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A-21 changes Herbert B. Chermside 09 Jan 2001 15:48 EST

Another hot one.  OMB is clarifying some of the complex issues brought up
as a result of overlaying cost accounting standards on A-21.  What follows
is from AAMC.  Thanks again, Lisa!

OMB today released the following memorandum that makes two important
clarifications to OMB Circular A-21, the circular that regulates
Facilities and Administrative Costs (F&A or indirect costs) concerning
the treatment of voluntary faculty effort and tuition remission.  As a
result of this clarification, voluntary uncommitted faculty effort will
no longer be included in the organized research base for computing the
F&A rate or reflected in the allocation of F&A costs.  In addition, such
faculty effort will now be excluded from effort reporting.   OMB also is
clarify that tuition remission costs of graduate students charged to
Federal programs under the provisions of A-21 is not contingent on there
being an employer-employee relationship, for tax purposes, between the
institution and the graduate student.  Both of these clarifications are
a direct result of the OSTP-led review of the federal-academic research
partnership and the President Clinton's related executive order issued
last week.  The text of the OMB memo follows.

Tony Mazzaschi
AAMC

January 5, 2001
M-01-06

MEMORANDUM FOR THE HEADS OF EXECUTIVE DEPARTMENTS AND
ESTABLISHMENTS

FROM: Joshua Gotbaum
Executive Associate Director and Controller

SUBJECT: Clarification of OMB A-21 Treatment of Voluntary Uncommitted
Cost Sharing and Tuition Remission Costs

This memorandum clarifies the treatment of voluntary uncommitted cost
sharing effort and tuition remission costs in accordance with OMB
Circular A-21, "Cost Principles for Educational Institutions." This
clarification is consistent with the recommendation by the National
Science and Technology Council (NSTC) to improve the
Government-university research partnership.

In two separate sections below, this memorandum discusses the purpose
of the clarification, the background, the related issue, and the
clarification for the treatment of voluntary uncommitted cost sharing
and tuition remission costs in accordance with OMB Circular A-21.

Voluntary Uncommitted Cost Sharing

Purpose. This memorandum clarifies the treatment of voluntary
uncommitted cost sharing effort in the computation of facilities and
administrative (F&A) rates in accordance with OMB Circular A-21.
Voluntary uncommitted cost sharing effort is defined, for the purpose of
this memorandum, as university faculty (including senior researchers)
effort that is over and above that which is committed and budgeted for
in a sponsored agreement.

Background. Circular A-21, section C.4, "Allocable Costs," states that
"a cost is allocable to a particular objective (i.e., a specific
function, project, sponsored agreement, department, or the like) if the
goods or services are chargeable or assignable to such cost objective in
accordance with relative benefits received or other equitable
relationship." Most faculty organized research effort is either charged
directly to the sponsor, or is considered mandatory or voluntary
committed cost sharing (i.e., cost sharing specifically pledged in the
proposal's budget or award) on the part of the recipient. Both mandatory
and voluntary committed cost sharings are consistent with the terms and
conditions of a sponsored agreement and captured in the accounting
system. Voluntary uncommitted cost sharing effort, on the other hand, is
faculty-donated additional time above that agreed to as part of the
award..

Mandatory and voluntary committed cost sharing must be properly
documented for cost accounting purposes. In addition, current Circular
A-21 provisions require that, for research projects that are funded by
both the Federal Government and a private third party (e.g., a
corporation), the faculty should properly document through reporting its
compensated effort, including mandatory and voluntary committed effort
in order to allocate salaries and associated F&A costs.

Issue. Recently adopted Cost Accounting Standards in Circular A-21 have
been interpreted by some Federal Government officials to require the
assignment of a proportionate share of F&A costs to the voluntary
uncommitted cost sharing effort by either including an estimated amount
in the organized research base or by adjusting the allocation of
facility costs related to this effort.

The reporting burdens on universities and their faculty associated with
detailed recording of voluntary uncommitted cost sharing may be
providing a disincentive for the universities to contribute additional
time to the research effort. In addition, the imprecise nature of the
data concerning the amount of voluntary uncommitted cost sharing has
made it difficult to compute and use as part of rate negotiations
between the Federal Government and the universities.

Clarification. Voluntary uncommitted cost sharing should be treated
differently from committed effort and should not be included in the
organized research base for computing the F&A rate or reflected in any
allocation of F&A costs. Furthermore, such faculty effort is excluded
from the effort reporting requirement in section J.8. This treatment is
consistent with the guidance in section J.8.b (1).c, "Payroll
Distribution," that a precise documentation of faculty effort is not
always feasible, nor is it expected, because of the inextricably
intermingled functions performed by the faculty in an academic setting
(i.e., teaching, research, service and administration).

Although voluntary uncommitted cost sharing will no longer be included
in the organized research base, it should be noted that current A-21
provisions for payroll distribution (section J.8.b) require that the
apportionment of salaries and wages must be supported by a payroll
distribution system that "will encompass both the sponsored and all
other activities on an integrated basis." The process must also identify
significant changes in the corresponding work activity. As such, when an
institution reduces a faculty member's level of activities dedicated to
other institutional responsibilities in order to shift his/her
activities to organized research activities, the institution must
reflect this reduction in the payroll distribution system (as an
increase to the research effort component) and in the F&A proposals.

In addition, most Federally-funded research programs should have some
level of committed faculty (or senior researchers) effort, paid or
unpaid by the Federal Government. This effort can be provided at any
time within the fiscal year (summer months, academic year, or both).
Such committed faculty effort shall not be excluded from the organized
research base by declaring it to be voluntary uncommitted cost sharing.
If a research sponsored agreement shows no faculty (or senior
researchers) effort, paid or unpaid by the Federal Government, an
estimated amount must be computed by the university and included in the
organized research base. However, some types of research programs, such
as programs for equipment and instrumentation, doctoral dissertations,
and student augmentation, do not require committed faculty effort, paid
or unpaid by the Federal Government, and consequently would not be
subject to such an adjustment.

In the future, OMB and the research agencies will evaluate the impact
on committed cost sharing of this clarification memorandum.

This interpretation of the treatment of voluntary uncommitted cost
sharing is applicable prospectively to future sponsored agreements and
future F&A proposal submissions. It does not require adjustments for
current sponsored agreements or affect the negotiated rates that were
agreed upon by the Federal Government and the universities based on
previous F&A submissions. F&A rates negotiated prior to this
clarification will not be renegotiated, nor will this clarification
affect the calculation of prior years' carry-forward amounts.

Tuition Remission Costs

Purpose: This memorandum provides a clarification for the tuition
remission costs of graduate students charged to Federal programs in
accordance with OMB Circular A-21, Section J.41, "Scholarships and
Student Aid Costs," and Section A.2.c. "Purpose and Scope."
Specifically, it clarifies that the Circular's requirement for a "bona
fide employer-employee" relationship does not mean that the tuition
remission costs are allowable only if the graduate student is treated as
an employee for the purposes of the Internal Revenue Code and the
Internal Revenue Service (IRS) regulations.

Background: OMB Circular A-21, Section A.2.c, "Purpose and Scope,"
states: "the dual role of students engaged in research and the resulting
benefits to sponsored agreements are fundamental to the research effort
and shall be recognized in the application of these principles." Section
J.41, "Scholarships and Student Aid Costs," states that tuition
remission costs for students are allowable on sponsored awards provided
that "there is a bona fide employer-employee relationship between the
student and the institution*" This statement has been interpreted
incorrectly by some Federal Government officials to mean that, for
tuition remission costs to be allowable, students must be treated as
employees of the university, for tax purposes, which would mean that
students' tuition remission benefits must be treated as taxable wages.
This misunderstanding has recently generated a considerable amount of
concern from universities and Federal research agencies. A clarification
of the "employer-employee relationship" condition is necessary to
correct this misunderstanding about the relationship between Circular
A-21 guidelines and the IRS regulations.

Issue: The Federal policy on support of graduate students participating
in research projects is to provide a reasonable amount of support
(tuition remission and other support) on the basis of the individual's
participation in the project. Sponsoring agencies are supporting
graduate students who fulfill a vital role both as students and as
researchers. This policy is not contingent on there being an
employer-employee relationship, for tax purposes, between the
institution and the graduate student. Rather, it recognizes the reality
that research activities are an essential component of the individual's
educational activities.

Clarification: OMB in the Circular did not intend to tie the
allowability of tuition remission costs to how they are treated for tax
purposes. However, given the misunderstanding that has arisen, a
clarification is needed. In recognition of the dual role of students (as
both students and researchers) engaged in research and the resulting
benefits to sponsored agreements (as recognized in Section A.2.c of OMB
Circular A-21) and research overall, tuition remission and other forms
of reasonable support that are associated with student status and
provided to individuals participating in the necessary work of a
sponsored agreement are allowable provided that:

(1) The individual is conducting activities necessary to the sponsored
agreement;

(2) Tuition remission and other support are provided in accordance with
established educational institutional policy and consistently provided
in a like manner to students in return for similar activities conducted
in nonsponsored as well as sponsored activities; and

(3) During the academic period, the student is enrolled in an advanced
degree program at a grantee or affiliated institution and the activities
of the student in relation to the Federally-sponsored research project
are related to the degree program.

Accordingly, tuition remission and other forms of support that satisfy
these criteria are allowable, regardless of whether the tuition
remission or other form of support qualifies as wages for tax purposes.

Tuition remission and other student support shall be subject to the
reporting requirements stipulated in Section J.8, "Compensation for
Personal Services," of OMB Circular A-21, or an equivalent method for
documenting the individual's effort on a research project. Tuition
remission may be charged on an average basis. In addition, as applicable
with other types of costs charged against Federal research projects,
total graduate student compensation must still meet Circular A-21
criteria for reasonableness and allowability.

Please contact Gilbert Tran, Office of Federal Financial Management,
telephone (202)
395-3052, for any questions regarding this Memorandum.

Herbert B. Chermside, CRA
Director, Sponsored Programs Administration
Virginia Commonwealth University
PO BOX 980568
Richmond, VA  23298-0568
Express Delivery Only:
 Sanger Hall, Rm. 1-073
 11th & Marshall Streets
 Richmond, VA  23219
Voice:  804-828-6772
Fax     804-828-2521
OFFICE e-mail   xxxxxx@VCU.EDU
Personal e-mail xxxxxx@vcu.edu
http://views.vcu.edu/ospa/

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