Non Cash Fringe Benefit: The Prevailing Wage Dilemma

Federal contracts can be a good way to expand the profitability reach of a construction company. But these jobs have their own complex rules, including paying prevailing wages pursuant to the Davis-Bacon Act. Many contractors face one particular dilemma when sorting through the prevailing wage requirement: Should they pay all applicable wages in cash or remit some of them as benefits?

Reviewing the basics

As you may know, the prevailing wage is the minimum wage contractors generally are required to pay employees working on construction, reconstruction, demolition and maintenance projects initiated by public agencies. The Davis-Bacon Act requires that a prevailing wage be paid on all federal projects for which costs exceed $2,000. Many states also have their own prevailing wage laws.

The Department of Labor (DOL) sets prevailing wage rates for federally funded projects. For each job, the prevailing wage is divided into a minimum basic hourly rate and a fringe benefit amount. For state-funded projects, individual states determine their own wage rates and fringe benefit amounts. If a project uses both state and federal funds, the higher wage typically applies.

Making the choice between cash and non cash fringe benefits

Although contractors are required to pay employees the base rate in cash, the fringe benefit portion can be paid in cash or in the form of a “bona fide” benefit plan. This plan may fund:

• A retirement account,
• Life, medical, dental and vision insurance, and
• Vacation days and other paid time off.

Many contractors, however, still choose to pay all prevailing wages in cash. This is mainly because of the perceived complexities of a bona fide benefit plan. And it’s true: Paying the entire prevailing wage in cash is generally simpler and entails fewer administrative and compliance complexities.

Bear in mind, however, that cash wages you pay employees are subject to payroll taxes — including the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as state unemployment taxes and workers’ compensation. These taxes typically add about 25 cents to every dollar in wages paid. So channeling the fringe benefit portion of the prevailing wage into a bona fide plan should reduce payroll costs.

Beefing up the non cash fringe benefit

There are other benefits to allocating the fringe portion of your employees’ prevailing wages to a retirement plan. For one, you’ll be providing workers with a reliable savings plan other than simply relying on Social Security. If you already have a 401(k) plan in place, it may be possible to amend it to add qualified employees’ prevailing wages as an additional contribution.

If you’ve established a profit-sharing plan, you won’t be able to combine the two. But you can still beef up benefits by establishing a separate, parallel plan for your employees’ prevailing wage contributions.

Recognizing pitfalls

Common pitfalls of a prevailing wage plan include a potential “annualization” requirement, depending on state law. An annualization provision requires an employer to make the same fringe benefit contribution on all hours worked, including time spent on private projects. Other areas that vary according to state law include overtime payments and transportation compensation.

Employees may also grumble when informed they’ll receive less cash in exchange for benefits. Perhaps explain to them that the savings generated by the new plan could ease cash flow, helping the company and strengthening their job security. You might also remind participants that the plan will help them save more for retirement and pay medical expenses.

In addition, implementing a prevailing wage benefit plan could lead to an audit from the DOL’s Wage and Hour Division (or one of its state equivalents). The agency keeps an eye on a variety of compliance issues.

Planning to bid

As you can see, there are viable reasons for paying a portion of prevailing wages as benefits — but there are pertinent risks to consider as well. If you’re planning to bid on a federal job in the near future, discuss the issue with your financial advisor. For more questions on non cash fringe benefits, feel free to contact us online.