Though prevailing wage employers are, in many respects, no different than other employers, hopefully they take advantage of the tax benefits found when providing fringe benefits to their employees.
A decade ago, many employers adopted benefit plans, in lieu of paying cash, simply for the tax benefits. While the benefits of the tax savings to the business remain valid, in today’s tight labor market, employers are also adopting benefit plans as a worthwhile tool to attract and retain valuable employees.
A Little History on Prevailing Wage Contracts
The Davis-Bacon Act, which took effect back in 1931, requires contractors working on federally-funded projects to pay employees a “prevailing wage” including the “anticipated cost of prevailing benefits.” This is generally expressed as a per-hour wage and per-hour cash equivalent value of benefits and is often based on a union scale. Prevailing wages are set by the U.S. Department of Labor and are included in the bid specifications of covered contracts. As an example, a contractor may bid on a federally-funded job which stipulates that laborers are entitled to a $30 per hour cash wage and $8 per hour in fringe benefits. Under the Davis-Bacon Act, employers can either choose to pay the fringe benefits as additional cash wages (which would result in an effective hourly wage of $38) or provide a “bona fide” benefit plan. Benefits that might be included in such a plan are retirement accounts (401(k) or pensions), medical insurance, vision insurance, dental insurance and life insurance.
Cash or Bona Fide Benefit Plan?
Many contractors choose to pay the fringe portion of the prevailing wage in cash, believing it’s the simplest way to comply with the law. But choosing this option is an extremely expensive way to comply because it doesn’t allow employers to realize the cost savings of providing their employees a bona fide benefit plan. The cash option is so much more expensive because all cash wages paid to workers are subject to payroll taxes such as FICA, FUTA, state unemployment taxes and worker’s compensation. Although there are variances in the rates of the latter two, the additional cost to employers for these taxes is typically around twenty-five cents on every dollar paid in wages. Simply by providing employees a bona fide benefit plan, the contractor can reduce payroll costs by the same amount, while also helping employees secure their futures.
Numerous studies have documented the critical importance of private pension savings and its role in the economic security of retirees. Our nation’s Social Security system is facing significant funding issues and potentially reduced benefits for future retirees. Independent of Social Security, too many workers have saved too little, if anything at all. The lack of personal savings combined with the looming Social Security problem poses significant future economic problems for the average construction worker. It’s for this reason more and more employers are adopting retirement plans.
However, employers working on publicly financed construction projects must balance the often inconsistent requirements of the respective prevailing wage statute that applies with the requirements of the Internal Revenue Code, the Employee Retirement Income Security Act (ERISA) and state insurance laws. While these additional requirements may not be inconsistent with the fringe benefit requirements in a prevailing wage policy, they may not be consistent or even easily reconcilable. Probably one of the most common mistakes that occurs when analyzing fringe benefit programs is when a firm fails to appreciate these inconsistencies and takes a “one-size-fits-all” approach with their benefit program. Contractors tend to have fewer problems when they rely on fringe benefit companies that are knowledgeable of this market.
Understanding the many distinctions is critical. While there are many prevailing wage laws in existence today—the federal Davis-Bacon Act requirements as well as thirty-two different state laws—let’s focus on federal requirements and touch on unique aspects of a few state laws. No two of the thirty-two state prevailing wage laws or the federal Davis-Bacon Act are exactly the same. While the intents are the same, the wording, terms, implementation and enforcement all vary significantly. Do not assume because you understand one policy you understand them all.
Common Pitfalls When Calculating Prevailing Wage Benefits
One of the most unique aspects of the Davis-Bacon Act and state prevailing wage laws is the “annualization” requirement—an employer must make the same fringe benefit contribution on all hours worked, including time spent on both public and private projects. The Davis-Bacon Act requires annualization, but there is an exemption for defined contribution pension plans with essentially immediate vesting. Prior to the end of ERISA pre-emption of state prevailing wage laws, most states either weren’t this specific or didn’t focus closely on this area. The shifting state policies in this area tend to create confusion and discourage employers from adopting retirement plans. This shouldn’t be the case, however, because the upsides (tax savings for the employer and a retirement savings plan for the employee) far outweigh the downsides.
“We do all prevailing wage work, and in the past, we paid the fringe in cash. The tax benefits we are now experiencing enables us to be more competitive,” says Jim Shannon, president of SK Mechanical in Ephrata, PA, a business focused entirely on designing and installing fire protection systems. “I run a small company and I don’t have time to keep up with changes in the law. Using a third-party with an approved program means that I don’t have to worry about gray areas—they’ve got me covered, and I know that all of our records are being validated and checked by a third party.”
Shannon also says that employing an experienced, outside fringe benefit provider saves him time. “I’ve got a lot of young employees, and if any of them have questions, I just direct them to call our plan administrator. For me, it’s peace of mind because I know I’ve got professionals looking out for me and my business so I can focus on what I do best—which is fire protection systems.”
“When we first implemented the plan, we