How the NIH Salary Cap is Applied in Real Life
Every year since 1990, Congress has set a salary cap limiting the direct salary that an individual may receive for working on an NIH grant. As an example, in 2019 the NIH Salary Cap figure was $192,300.
Here are two key points about the salary cap that might help you breathe easier.
- The salary cap applies only to direct labor costs charged to NIH awards.
- The $192,300 is effectively a cap on the hourly rate that can be charged to the NIH grant.
Two examples of how the NIH salary cap works
Example #1 Direct, full-time labor
Let’s assume you have a full-time employee whose salary is $200,000 per year, or $16,666.67 per month, or $96.15.
The 2019 NIH salary cap is $192,300, or $16,025 per month, or $92.45 per hour.
In a month when this employee dedicates all of her time to NIH awards, the amount in excess of the salary cap is $632.65. This is calculated as $96.15 – $92.45 *173.33 hours – please note that this should be based on the actual number of hours in that specific month.
This $632.65 excess is direct labor that you will charge to an “unallowable cost” account that you’ll have to pay for with non-federal funds.
Example #2 Direct and indirect labor
You have an employee who works on your NIH award as direct labor. He also does some administrative tasks (indirect labor) during the month.
His salary is $200,000 per year, which equates to $16,667 per month, or $96.15 per hour.
In one month, he works 40 hours on the NIH award and 128 hours on administrative tasks.
We have no salary cap limitation issues with the indirect portion. The portion of his salary allocated to indirect labor is 128 hours at $96.15 per hour = $12,307.20.
40 hours were spent on direct labor at $96.15 or $3,846. This is the amount of salary apportioned to direct labor on an NIH grant.
The salary cap for 40 hours of direct labor on NIH awards is $3,698 (40 hours * $92.45). The amount in excess of the salary cap is $148. ($3,846 – $3,698)
The $148 is direct labor that you will charge to an “unallowable” labor account and pay for with non-federal funds or your award fee.
Jamming Salary Into F&A Rates
After reading the examples above let’s say you want to pay yourself $400,000/year – and to get it paid by the Federal Government, you’ll charge most of your time to F&A rate activities.
The problem is that indirect cost rates (F&A rates) need to be negotiated, and reasonableness is critical in negotiations. In our experience, $400,000 is a non-starter when negotiating with the Division of Financial Advisory Services (DFAS), but hopefully, this article demonstrates that if an employee’s pay exceeds the NIH salary cap you are required to meticulously maintain time sheets, distribute labor costs between direct and indirect labor costs, and be reasonable.
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