Some federal contracts require a set health and welfare benefit, and whether an ICHRA allowance satisfies it is a question for counsel.

Who and what the act covers

The Service Contract Act applies to federal contracts above $2,500 whose principal purpose is nonconstruction services in the United States and that use service employees. Bona fide executive, administrative and professional employees under the Fair Labor Standards Act are excluded. When a contractor falls short, the Wage and Hour Division can withhold contract payments, and violators can be barred from new federal contracts for three years.

Sources: Congressional Research Service, The McNamara-O’Hara Service Contract Act and 41 U.S.C. 6701 to 6707.

The required hourly amount

The Wage and Hour Division begins posting the new rates on wage determinations on August 10, 2026. A contractor applies the rate on the wage determination in effect at the anniversary date of a multi-year contract or at the start of an option period, and should wait for notice from the contracting officer. The rate on your contract’s wage determination controls, not the national figure. Source: Boon Group summary of the Department of Labor announcement.

How hours are counted

Unless the wage determination says otherwise, the amount is owed for every paid hour, including paid vacation, sick leave and holidays, up to 40 hours a week and 2,080 hours a year per contract. An employee who works three 12-hour days has 36 hours that week, which at $5.92 is $213.12. An employee on 80 hours of paid vacation still earns the amount for those 80 hours. Because the amount follows hours, a flat monthly ICHRA allowance rarely matches it exactly.

Source: 29 CFR 4.175(a).

Per employee or averaged

Where the wage determination states a fixed hourly payment, the employer’s contribution for each employee governs, even if the average across employees would be higher. Only an average-cost determination lets contributions vary by employee as long as the total averages out, and any shortfall must then be made up in cash or equivalent benefits to all service employees in the plan on the next regular payday. Contributions for non-service employees generally cannot be credited toward the requirement.

Source: 29 CFR 4.175(a)(2) and (b).

A flat allowance against the hourly amount

The table compares an illustrative flat $700 monthly allowance with the $5.92 rate for three employees. The figures are illustrations and not a recommendation.

Monthly hours are 40 hours times 52 weeks divided by 12, and 20 hours times 52 divided by 12. Whether an allowance that exceeds the requirement for one employee can offset another depends on whether the wage determination is a fixed-payment or average-cost determination. Source: 29 CFR 4.175. How the Department of Labor treats an ICHRA allowance is not addressed in the guidance we reviewed, so counsel on the contract comes first.

When the value has to be paid

Periodic payments to a bona fide plan may be made no less often than quarterly. Cash equivalents and differentials are due on the regular payday for wages. Payments for employees in a waiting period count toward the obligation only if a contribution is actually made for them, and cash equivalent payments are the way to cover employees excluded from a plan during an ineligibility period. Source: 29 CFR 4.175(c) and (d).