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As we approach the end of the June 30 Fiscal Year and the end of the first test period under DSP Wage Verification, we wanted to take the opportunity to remind everyone of the requirements associated with the 5% CIH and FSW Waiver Rate increases effective October 1, 2017. As described in the DDRS memo from August 22, 2017: Due to the joint effort of The Arc of Indiana and the Indiana Association of Rehabilitation Facilities (INARF), the Indiana General Assembly passed House Enrolled Act 1001 which mandated a 5 percent rate increase for specific services provided under the FSW and CIH waivers with the intent to use the rate increase to increase wages for direct care staff. The legislation requires an authorized provider to use at least 75 percent of the amount of the increase to the reimbursement rate to increase the wages paid to direct care staff. If a provider does not use at least 75 percent of the increase to the reimbursement rate to increase direct care staff wages, the Office of the Secretary of Indiana’s Family and Social Services Administration (FSSA) agency shall recoup the difference between the rate reimbursement and the amount that provider actually used to pay increased wages to direct care staff. A provider may retain the remaining 25 percent to be used for employer-related costs of providing direct care services. This legislation has been codified under Indiana Code 12-15-1.3-18. As you should be aware, INARF worked with DDRS and FSSA audit staff to develop the Direct Care Staff Wage Calculation spreadsheet and instructions to assist you in complying with the conditions of the legislation that were posted to the DDRS website on August 22, 2017. It is our understanding that many providers are using some combination of wage increases and bonus programs to increase compensation to direct care staff to meet the conditions of the legislation. While wage increases clearly meet the intent of the legislation and are easily confirmed, bonuses may be subject to interpretation and can potentially be disallowed from being considered as compensation for these purposes. We would like to provide additional clarification and items for your consideration relative to bonuses. The Department of Labor describes bonuses as either discretionary or non-discretionary for purposes of determining overtime wages. Non-discretionary bonuses must be included in determining overtime wages while discretionary bonuses may be excluded. The DOL Compliance Assistance Kit provides guidance and examples on determining overtime when there are bonuses paid (For more information see: https://www.dol.gov/whd/StateandLocalGovernment/media/OT%20Examples%20final.htm). The guidance from DOL is: Bonuses for purposes of calculating overtime pay, section 7(e) of the FLSA provides that non-discretionary bonuses must be included in the regular rate of pay. Non-discretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with a facility. Few bonuses are discretionary under the FLSA, allowing exclusion from the regular rate (see 29 CFR 778.200 and 778.208). Referral bonuses paid for recruitment of new employees are not included in the regular rate of pay if all of the following conditions are met: (1) participation is strictly voluntary; (2) recruitment efforts do not involve significant time; and (3) the activity is limited to after-hours solicitation done only among friends, relatives, neighbors and acquaintances as part of the employees’ social affairs. 29 CFR 778.211 discusses discretionary bonuses specifically: b) Discretionary character of excluded bonus. In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a). Similarly, an employer who promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, is his discretion, the financial condition of the firm warrants such payments, has abandoned discretion with regard to the amount of the bonus though not with regard to the fact of payment. Such a bonus would not be excluded from the regular rate. On the other hand, if a bonus such as the one just described were paid without prior contract, promise or announcement and the decision as to the fact and amount of payment lay in the employer's sole discretion, the bonus would be properly excluded from the regular rate. If you have announced a non-discretionary bonus program to your employees as described above and you are including these bonuses in the overtime calculation, we believe that there should be no concerns on including this compensation in your calculations for DSP Wage Verification. However, if you have been using discretionary bonuses to increase compensation to direct care staff, your organization needs to ensure compliance with certain federal rules on such compensation and bonuses. It is more a question of meeting Federal audit guidance than DOL rules for discretionary bonuses. Attached is guidance which was provided by FSSA audit relative to the treatment of compensation and bonuses. This guidance is from the Federal Office of Management and Budget Guidance – Part 200 Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards. Specific guidance referred to by FSSA includes: 200.430 (e) Special considerations. Special considerations in determining allowability of compensation will be given to any change in a non-Federal entity’s compensation policy resulting in a substantial increase in its employees’ level of compensation (particularly when the change was concurrent with an increase in the ratio of Federal awards to other activities) or any change in the treatment of allowability of specific types of compensation due to changes in Federal policy. Under this section FSSA could conclude that a bonus determined based upon unspent DSP wage rate increase funds being distributed at the end of a period is a substantial increase in compensation due to an increase in Federal funds and would not be allowable in determining DSP wage compensation for DSP Wage Verification. (f) Incentive compensation. Incentive compensation to employees based on cost reduction, or efficient performance, suggestion awards, safety awards, etc., is allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the non-Federal entity and the employees before the services were rendered, or pursuant to an established plan followed by the non-Federal entity so consistently as to imply, in effect, an agreement to make such payment. We believe this section is directly in line with non-discretionary bonus programs and provides support for the inclusion of such programs in determining DSP wage compensation for DSP Wage Verification. (g) Nonprofit organizations. For compensation to members of nonprofit organizations, trustees, directors, associates, officers, or the immediate families thereof, determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of earnings in excess of costs. This may include director’s and executive committee member’s fees, incentive awards, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost-of-living differentials. Under this section FSSA could conclude that a bonus determined based upon the overall profitability of the organization being distributed at the end of period is a distribution of earnings in excess of costs that might not be allowable in determining DSP wage compensation for DSP Wage Verification. For additional information, refer to the guidance from the Office of Management and Budget (OMB). As a reminder, INARF has previously shared the following information and reminders regarding the DSP Wage Compensation Increase and educational audits: 7/31/2017 Universal Guidance on Bonus Pay 10/4/2017 INARF Wage Verification Webinar 2/28/2018 HIGH IMPORTANCE: DSP Wage Compensation Educational Audits 3/7/2018 Update on Educational Audit Activity by FSSA Regarding Waiver Rate Increases and DSP Wages We hope this information is helpful. If you have questions, please contact Sarah Chestnut at sarah@inarf.org.