Strategic Shift in Fringe Benefit Rate Management Beyond HHS‑CAS Negotiation

Fringe Benefit Rate Management Landscape

Under federal awards, institutions recover fringe benefit costs either through the Department of Health and Human Services – Cost Allocation Services (HHS‑CAS) or other cognizant agency review and negotiation of a fringe benefit rate(s) or through specific identification of fringe benefit costs by employee. With either option, the negotiated rate or detailed language documenting the specific identification process is included in the Rate Agreement and used by agencies to confirm the correct process included in grant submissions. The option of internally developed fringe benefit rates was used historically by many institutions before, and for a long time after, HHS-CAS first began negotiating the rates as a courtesy to federal grantees and federal awarding agencies. Shifting back to internal rates introduces greater institutional control and flexibility but also creates consideration of compliance, audit, and financial risks. Below are the advantages and risks of making this transition to internally developed fringe benefit rates.

Fringe Benefit Rate History and Current Context

HHS-CAS first began reviewing and negotiating fringe benefit rates as a courtesy to the grantees and for assistance to federal awarding agencies 35 years ago. Over time, an increasing number of research institutions with large volumes of federal awards started negotiating fringe benefit rates with HHS-CAS as sponsors and pass-through entities often preferred the dependability and confidence of federally negotiated rates. This process is done annually and can be combined with the indirect cost proposal process.  As the number of institutions receiving negotiated fringe benefit rates grew, the speed of HHS-CAS completing their reviews and negotiating timely rates became less reliable. In April 2025, HHS-CAS staffing substantially decreased by approximately 75%. Currently, there are often nearly two-year wait times for rates to be negotiated from the time the rate proposal is submitted to HHS-CAS for their review. This can lead to significant under-recovery of fringe benefit costs as healthcare and other benefit pools increase in cost.

Federal regulations (2 CFR 200) do not require institutions to maintain a negotiated fringe benefit rate, unlike the requirements for indirect cost rates. Recently, HHS-CAS has indicated that it may allow institutions with negotiated fringe benefit rates to transition to a system of annual internally developed fringe benefit rates, theoretically treating fringe benefit rates like an institutional service center’s billing rates charged to federal awards.

Best Practices for Requesting a Transition from Negotiated Rates to Internally Developed Rates

If your institution currently has a proposal under review with HHS-CAS, you may request, after the proposal has been reviewed by the assigned negotiator, that, beginning with the fiscal year following the negotiated rate period, the rate agreement reflect that fringe benefit rates are no longer published and will instead be internally developed and maintained.

For example, if your institution’s most recent proposal establishes fixed fringe benefit rates through June 30, 2027, you may request that internally developed rates take effect beginning July 1, 2027. Under this process, the institution would no longer be required to submit the fringe benefit rate proposal to HHS-CAS for review and approval.

If your institution has an upcoming proposal due, you may incorporate a request for this transition within the proposal, specifying that the change would take effect at the conclusion of the next negotiated rate period.

Before pursuing this transition, institutions should ensure they have sufficiently robust internal controls in place to support the calculation, documentation, monitoring, and application of fringe benefit rates.

The following outlines key advantages, risks, and challenges to evaluate prior to requesting this transition.

Key Advantages of Internally Developed Fringe Rates

1. Increased Flexibility and Responsiveness

Faster implementation

Internal rates can be updated in preparation for the start of a new fiscal year rather than waiting for delayed federal negotiation cycles.

Tailored methodologies

Institutions can continue designing rates aligned to specific employee groups or operational changes.

Adaptability to cost changes

Allows quicker incorporation of current costs for rising healthcare, retirement, or statutory costs.

2. Administrative Efficiency (Potentially)

Reduced negotiation burden

Eliminates time-consuming HHS‑CAS submissions, documentation exchanges, and formal negotiations.

Simplified internal processes

Finance teams can adjust future rates based on current costs without waiting for federal approval cycles.

3. Improved Cost Alignment (Short-Term)

Quicker true-ups

Over/under recoveries can be corrected more quickly through current or future rate adjustments.

Targeted equity

Distinct groups (e.g., faculty, staff, clinical personnel) can be evaluated separately to better align rates with their actual benefit utilization patterns.

4. Strategic Financial Management

Internal control on over and under recoveries

Institutions can actively manage annual rate fluctuations by smoothing rate changes or timing.

Enhanced forecasting

Organizations may align fringe benefit rate development with internal budgeting cycles rather than federal timelines.

Key Risks and Challenges

1. Increased Compliance and Audit Risk

Lack of federal approval

Rates not included in a Rate Agreement lack formal validation by a cognizant agency.

Higher scrutiny

Auditors may explore fringe benefit rate development requiring support for methodologies, assumptions, and allocation bases. Additionally, fringe benefit rates may be subject to review as part of the Single Audit.

Uniform Guidance risk

Institutions must independently demonstrate compliance with 2 CFR 200 cost principles (allowability, allocability, consistency).

2. Risk of Cost Disallowance

Questioned costs

Federal sponsors may challenge fringe charges if rates appear unreasonable, unclear or inconsistent.

Inconsistent application risk

Variability of application across academic departments or awards increases vulnerability.

3. Transparency and Credibility Concerns

Reduced external confidence

Sponsors and pass-through entities often prefer federally negotiated rates as a method of verification.

Perception challenges

Internally set rates may be viewed as less objective.

Cumulative variances

Without a formal federally approved carry-forward mechanism, tracking variances may become complex.

Institutional Planning and Compliance Considerations

Switching to internally developed fringe benefit rates provides greater flexibility, speed, and control, enabling institutions to align rates more closely with current costs and budgeting cycles. It complies with the current principles of the Uniform Guidance. However, these benefits come with trade-offs, including higher compliance risk, increased audit scrutiny, and potential financial exposure from questioned or disallowed costs.

For many institutions, success with this model depends on strong internal controls, sufficient documentation, consistent application, and disciplined reconciliation of variances. Without these elements, the risks may outweigh the operational advantages compared to maintaining HHS‑CAS–negotiated rates. Attain Partners can help ensure internal rates are in compliance with the cost principles, reasonable, consistent, and properly developed. In addition, our team can ensure proper application of over/under recoveries in current or future periods.

For More Information

If you are interested in discussing any parts of this document, you may contact Wally Davis, Partner, or Mike Leonard, Senior Grants Management Consultant. We can assist you in the process, timeline, and with your cognizant agency. 

About the Author

Michael Leonard is a Senior Grants Management Consultant at Attain Partners. Michael brings deep expertise in federal financial management and cost allocation. Before joining the firm in July 2025, Michael spent over 33 years at the U.S. Department of Health & Human Services, where he served as both a College & University National Specialist and Supervisory Accountant.

Nationally recognized for his leadership in college and university cost allocation, Michael has led high-stakes negotiations, driven regulatory compliance, and facilitated inter-agency coordination across complex federal landscapes. His work under 2 CFR Part 200 has shaped national guidance and training efforts, helping institutions navigate cost principles with confidence and precision.

Michael’s proven ability to lead cross-functional teams, mentor staff, and manage field office operations has consistently delivered measurable cost savings and strategic outcomes. He is a sought-after speaker and federal representative, known for his engaging presentations and insightful Q&A sessions at both national and virtual conferences.