Implement a Prevailing Wage Retirement Plan

Construction Business Owner, June 2009

Company owners are often frustrated over their inability to use a 401(k) to save money for retirement. Generally speaking, IRS regulations limit owners and other highly compensated employees to contributing a maximum of 2 percent more than the average contributed by all non-highly compensated employees* and if hourly employees are contributing nothing, well, the math isn't hard to do.

Business owners who do prevailing wage work and use the fringe allocation of the specified wage to set up a bona fide benefit plan for their hourly workers can use that allocation to greatly improve their own retirement benefit.

"Putting a prevailing wage retirement plan in place can really help both the company owners and the hourly workers using highly-specialized plan design," says Fringe Benefit Group's Regional Sales Director Karen deMontigny.

She cites as an example a client for whom she implemented a New Comparability plan which, in general, lets companies establish two or more classes of employees and designate higher employer contributions to select employee groups.

"This client did 70 percent prevailing wage work," deMontigny says. "They always made profit-sharing contributions at year-end for their employees.  Under a traditional 401(k) plan, they were limited as to what they could contribute for themselves.  By using the New Comparability profit-sharing allocation, the owners were able to put away the maximum $49,000."

There are several other ways prevailing wage contributions can be used to benefit owners and key employees.  Before further exploring these concepts, a bit of background on prevailing wage laws and the advantages of setting up a bona fide benefit plan may be helpful.

Payroll Savings Now

Federal construction contracts in excess of $2,000 are subject to the Davis-Bacon Act, which requires payment of locally "prevailing wages" including the "anticipated cost of prevailing benefits."  Generally this is 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.

Many contractors pay the fringe benefit portion of the prevailing wage as additional cash wages, believing it's the easiest way to comply with the law.  But allocating this amount to a bona fide benefit plan or plans results in significant cost savings. Benefits that might be included in a bona fide benefit plan offering are retirement, medical, dental, vision and life insurance plans.

The reason contractors save money by offering a bona fide benefit plan is that when the fringe portion of the prevailing wage is used to provide benefits for hourly workers, this amount is not subject to payroll costs such as FICA, FUTA, state unemployment taxes and workers compensation insurance.   Although there are variances in the rates for the last two, conservatively these taxes represent an additional $.25 on each dollar paid as cash wages.

Assume XYZ Construction Company has fifteen employees doing prevailing wage work. These employees work approximately 1,000 hours each per year. The fringe amount above the base rate is $4/hour and the average approximate additional payroll cost when paying fringe dollars as cash wages is 25 percent.

15 employees X 1,000 hours = 15,000 total hours
15,000 hours X $4 = $60,000 in additional payroll
$60,000 X 25 percent = $15,000 XYZ Construction Company Savings

The savings realized by allocating the fringe portion of the prevailing wage to bona fide benefit plans means two things for contractors: bids submitted for government work will be much more competitive, and/or their profitability will improve.

With record numbers of contractors registering to bid on federal and state contracts, competition for the opportunities presented by President Obama's Economic Stimulus package will be fierce.  And it's expected that compliance with government regulations will be tightened as well, given promises of accountability and transparency for the funds appropriated.

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