Contractors might save by electing to contribute excess fringe benefits to a bona fide retirement savings plan on their employees’ behalf.
Construction contractors and subcontractors doing work on federal prevailing wage jobs subject to the Davis-Bacon Act are familiar with the difficulty of complying with a wide range of requirements where the failure of compliance can result in serious consequences, including criminal charges. In an effort to simplify compliance, many contractors elect to pay the excess fringe benefits portion of the prevailing wage rate as additional wages to their employees. While this method is certainly straightforward, these contractors are missing out on an opportunity to reap significant cost savings by electing to instead contribute these funds to a bona fide retirement savings plan on their employees’ behalf.
By reclassifying the excess fringe benefits paid as wages to employer 401(k) contributions, contractors can reduce their FICA, FUTA, and SUTA costs as well as their direct labor costs thereby reducing their workers’ compensation premiums. In the current competitive bidding environment, these reduced labor costs can make the difference.
In addition, if the contractor’s 401(k) plan is currently forced to limit highly compensated employee (HCE) contributions to the plan to meet Department of Labor compliance requirements, this provision can have an even greater benefit. The prevailing wage contributions (primarily received by non-highly compensated employees) may be counted as elective deferrals to the plan increasing the threshold for contributions allowed by HCEs.
Alternatively, if the contractor currently makes profit sharing contributions to their 401(k) plan, the prevailing wage contributions may be used to offset the calculated profit sharing contribution to the related employee thereby further reducing costs.
In order to implement prevailing wage 401(k) contributions, your 401(k) plan needs to be amended to include a prevailing wage contribution source. Please note that many retirement plan administrators do not support this type of contribution due to its specialized nature. In addition, all employees receiving prevailing wage contributions need to be eligible for the plan which may require an additional amendment to the plan's existing eligibility requirements. It is important to note that the eligibility requirements can be carved out separately so that these employees would not have to be made eligible to receive other employer contributions, including matching contributions.