Is Your Supplemental Unemployment Benefit Plan Compliant?

In 2015, the United States Department of Labor (DOL) Wage and Hour Division (WHD) alerted Supplemental Unemployment Benefit (SUB) plan providers that credit for employer contributions made on Davis-Bacon Act (DBA) covered contracts must be calculated on an annualized basis. If your company is utilizing a SUB plan, then you have an urgent need to understand this change.

Your SUB plan may still be viable, but you may need to alter the way it is funded. If that is not an option, then there are other, bona fide benefits that you can put in place. But you need to act now. Don’t put your business at risk for fines by delaying the conversation.

SUB plans have been around since the 1950s, when they were created in an attempt by some of the country’s labor unions to negotiate guaranteed annual wage plans. This was a particular concern for workers in industries with cyclical and seasonal work. Workers who were laid off received unemployment benefits far less than their salaries, and SUB plans were created as a way to bridge that gap.

From an employer’s standpoint, providing supplemental pay to workers during a layoff is beneficial as well. During a workforce reduction, cash is often scarce, and payroll taxes on severance pay can be expensive. By establishing a comprehensive tax-qualified SUB plan, employers have a substantial source from which to make payments that supplement state unemployment benefits.

Why You Should Supplement State Unemployment Benefits

Under a SUB plan, a worker is eligible for payments if he/she is laid off by the company. A SUB plan provides for supplemental unemployment benefits as a result of an employee’s involuntary separation from employment, whether temporary or permanent. Some examples of such an event include:

• A reduction in workforce
• The discontinuance of a plant or operation
• Other, similar conditions

A qualified plan cannot provide for the payment of benefits when the unemployment results from a voluntary decision by the employee or if the employee is terminated for cause. SUB payments are also contingent on the concurrent receipt of state unemployment benefits.

How Recent Change Impacts Contributions The trusts from which SUB payments are made are funded by the employer, and they may use a formula of a certain amount contributed per employee, per hour. This is where complications arise for contractors who work on federally funded or Davis-Bacon Act contracts, and who use the fringe portion of the prevailing wage to fund the trusts.

While SUB plans are considered bona fide benefit plans, an exemption from the requirement that credit be based on contributions being made for all hours worked both public and private was revoked by the DOL’s WHD in October 2015. In other words, credit must now be calculated on an annualized basis. This means that federal contractors working on Davis-Bacon Act projects must contribute to the SUB plan on all hours worked, not just when working on public contracts.

What to Understand about Annualization

The policy change comes down to one word: annualization. The following is a basic explanation of the principle. Most federal contractors make contributions to SUB plans only for hours worked on Davis-Bacon projects. However, chances are good that the employee also worked on private projects for which no SUB contributions were made. Therein lies the problem. Congress did not intend for contractors to be able to subsidize a benefit which is continuously available, such as health insurance, with contributions solely or predominantly made on Davis-Bacon projects.

Contractors who perform federally funded construction work cannot take full credit against the fringe for contributions made to a SUB plan while only working on Davis-Bacon project because annualization requires that contributions an employer makes to the plan be averaged over all hours the employee worked during the year. For example, if an employer contributes $6,000 to a plan on behalf of an employee who works 500 hours on Davis-Bacon jobs and 1,500 hours on private jobs, it can take credit against the fringe portion of the prevailing wage for $3 per hour ($6,000/2,000 hours).

The only bona fide benefits that are not subject to annualization are certain defined contribution retirement plans. WHD specifically exempted from annualization any defined contribution retirement plan where the plan provides for immediate participation and essentially immediate vesting (100-percent vesting after an employee works 500 or fewer hours).

What Criteria You Need to Know

The change affects federal Davis-Bacon Act contracts and federally financed Davis-Bacon Related Act (DBRA) covered contracts. There are a few states with either a general SUB or a plan-specific exemption. This change does not affect those state prevailing wage covered contracts in which these exemptions exist, though. SUB plans are acceptable for use in conjunction with prevailing wage jobs if they meet certain criteria. Contributions must now be annualized, which means that contributions must be made for all hours worked on both public and private jobs, and receipt of benefits must be tied to receipt of state unemployment benefits. SUB plans may be especially beneficial for contractors in industries with a high degree of seasonality.

When it comes to SUB plans, there is a lot of misinformation and market confusion. Be skeptical of any sales claims that there is no need to annualize, that receipt of benefits does not have to be contingent upon receipt of state unemployment benefits and that benefits are available to employees who are simply short a few hours of work in a pay period, because this is not accurate.

Look for a benefits partner who can work with your broker and understands the unique challenges that Davis-Bacon and Service Contract Act contractors face when creating and managing compliant bona fide employee benefits plans. Choose a company that specializes in prevailing wage compliance and provides a flexible, easy-to-use solution that reduces workloads while still offering great benefit options to employees.