GAB Decision 657
June 7, 1985
East Central Illinois Foundation for Health Care;
Ford, Cecilia Sparks Settle, Norval D. (John) Teitz Alexander G.
Docket No. 84-120
East Central Illinois Foundation for Health Care (appellant, ECIFHC)
appealed a final determination by the Health Care Financing
Administration (HCFA, Agency) to disallow the distribution of the
employer's share of the Federal Insurance Contributions Act (FICA) tax
refund of $29,226.75 including interest to PSRO employees. The basis
for the disallowance was that the employer's share of the refund must be
returned to the Agency either as a refund of taxes or as an applicable
credit under the cost principles. We sustain the disallowance except for
the portion of the refund which pertained to FICA payments made while
the PSRO was funded under a contract rather than a grant. We have no
jurisdiction over the refund which pertains to the use of the contract
funds. Background Professional Standards Review Organizations (PSROs)
were established under amendments to the Social Security Act in 1972.
(Pub. L. 92-603) The purpose of the PSRO program was to see that health
care services funded under the Medicare, Medicaid, and Maternal and
Child Health Programs were medically necessary, conformed to appropriate
professional standards, and were delivered in the most effective,
efficient, and economical manner consistent with quality care. (42
U.S.C. Sec. 1320c.) PSROs were ordinarily entirely federal funded.
PSROs as employers originally paid FICA taxes for Social Security for
both the employer's share and the share collected from the employees.
Certain PSROs litigated payment of FICA taxes with the Internal Revenue
Service (IRS) and were eventually successful in obtaining a
determination that PSROs were entitled to be exempt from FICA taxes
under section 501(c) (3) of the Internal Revenue Code as non-profit
charitable corporations. This exemption was retroactive, and permitted
PSROs to recover FICA taxes paid by them from their incorporation,
subject to the limitation period on tax refunds. /1/
(2) The exemption was not automatic, however, and had to be claimed by a
PSRO on behalf of those employees who elected to opt out of Social
Security coverage. There were 27 PSROs which elected to ask for FICA
refunds. All returned the employees' share to the particular employees
who had paid the FICA taxes. There is no question before the Board about
these refunds to the employees. Disputes did arise over the disposition
of the employers' shares of the refunds. In Area IX Oakland-Macomb
PSRO, Decision No. 528, April 9, 1984, where the PSRO disbursed the
employer's share plus accrued interest directly to the employees, we
held that the employer's share of the refund should have been returned
to HCFA as a refund of taxes or as an applicable credit under the cost
principles. In this case the PSRO also distributed the employer's share
of the refund, including interest, to the employees on whose behalf the
FICA payments had been made. Before distributing the funds to the
employees the PSRO contacted HCFA orally and in writing for
authorization to make payment to the employees. Receiving no response,
the PSRO went ahead with paying the employer's share of the refund to
the employees. Analysis I. THE PERMISSION GIVEN BY HCFA TO OTHER PSROS
TO USE THE REFUND FOR EMPLOYEE BENEFIT PLANS HAS NO BEARING HERE. The
Board learned, while this case was pending, that in another case before
us HCFA had approved reinvesting the employer's share of the refund in
an employee benefit plan. San Joaquin Area PSRO, Decision No. 656, June
7, 1985. In the San Joaquin case, the brief submitted by HCFA indicated
that approximately 15 PSROs were permitted to retain the employer's
share of the FICA refund for investment in a pension plan. The Board
thereupon invited the parties in this case (and in two other PSRO
appeals then pending) to supplement their briefing "to address the
application and relevance of HCFA's approval of San Joaquin Area PSRO's
plan to reinvest the employer's contribution in an employee benefit
plan." Board letter, January 2, 1985. /2/
(3) The PSRO has contended that the interest of HCFA in the refund
"simply cannot be greater in one situation where the funds are returned
to the employees to provide for their retirement as they see fit, and in
another situation where the funds are deposited in a Deferred Pension
Account for the direct benefit of the employees." (Appellant's brief,
pp. 12-13) We disagree. We believe that there is a significant
difference between an employer using its refund to fund a pension plan
of a type approved by HCFA, and an employer turning over the refund to
the employees to use, possibly for their own retirement planning, or for
any worthwhile or foolish use they chose. The fact that other PSROs were
permitted to use the employer's share of the FICA refund to fund
employee benefit plans has no relation to the employer simply paying
over the refund to the employees to use as they saw fit. II. THE
EMPLOYER'S SHARE OF THE FICA REFUND MUST BE RETURNED TO HCFA. In
Oakland-Macomb we held that the employer's share of the refund had to be
returned to HCFA under the cost principles, either as a refund of taxes
or as an applicable credit. Appellant argues that we should not follow
Decision No. 528, both on legal principles, and because the facts here
are different. In its opening brief the PSRO makes several legal
arguments, which are summarized by appellant as follows: An employee
obtains an interest in the employer's portion of FICA contributions made
on his behalf. This interest is of sufficient substance to be afforded
protection from arbitrary governmental action. Congress gave
organizations such as ECIFHC exemptions from FICA contributions. If the
interpretation of DHHS is upheld, employees will be forced to forfeit
approximately one-half of their interest in the system. Congress could
not have intended such a penalty to result from the grant of exempt
status. FICA contributions are deposited in the Federal Old Age and
Survivors Insurance Trust Fund. Once placed in this trust, these funds
are administered for the benefit of the covered employees. Any refund
from this trust rightfully belongs to the beneficiary-employees.
Consequently, the refund was made to ECIFHC as a matter of
administrative convenience, to be distributed to the applicable
employees. . . . Appellant's brief, pp. 4-5.(4) (We consider separately
below the arguments as to the failure of HCFA to respond to the PSRO's
statements of its intentions.) We have considered all these arguments,
as well as the cases cited by appellant. /3/ The arguments are generally
conclusions; while some are correct, the others do not necessarily
follow from them. These arguments lose sight of several factors:
(1) The employer's share of the refund came from HCFA funds.
(2) Each employee's share of the refund, the amount he paid in out of
his own funds, has already been returned to him.
(3) Each employee did not have to join in the PSRO's request for a
refund. If he did not, he would have continued to be covered by Social
Security for the period covered by the refund.
It is true that an employee obtains an interest in the employer's
portion of FICA contributions made on his behalf. Obviously this
interest is to be afforded protection from "arbitrary governmental
action." However, we held in Oakland-MaComb that once refunds of FICA
were requested, the employer's share of the refund had to be returned to
HCFA under the cost principles; this is not arbitrary action.(5) The
fact that the employees will not receive a benefit from the employer's
share of the FICA payment is again not something the "employees will be
forced to forfeit." They chose to ask for the refund; if they had not,
they would have remained under Social Security. The refund was not made
to the employer as a matter of administrative convenience to be
distributed to the applicable employees; under the cost principles it
belonged to HCFA and was to be returned to it. We have considered all
these arguments carefully and see no reason why we should not follow our
holding in Decision No. 528. The funds used to pay the FICA which was
refunded came from HCFA. The employees voluntarily elected to opt out of
Social Security and received a refund of what each had paid into FICA
from his funds. Under the cost principles HCFA is entitled to the refund
of the FICA payments which came from grant funds it had given the
employer. We consider below whether the particular facts here preclude
HCFA from recovering the refund. III. HCFA CANNOT BE ESTOPPED FROM
RECOVERING THE FICA REFUND. In addition to questioning the legal basis
for the holding in Decision No. 528, the PSRO claimed that even if HCFA
had a right to reacquire the FICA refund, it may not assert such a right
at this time. HCFA did not respond to the PSRO's notification of its
intention to distribute the funds in the absence of any contrary
instructions from HCFA; therefore, says the PSRO, HCFA is now estopped
from making any claim to the funds. (Appellant's brief, p. 16) The
PSRO's contention differs slightly from the classic estoppel argument,
that the party claiming the estoppel must have relied on its adversary's
representation (or conduct) to its detriment, and that reliance must
have been reasonable. In this case HCFA did not tell the PSRO that it
was all right to distribute the FICA refund to the employees; it simply
failed to respond to notification of the PSRO's intention.
A. The facts on the estoppel claim. There is no dispute about the
correspondence between the PSRO and HCFA pertaining to the inquiries
about distributing the refund. The first letter is dated July 6, 1981,
but refers to a prior phone conversation. (Appellant's appeal file,
Exhibit 2) This letter from the Executive Director of the PSRO to a
Grants Management Specialist in HCFA's Central Office in Baltimore is
very specific:(6) It is our intention to distribute this money plus
related interest to employees, either in cash where the employee would
be taxed in the current period, or pay the money into a tax deferred
pension or annuity for the employees' benefit. This distribution will
occur on or about October 1, 1981 unless we hear to the contrary from an
appropriate government official with specific information such that an
appeal can be made. The PSRO waited long after the deadline it had
imposed of October 1st. On January 20, 1982 the Executive Director wrote
once more to the Grants Management Specialist. Again the PSRO gave HCFA
a choice, repeating its position that the refund "should be reinvested
on behalf of the employees into another retirement program or refunded
to the employees." (Appellant's appeal file, Exhibit 5) The PSRO also
gave HCFA a further notice: It has now been over six months since our
notice of intent to distribute these retirement funds was provided and
no dissenting opinion or recommendation has been received from the
Department of Health and Human Services . . . Therefore the final
distribution of the FICA refund will be made to the appropriate
employees . . . February 8, 1982. /4/
Again, HCFA did not respond.
B. The law on the estoppel claim and its application here. The
Supreme Court in its most recent case on estoppel of the federal
government first discussed the requirements for estopping a private
party. Heckler v. Community Health Services of Crawford County, 104 S.
Ct. 2218 (1984). The party claiming the estoppel must have relied on
its adversary's conduct in such a manner as to change its position for
the worse, and that reliance must have been reasonable, "in that the
party claiming the estoppel did not (7) know nor should have known that
its adversary's conduct was misleading." Id., at 2223. In Shenandoah
Professional Standards Review Foundation, Decision No. 652, dated June
5, 1985, we stated that where the cost principles pertaining to
applicable credits and refund of taxes were not ambiguous, it was not
reasonable for the PSRO to assume that any government employee could
vary the provisions of a published federal regulation. In Shenandoah the
PSRO relied on oral approval of a federal employee. In this case we do
not have either oral or written approval, but only failure to reply.
Even if there were grounds to estop a private party under these
circumstances, there would not be an estoppel against the federal
government. The Supreme Court has refused to decide whether even
"affirmative misconduct" would suffice. See Schweiker v. Hansen, 450
U.S. 785 (1981); INS v. Hibi, 414 U.S. 5, 8 (1973). What is clear is
that the federal government cannot be estopped in the absence of
"affirmative misconduct." There is no definition of what affirmative
misconduct is in the cases, but presumably it requires something more
than mere failure to act. /5/
While the failure of HCFA to respond to a request for advice on the
disposition of the refund was hardly commendable (particularly where it
was replying to at least one other PSRO at about the same time), we
cannot as a matter of law state that its conduct rose to the level of
"affirmative misconduct." Therefore we must find that HCFA cannot
be
estopped. /6/
IV. THE GRANT APPEALS BOARD DOES NOT HAVE JURISDICTION OVER DISPUTES
UNDER FEDERAL PROCUREMENT CONTRACTS. Appellant's first funding was under
a negotiated cost reimbursement contract effective June 3, 1977. The
contract was extended and remained in effect until December 1979 when
the contract was converted into a grant award. (See HCFA response, p.
3, and Exhibit A attached) The parties do not dispute that a portion of
the amount of FICA tax which was refunded and distributed to the (8)
employees was paid under the procurement contracts. The issue in this
case is not which cost principles apply to the refund, /7/ but whether
we have any jurisdiction over this part of the appeal. See Shenandoah
Professional Standards Review Foundation, Decision No. 652, June 5,
1985.
The dispute pertains in part to refunds of taxes which were paid during
a period when the PSRO was funded by the federal government under a
federal procurement contract. Disputes under federal contracts are now
governed by an extensive procedural scheme established pursuant to the
Contracts Disputes Act. 41 U.S.C. Secs. 601-613. The Board has no
jurisdiction over disputes arising under such contracts, as appellant
points out. 45 CFR Part 16, Appendix A. We could not have considered
any dispute between the parties under the contract when the FICA taxes
were paid. Neither can we adjudicate any dispute between the parties as
to the disposition of any refunds of taxes paid from funds provided
under those contracts. It is therefore clear that the contracts under
which the PSRO was funded until it came under a grant were procurement
contracts, and the Board has no jurisdiction to resolve disputes under
such contracts. There has been no final decision over which we have any
jurisdiction on appeal. /8/
The Agency dismisses the jurisdictional problem with a brief mention in
a footnote:(9) With regard to the tax refunds which were deemed
allowable costs during the contract period, HCFA assumes that the
Foundation has no objections to the Board's exercise of jurisdiction and
that the Board has accepted jurisdiction pursuant to 45 CFR Sec.
16.3(a). HCFA response, p. 3, n. 2. We need not reach the question
whether the Board could accept jurisdiction if the parties consented,
since the PSRO did not at any time agree to the Board's jurisdiction.
There is of course nothing to prevent the parties from agreeing to apply
the Board's decision affecting grant funds to the contract funds. /9/
CONCLUSION We therefore sustain the disallowance except for that
portion of the FICA refund which pertained to the period when the PSRO
was funded under a contract rather than a grant. We leave to the
parties the proper determination of the excluded share of the refund.
/1/ The issue was limited to a brief time period, since by
amendment to the Social Security Act all PSROs became subject to paying
FICA taxes effective January 1, 1984. /2/ This PSRO had in fact
included with its appeal file a letter from HCFA to still another PSRO
(Western Michigan PSRO, Inc.) asking for a refund of interest only on
the employer's share of the FICA refund. (Exhibit 13) Appellant's brief
stated that this other PSRO had instituted a Deferred Pension Account
with the employer's share of the refund, but nothing in the HCFA letter
made any reference to the use of the principal of the employer's share.
/3/ Appellant cites Methodist Home and Hotel Corp. v. United
States, 291 F. Supp. 595 (S.D. Texas 1968), for the proposition that
"FICA contributions made by an employer are not made for the benefit of
the employer but on behalf of the employee and credited to his or her
account within the social security system." (Appellant's brief, pp.
5-6) This is undisputed, but does not deal with what happens to the
employer's share of a refund. In Methodist Home the plaintiff was
always exempt from paying FICA, and the employees had to waive the
exemption to be covered by social security. Here they had to elect to
opt out for the refund period. Flemming v. Nestor, 363 U.S. 603, 611
(1959) is cited by appellant for the proposition that "(T)he interest of
a covered employee . . . is of sufficient substance to fall within the
protection from arbitrary governmental action afforded by the Due
Process Clause." (Appellant's brief, p. 6) No one denies this, but it
has no direct bearing on the issue before us. The other cases cited by
appellant are all similar statements of general import. /4/ The
failure of HCFA to respond to this PSRO is surprising. On June 15,
1981, another Grants Management Specialist in the HCFA office in
Baltimore approved a request of another PSRO to reinvest the employer's
refund in an appropriate employee benefit plan. The PSRO was San Joaquin
Area PSRO; copies of the request and the approval were sent to the
parties here in the Board's January 2, 1985 request for comment. /5/
Mere inaction over a long period of time is not affirmative
misconduct. See INS v. Miranda, 459 U.S. 14, 17-18 (1982). /6/
In Oakland-Macomb we stated that "there would be an estoppel issue only
if HCFA advised the PSRO to disburse the funds, and they did so in
reliance on this advice, even though the cost principles were contrary
to this advice." Decision No. 528, p. 11. Here there is no contention
that HCFA ever told the PSRO to give the funds to the employees. /7/
Since we find that we have no jurisdiction over the refund of
FICA taxes where the taxes were paid during the time period when the
PSRO was funded by contract, we do not reach the issue of which cost
principles do govern. Presumably the same principles would apply in any
event. The original negotiated contract (Ex. A, p. 2) refers to
"General Provisions, HEW Form 315A (rev. 7/76) negotiated
cost-reimbursement type contract with nonprofit institutions other than
educational institutions." HEW Form 315A (rev. 7/76) provides that
allowable costs shall be determined by the contracting officer to be
allowable in accordance with 45 CFR Part 74 Appendix F for non-profit
institutions. See 41 CFR Sec. 3-16.950-315A, 4.(a) (1) (i) (1979). /8/
Presumably the final decision on the disputed refunds under the
procurement contract would be by the contracting officer, and appealable
to the Armed Services Board of Contract Appeals or the U.S. Claims
Court in accordance with the Disputes Clause of the contract and the
Contracts Disputes Act. /9/ The PSRO claims that HCFA cannot
recover the tax refund pertaining to the contract period because the
PSRO executed an assignment to "close out" this contract, in which
it
excluded any FICA refunds. (Reply brief, p. 5, and Exhibit B) Since we
have no jurisdiction over any refund of FICA paid under the contract, we
do not reach the issue raised by the PSRO. Similarly, the question of
whether the PSRO received federal funds during the first six months of
1978 is not before us (see HCFA response, p. 4, and reply brief, p. 1),
because during the period in question the PSRO was not under grant
funding.
AUGUST 08, 1985