GAB Decision 656
June 7, 1985
San Joaquin Area PSRO;
Ford, Cecilia Sparks; Settle, Norval D. (John) Teitz, Alexander G.
Docket No. 84-168
San Joaquin Area PSRO (PSRO, SJAPSRO) appealed a determination by the
Health Care Financing Administration (HCFA, Agency) that interest earned
of $6,647.67 on the employer's share of the Federal Insurance
Contributions Act (FICA) refund must be returned to HCFA. The FICA
refund resulted from a retroactive change in the tax exempt status of
the PSRO. The PSRO requested and received approval to use the
employer's refund for an employee benefit plan. The main question in
this appeal is the disposition of the interest on the employer's share.
We uphold the determination, finding that HCFA is entitled to the
interest under the cost principles. The PSRO should be given an
opportunity to document to HCFA that a portion of the refund is
nonfederal funds and hence is not returnable to HCFA. Background
Professional Standards Review Organizations (PSROs) were established
under amendments to the Social Security Act in 1972. (Pub. L. 92-603)
The purpose of the PSRO program was to see that health care services
funded under the Medicare, Medicaid, and Maternal and Child Health
Programs were medically necessary, conformed to appropriate professional
standards, and were delivered in the most effective, efficient, and
economical manner consistent with quality care. (42 U. S.C. Sec.
1320c.) PSROs were ordinarily entirely federal funded. PSROs as
employers originally paid FICA taxes for Social Security for both the
employer's share and the share collected from the employees. Certain
PSROs litigated payment of FICA taxes with the Internal Revenue Service
(IRS) and were eventually successful in obtaining a determination that
PSROs were entitled to be exempt from FICA taxes under section 501(c)
(3) of the Internal Revenue Code as nonprofit charitable corporations.
This exemption was retroactive, and permitted PSROs to recover FICA
taxes paid by them from their incorporation, subject to the limitation
period on tax refunds. /1/
(2) The exemption was not automatic, however, and had to be claimed by a
PSRO on behalf of those employees who elected to opt out of Social
Security coverage. There were 27 PSROs which elected to ask for FICA
refunds. All returned the employees' share to the particular employees
who had paid the FICA taxes. There was no issue before us about these
refunds to the employees. Disputes did arise over the disposition of the
employers' shares of the refunds. In Area IX Oakland-Macomb PSRO,
Decision No. 528, April 9, 1984, where the PSRO disbursed the employer's
share plus accrued interest directly to the employees, we held that the
employer's share of the refund should have been returned to HCFA. The
interest which had accrued on the employer's share was not treated
separately but was required to be returned to HCFA with the principal of
the refund. Analysis I. THE INTEREST ON THE FICA REFUND BELONGS TO THE
FEDERAL GOVERNMENT UNDER THE COST PRINCIPLES. We held in Oakland-Macomb
that under the cost principles the refund of the employer's share of the
FICA refund should be returned to HCFA as either a refund of taxes or an
applicable credit under the cost principles. We had no reason to
distinguish between the principal of the employer's FICA refund and
interest on it; here that distinction is the main issue. /2/
The cost principles, at 45 CFR 74.47 (1981), state: Interest earned on
advances of grant funds. (a) Except when exempted by Federal statute .
. . grantees shall remit to the Federal Government any interest . . .
earned on advances of HHS grant funds. . . .(3) Part 74 of 45 CFR
applies to all HHS grants, except where inconsistent with federal
statutes, regulations, or other terms of a grant. 45 CFR 74.4. Earning
interest on the return of the FICA refund is like earning interest on an
advance of grant funds, since both are interest on federal funds. But
even if section 74.47(a) does not apply, another provision does. A
provision in Office of Management and Budget (OMB) Circular A-122, "Cost
Principles for Nonprofit Organizations" (June 27, 1980), made applicable
here by 45 CFR 74.174(a) and cited in Oakland-Macomb for return of the
refund to HCFA, is very specific on interest earned on a tax refund:
Any refund of taxes, and any payment to the organization of interest
thereon, which were allowed as award costs, will be credited either as a
cost reduction or cash refund, as appropriate, to the Government. A-122,
Attachment B, section 46.b. (emphasis added) The cost principles
therefore require that any interest earned on the employer's share of
the FICA refund must be returned to HCFA; the PSRO did not attempt to
use the interest as a "cost reduction," hence the interest must be
a
cash refund to the government. /3/
II. THERE IS NO BASIS FOR ESTOPPEL HERE. The contention of the PSRO is
that the cost principles do not matter here, since the PSRO had specific
permission from HCFA to keep the interest on the FICA refund for its
employee benefit plan. The position of the PSRO, although not
articulated in technical legal language, amounts to an argument that
HCFA cannot now change its mind and must be estopped.(4)
A. The PSRO was never specifically given permission to keep the
interest on the refund. The issue here arose because neither the request
of the PSRO nor HCFA's reply differentiated between the principal and
interest components of the refund. The inquiry to HCFA was made for the
PSRO by Price Waterhouse & Co. It asked, before the refund was
received: As independent auditors for SJAPSRO . . . please confirm
directly to us your agreement with the SJAPSRO that to the extent the
refund is reinvested in an employee benefit plan, or redistributed in
the case of employee contributions, the FICA taxes previously determined
to be allowable costs will continue to be so treated. . . . Appellant's
Appeal File, Tab A. The reply (from a Grants Management Specialist in
HCFA's Central Office in Baltimore) was in part as follows: It is
understood that the San Joaquin Area PSRO will recover FICA taxes paid .
. . This office is in agreement with the outlined plan to return
employee contributions to the respective employees and to reinvest the
employer's contribution in an appropriate employee benefit plan. Such
costs will continue to be considered allowable. . . . Appellant's Appeal
File, Tab B. The PSRO contends that this approval for the use of the
employer's share of the refund referred to the entire share including
interest. It would be unfair to permit HCFA to change its mind, says the
PSRO; the argument is substantially that HCFA should be estopped.
B. There was no detrimental reliance by the PSRO. We need not
address the difficult question of whether the federal government can be
estopped by the misrepresentations of one of its employees or officials.
We need not consider whether "affirmative misconduct," /4/ rather
than
mere negligence, would be sufficient(5) to estop the government. There
is no basis for applying estoppel here against even a private party
because one of the requisite factors for any estoppel is missing,
namely, detrimental reliance. /5/
Even if the permission to use the refund for an employee benefit plan
did carry with it permission to use the interest as well as principal,
the PSRO has not used the interest for that purpose. The record here
shows that the PSRO has retained the interest separately. See Notice of
Appeal. Clearly if the PSRO has the interest in a separate fund there
can be no detriment to it if it has to return the money. If the PSRO
had in fact paid the interest, as well as principal, into the employee
benefit plan, possibly it could not get it back without the employees'
consent if the employees had vested interests in the plan. There would
then be at least an arguable position that there was detrimental
reliance by the PSRO on HCFA advice. Here the money is still available,
so the position of the PSRO has not changed for the worse. III.
NON-FEDERAL FUNDS DO NOT HAVE TO BE RETURNED TO HCFA. In the
disallowance letter (Nathanson to Dr. Lee, August 7, 1984, Tab D) HCFA
refers for the first time to the possibility of non-federal funds being
included in the FICA refund.
The Executive Director of the PSRO indicated that all of the interest
($6,647.67) may not be attributable to a Federal source, since the PSRO
was involved in both Federal and non-federal review in the years covered
by the refund. We have reviewed prior audits, but we have not found
sufficient information to make a determination as to the validity of
this assertion. . . . The letter goes on to say that unless the PSRO can
provide documentation indicating what amount of interest is attributable
to a non-Federal source, the PSRO should return the entire amount.(6) In
its notice of appeal to the Board the PSRO did not furnish any
documentation, but stated that "(B)ased on labor distributions of
involved employees at the time, the federal portion (of the interest on
the refund) is $5,863.24 and the non-federal portion is $784.43." In its
reply to HCFA's brief the PSRO again pointed out that a portion of the
funds was "nonfederal." (PSRO Letter to Board, January 25, 1985, p.
2)
HCFA never responded. Accordingly, we find that the PSRO should be
given a reasonable opportunity to submit evidence which will justify
reducing the disallowance by $784.43 for nonfederal funds. IV. CONTRACT
AND GRANT FUNDING. In its reply to the HCFA brief the PSRO, in arguing
that the funds in question do not represent interest on advances of
Federal PSRO Program Income, submitted the following: (It also should
be pointed out that some of these funds were for calendar year 1978,
while SJSPRO was under contract rather than grant funding.) Reply to
HCFA brief, January 25, 1985. This Board does not have jurisdiction over
disputes pertaining to procurement contracts. The issue is not which
cost principles apply to the refund, but whether we have any
jurisdiction over a dispute concerning an expenditure made under a
procurement contract. There is nothing to prevent the parties from
agreeing to apply the Board's decision affecting grant funds to the
contract funds. We note, further, that the PSRO raised no
jurisdictional issue. It offered no documentation to show that a
procurement contract was in fact involved. Its parenthetical reference
to contract funding was made only in reference to a question of program
income. Under these circumstances, we do not consider the question of
our jurisdiction to be an issue in this case.
CONCLUSION The interest on the employer's share of the FICA refund
must, under the cost principles, be returned to HCFA. The Agency is not
estopped because of its permission to use the "refund" for funding
an
employee benefit plan. The PSRO should submit documentation as to the
amount of nonfederal funds in the FICA refund. If the parties cannot
agree on the amount, the PSRO may(7) appeal to us on this one issue
within 30 days of an adverse determination by HCFA. /1/ The issue was
limited to a brief time period, since by amendment to the Social
Security Act all PSROs became subject to paying FICA taxes effective
January 1, 1984. /2/ The PSRO did rely also on the provision in
section 6406 of the Internal Revenue Code that the allowance or
nonallowance by the Secretary of the Treasury of interest on any credit
or refund under the tax laws shall not be subject to review "by any
other administrative or accounting officer, employee, or agent of the
United States." This applies obviously to the determination of interest
on a refund by the Treasury; it has nothing to do with the distribution
of the interest by the recipient. /3/ The Agency relies also on a
reference in OMB Circular A-122 that disposition of program income is
governed by a provision in Attachment D of OMB Circular A-110. We agree
with the PSRO that interest earned on the FICA refunds is not program
income. The provision in Attachment D of A-110 cited by HCFA defines
program income as "gross income earned by the recipient from the
federally supported activities." Program income for a PSRO would be
income earned by it in its monitoring of health care services. In any
event, Attachment D states that income earned on advances is excluded
from the definition of program income. (See HCFA Brief, p. 3; see also
45 CFR 74.41) /4/ See, e.g., Schweiker v. Hansen, 450 U.S. 785,
788 (1981); INS v. Hibi, 414 U.S. 5, 8 (1973); Montana v. Kennedy,
366 U.S. 308, 314-15 (1961); see, also, INS v. Miranda, 459 U.S. 14, 17
(1982). /5/ The most recent Supreme Court case on estoppel
against the government states the requirements for estoppel against a
private party. These requirements include that the party claiming the
estoppel must have relied on its adversary's conduct in such a manner as
to change its position for the worse. Heckler v. Community Health
Services of Crawford County, 104 S. Ct. 2218, 2223 (1984).
AUGUST 08, 1985