accordance with the established policies of
the organization are allowable, provided: * * * (d) The costs assigned
to a given fiscal year are funded for all plan participats within six
months after the end of that year. /4/ The Agency asserted that
the Board in a prior decision had accepted the OMB effective date of a
circular (not A-122) as the date that applied. (Confirmation of
Telephone Conference Call, dated December 22, 1983, p. 2) However, the
decision referred to (State of Idaho -- Division of Financial
Management, Decision No. 266, March 24, 1982), does not present the
question whether the OMB effective date governs where HHS adopts the OMB
circular after that date. /5/ One argument not advanced by the
Agency is that the six-month rule was required by generally accepted
accounting principles or practices. Appendix F stated, at B. 2., that
one factor affecting the allowability of a cost is "application of those
generally accepted accounting principles and practices appropriate to
the particular circumstances. . . ." Although it is conceivable that the
six-month rule may have been generally adhered to at the time in
question, we cannot conclude that it was required by generally accepted
accounting principles or practices absent supporting evidence in the
record. /6/ The plan stated that "the Employer shall, with
respect to each Plan Year, not later than the time prescribed by law for
the filing of the Employer's Federal income tax return for the Fiscal
Year corresponding to such Plan Year (including extensions thereof), pay
over to the Trustees as its contribution. . . ." (Article VI, 6.1)

JANUARY 08, 1985