Some federal contracts require a set health and welfare benefit, and whether an ICHRA allowance satisfies it is a question for counsel.
Under the Service Contract Act, covered contractors must provide a required health and welfare benefit for covered employees, in benefits or cash. Department of Labor guidance we reviewed does not address ICHRAs, so contract-specific advice comes first.
What to check in each contract.
Find the Clause
List every contract and look for a health and welfare clause or a wage determination.
Benefits or Cash
The requirement can be met with equivalent bona fide benefits or with cash payments recorded separately from wages.
Per Employee
The required amount is measured for each employee rather than averaged, and administrative costs cannot be subtracted.
Bona Fide Plan
Benefits must come under a bona fide plan that is written, enforceable and mainly for workers.
ICHRA Is Unaddressed
The guidance we reviewed does not say whether an ICHRA allowance counts. Get counsel view before relying on it.
Document the Basis
Keep a record of how each contract requirement is met.
The Service Contract Act Health and Welfare Requirement in Numbers
The requirement is an hourly dollar amount set in the wage determination, so the test for an ICHRA is arithmetic: does the allowance, plus any cash you add, reach the required amount for every covered employee?
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
| Contract type | Rate through 2025 | Rate posted from August 10, 2026 | Annual at 2,080 hours | Monthly at 2,080 hours |
|---|---|---|---|---|
| Standard SCA contract | $5.55 | $5.92 | $12,313.60 | $1,026.13 |
| Contract also subject to Executive Order 13706 | $5.09 | $5.42 | $11,273.60 | $939.47 |
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.
| Employee | Paid hours | Required at $5.92 | Illustrative ICHRA allowance | Gap to make up |
|---|---|---|---|---|
| Full-time, 40 hours a week | 173.33 a month | $1,026.13 | $700.00 | $326.13 |
| Part-time, 20 hours a week | 86.67 a month | $513.07 | $700.00 | None; the allowance exceeds the requirement |
| Full-time employee who declines the ICHRA | 173.33 a month | $1,026.13 | $0 | $1,026.13 as cash or other equivalent benefits |
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).
The questions contractors ask about federal contract benefit rules.
What is the Service Contract Act requirement?
Covered contractors must provide a required health and welfare benefit to covered employees, set by the contract wage determination.
Can cash satisfy it?
Yes. The requirement can be met by equivalent benefits or by cash payments recorded separately from regular wages.
Is it averaged across employees?
No. It is measured for each employee.
Does an ICHRA count?
The Department of Labor guidance we reviewed does not address ICHRAs. Counsel should confirm before relying on an allowance.
Does this apply to every defense contract?
No. It applies to covered service contracts, and other contract types follow other rules.
Who checks the contract?
Your contracts staff and counsel do, and we coordinate with them.
Is there a defense contractor page?
Yes. Our ICHRA for defense contractors page covers the whole picture.
General information about individual coverage HRAs, not legal or tax advice. Plan-specific questions belong with ERISA counsel and your tax advisor, and we will bring them in.
Where these details come from.
This page summarizes public guidance reviewed in October 2026. Rules change, so confirm current requirements with counsel.
CMS: Individual Coverage HRAs →
U.S. Department of Labor: Employee Benefits Security Administration →
More ICHRA questions and the industries they affect.
Government Billing Rates
How the allowance reaches billing rates.
Hours and Mid-Year Changes
Measuring hours and status changes.
Class Assignment
Sort each employee group into a permitted class.
ICHRA for Defense Contractors
Federal contract requirements and billing rates.
ICHRA for Staffing Agencies
Internal staff and placed employees.
ICHRA for Technology Companies
Salaried teams, remote hires and contractors.
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