Are Holiday Bonuses or last minute “Incentive Compensation” Allowable?

The short answer is no, not usually. The longer answer is that “Incentive Compensation” is sometimes allowed.

The first rule under the Uniform Grant Guidance is that any expenditure of federal funds must be “reasonable, necessary, allowable and properly allocated“. Typically the decision about whether an expense is reasonable and necessary is made at the time the budget is prepared and approved in advance by the organization’s board and the funder, prior to the beginning of the fiscal year in which the expense occurred. That, then, is the first question — was this in the budget? If there was enough money in the salary budget that was unspent, that does not in and of itself make this allowable.

Most of us have looked at the money that remained in our Part C grant on September 30 and wondered, is there any way I can spend that? The staff aren’t paid as much as I wish. Maybe there is a way to give it to them?

Probably not unless it was planned. The question of whether it is allowable is answered at least partially in the citation below.

Code of Federal Regulations – – Title 2 – Grants and Agreements

200.430Compensation—personal services.

(a) General. Compensation for personal services includes all remuneration, paid currently or accrued, for services of employees rendered during the period of performance under the Federal award, including but not necessarily limited to wages and salaries. Compensation for personal services may also include fringe benefits which are addressed in § 200.431 Compensation—fringe benefits. Costs of compensation are allowable to the extent that they satisfy the specific requirements of this part, and that the total compensation for individual employees:

(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.

As you can see in (f) Incentive compensation may be allowable if it meets the test of reasonable and if there was an “agreement entered into in good faith” with the employees in advance, before the service was rendered. This agreement would not necessarily be in writing, although an approved policy and procedure would be the typical way to agree in advance to such an item. An “established plan” would also typically be in either the budget or in policy or in some other way documented IN ADVANCE of the expenditure being made.

The final test of whether this cost would be considered a proper use of federal funds is that it must be properly allocated. Each center is required to allocate its costs across its various funding sources based on a Cost Allocation Plan or an Indirect Cost Rate. Whichever one is being used by the center, it is in writing and approved by the funder, and staff must record their time in a way that properly splits it between funding sources as well. The form used to create this time and effort record is called a Personnel Activity Report or PAR. The understanding of how this applies to centers if fairly recent — in the past two or three years — but we have a lot of training provided at ilru.org to assist centers in this documentation. You would need to check your Indirect Cost Rate proposal to be certain, but it is typically that all benefits are allocated in the same way as the salary is allocated. If a staff member is 100% Part C, for example, then their benefits including this Incentive Compensation, would also be allocated 100% to Part C. If their salary as documented in the PAR is 50% Part C and 50% Part B, then the benefits including this Incentive Compensation, would also be allocated 50% and 50%.

If the decision to give an Incentive was made when the center realized that it had not spent all of its federal funds, and was impulsive rather than planned, it is my opinion that it would not be allowable.

I should also note that under the Rehabilitation Act, the Department of Rehabilitation as the Designated State Unit (DSU), has been allowed impose additional requirements on the Part C grants. For example, in California the allowable mileage reimbursement is set by the State. The State also determined that the number of paid holidays granted by a center cannot exceed the holidays granted to state employees, and has stated that bonuses are not allowable. It is not yet clear if this has changed with the latest reauthorization, but the Designated State Entity (DSE) may be allowed to add its own requirements onto the federal grantees as part of their oversight function.

It is possible, then, that the state judgment that this could not be allowed would actually impact whether the federal grant would allow the expense.

I know this is very complicated. Each Center is expected to sort through these requirements and respond with sound business practices based on the requirements. A well-thought-out justification should be included in your financial records if that analysis determines the expense is proper, though, because this is certainly an area of vulnerability. Remember that I am not your compliance person. I provide technical assistance and training for CILs, but the information I am providing is my opinion, and could be overruled by your funder. Also, I am neither an attorney nor a personnel specialist, and personnel law varies greatly state to state.

You should contact your Program Officer at the Administration on Community Living, Office of Independent Living Programs if you have any questions about this and the specifics of how this might apply in your center. You can find a document of ILA staff assignments by state on this page.