Prevailing Wage Davis Bacon

[30Rock]

Hi - employer has a 401k plan and has Davis Bacon contractors. Employer wants these workers to be subject to 1 Year of Service and age 18 eligibility requirements for the prevailing wage contribution. Is this possible? Are some state laws able to override federal? Can the employer pay them prevailing wage outside the plan for the year they are holding them out?

[rcline46]

YOu will need to read the prevailing wage law(s) for the state of the employer, and possibly engage the services of a labor attorney in that state.

[Jim Norman]

Sure he can have an eligibility period. But why?

If the PW ees are not in the plan for that first year, then there are no plan contributions counted toward satisfaction of the PW. But he still must meet the PW requirements of his contract(s). So for the PW employees who are not yet eligible for the plan, he will have to pay them the full PW in cash, plus FICA, Medi, and workers comp premiums (read - extra cost). And then when they become eligible for the plan and he intends to count the plan contribution toward the PW requirement, the newly eligible employees get a cut in their wages. That will go over well.

[oldman]

Attached McKay Hochman provides good information on Davis-Bacon plans.

"Davis-Bacon Prevailing Wage Retirement Plans

Sample Prototype Plan News Article October

Rev. 11/01/02

--------------------------------------------------------------------------------

Most of the mystery surrounding Davis-Bacon plans is caused by the fact that the requirements of this type of plan design are found in the Davis-Bacon Act not the Internal Revenue Code or ERISA. Additionally, Davis-Bacon compliance is monitored by the wage and hour division of the Department of Labor and not the Pension and Welfare Benefits Administration nor the IRS.

To provide some historical perspective, the Davis-Bacon Act was signed into law in 1931 to prevent the federal government from reducing local area construction wages. The Act was amended in 1935 to establish a system of setting wage rates in advance of the contract bidding. In 1964, it was amended to include fringe benefits as a component of the overall prevailing wage. In general, the Davis-Bacon Act requires any contractor bidding on a government construction project in excess of $2,000 to pay workers at a “prevailing union wage”, even if the employer did not employ union members.

In general, the prevailing wage is based on area union wages and fringe benefits. Thus, prevailing wage compensation can be broken down into two components - the prevailing hourly wage and the prevailing hourly fringe benefit amount. Davis-Bacon prevailing wages must be paid to affected employees unconditionally and not less often than once a week.

The prevailing wage fringe benefit component is intended to take into account fringe and welfare benefits, such as health insurance, which are paid to union construction workers. Under Davis-Bacon guidelines, the fringe benefit amount can be paid as cash wages. However, pursuant to Revenue Ruling 75-241, if the fringe amount of the compensation package is paid to the worker as cash compensation, it becomes subject to FICA and other payroll taxes as well as for purposes of determining workers compensation premiums. Despite the additional tax liability to both the contractor and the employee, contractors frequently pay the fringe wages in the form of compensation. In some areas, this is necessary in order to get qualified workers, in other instances contractors claim it is just easier. Through a combination of attractive plan design and good communication, a Davis-Bacon plan could be just as easy and just as attractive, if not more attractive than payment in cash.

From a practical perspective, there are certain plan features that coordinate better with the prevailing wage guidelines. In general, the Davis-Bacon portion of a retirement plan must provide for immediate eligibility and full and immediate vesting. Absent immediate eligibility, the Davis-Bacon fringe would need to be paid as compensation until such time as the individual becomes eligible. Full and immediate vesting is required because, unlike a traditional qualified plan, in a Davis-Bacon situation, the contributions are in lieu of actual cash wages due to the participant. Thus forfeitures cannot inure to another employee, nor can they be used to offset future plan contributions.

Contributions are required to be made not less often than quarterly, this differs from both the rules that apply to 401(k) elective deferrals as well as other employer contributions. In addition, the plan design can not require a requisite number of hours of service or last day employment.

Davis-Bacon plans are not subject to the multiemployer rules; since the employment relationship is not governed by a collective bargaining agreement. Therefore, it becomes essential to keep complete and accurate records of all Davis-Bacon hours. Because of the tenuous nature of construction work, one area of particular concern in a Davis-Bacon plan is when does a separation from service occur? A worker may be laid-off for a period of time and then re-employed during the construction season. There are no clear cut guidelines as to when a separation of service occurs in this respect, therefore care should be taken to make sure that all participants are handled in the same manner. To the extent that the contractor knows that the employee will return after a lay-off they should probably be treated in the same manner as seasonal employees as opposed to a terminee. This is certainly the case if the contractor pays for any benefits during any lay-off periods.

Prior to EGTRRA, a common issue in Davis-Bacon plans was Internal Revenue Code Section 415 violations. This happened based on the fact that the contribution to the plan was based on the difference between prevailing wage rates and a participant’s normal pay and benefit rates and how much time they spent performing covered prevailing wage service. Unlike a traditional retirement plan where annual additions can be held as suspense and/or reallocated to other participants, if a Davis-Bacon participant incurred an annual addition violation, that amount would need to be paid directly to the participant outside the plan. This results in additional taxable compensation and additional payroll taxes to be paid by the contractor. Thankfully, the increased 415 annual addition limitation will prevent most annual addition violations, although special care should be taken to avoid deduction violations under Code Section 404 which is limited to 25% of compensation.

One area that remains problematic for Davis-Bacon plans is coverage and nondiscrimination testing. All of the 401(a)(4) nondiscrimination rules apply to Davis-Bacon plans. In some cases Davis-Bacon amounts can be helpful when doing the general test. This would be true in a cross-tested plan where non-highly compensated employees receive significant Davis-Bacon contributions that can be used as the allocation gateway as well as for all or a part of the cross-tested benefit. Remember, however, that Davis-Bacon prevailing wages may apply to an owner or other highly compensated employee working in a non-managerial role. To the extent that an HCE receives a significant Davis-Bacon contribution, this can cause the plan to fail nondiscrimination testing. Remember any corrective methodology used to pass a failed discrimination test can not result in the Davis-Bacon employee forfeiting any of his or her Davis-Bacon contributions. The definition of HCE is based on the prior plan year compensation. It is very important to identify all HCEs carefully. The volatile nature of the construction industry could result in discrepancies in the HCE group from year to year.

Despite the attractiveness of a Davis-Bacon plan, some contractors may argue that they simply must pay the fringe benefit amount as compensation in order to retain good workers. In those cases a plan designed with liberal withdrawal rights and loans could serve double duty. The Davis-Bacon contributions could serve as the foundation for some aggressive plan design that benefits the owners, while the Davis-Bacon workers benefit, especially during lay-offs by loan and hardship withdrawal provisions. Davis-Bacon plan design and administration can get complicated because the plan and its operation must remain in compliance with both the Internal Revenue Code and the Davis-Bacon Act, however, once you are familiar with the potential pitfalls the administration is rather straightforward.

To learn more, call 973-492-1880 or e-mail info@mhco.com.

© 2011, McKay Hochman Co., Inc. All rights reserved."

[GMK]

For future reference, and just as a matter of style,

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[30Rock]

Thank you all!!!