Prevailing wage laws were originally put in place during the Great Depression to prevent unfair labor practices in non-union situations. There are federal prevailing wage laws, state prevailing wage laws and even prevailing wage laws related to certain localities.
The Davis-Bacon Act is a federal prevailing wage law that applies to contractors who perform work on federal contracts. The Act is governed by the Department of Labor. Contractors working on federal building projects must pay the prevailing wage for the project. Prevailing wage compensation is divided into two parts – the prevailing wage and the prevailing wage fringe. The contractor can choose to satisfy the required Davis-Bacon obligation in several ways:
- By paying both the wage and fringe portions in cash;
- By paying the wage portion in cash and the fringe portion through a contribution to a benefit plan;
- By a combination of the two methods.
Many companies will choose to satisfy some or all of the required prevailing wage fringe by contributing that amount to a benefit plan (like a profit sharing plan) on behalf of the employee, rather than paying it to the employee in cash. If the contractor pays the fringe as compensation, the payment is subject to FICA and other payroll taxes. However, by contributing the fringe to a benefit plan, it is not subject to taxes. Employers who choose to contribute the prevailing wage fringe into their defined contribution retirement plan can either simply deposit the money on the employee’s behalf into a fully vested account, or the employer can use the prevailing wage fringe payment as an offset against an otherwise required company contribution (like a profit sharing contribution or a matching contribution). The prevailing wage fringe payment can be used to offset a top-heavy required minimum contribution or even a safe harbor contribution.
It is important to note that there is no such thing as a “Davis-Bacon Plan” – there are no Davis-Bacon provisions in the Internal Revenue Code or the Employee Retirement Income Security Act (ERISA). Rather, a qualified Defined Contribution plan can be designed in such a way as to help the employer satisfy the benefit requirements of the Davis-Bacon Act. In order to properly maintain such an arrangement, the plan’s TPA must be familiar with the interaction between the Davis-Bacon Act and ERISA. Special consideration needs to be given to such plan design features as eligibility requirements, service crediting method, vesting, timing of contributions and the treatment of forfeitures.
To learn more about the advantages of discharging required prevailing wage fringe payments through a qualified retirement plan or to discuss implementing a prevailing wage defined contribution program, contact us or view our resources.