Davis-Bacon plan

[Guest PMiller]

We are taking over a 401(k)/PSP where certain employees derive a portion of their annual comp. from projects subject to prevailing wage (Davis Bacon - D/b) done by the employer. In 2000, 1 of the D/B EEs was an HCE (6 HCEs total), and 17 of the 30 NHCEs received a contribution under the D/B method.

The employer calculates the contribution required under D/B for the EEs who are affected. The full amount of the contribution (up to 415 limit) is allocated to these EEs as an employer contribution. Other EEs receive an employer discretionary contribution (3% of comp. in 2000) allocated on a comp-to-comp basis to EEs with 1000 hours employed on last day of plan year. In cases where the D/B contribution of an EE was less than 3% he/she received an employer contribution in an amount to make his/her total contribution 3%. This scenario creates different rates of contributions. One resource I contacted said that each contribution rate is subject to 410(B) testing. The prior TPA indicates that the "offset" of the employer contribution with the D/B contributions is acceptable in spite of the varying rates of contribution and has used the ratio percentage test as the 410(B) testing method. The document contains no specific language addressing the D/B allocation method (only the comp-to-comp formula) described or the testing. Would appreciate feedback. Thanks.

[GBurns]

I do not think that it is even allowed for Davis Bacon (or other Prevailing Wage jobs) employees to be in the same plan as non-DB employees. I suggest that you check with a TPA who is experienced in DBRA and other Prevailing Wage plan administration. It is a very technical area and there are very few TPAs capable of administering them.

[IRC401]

NOTE: I DON"T PRACTICE LABOR LAW (including wage and hour work) !!!

Suppose for purposes of discussion that:

1. An employee works 2000 hours per year.

2. The employee spends 1200 hours on Davis-Bacon work.

3. The employee earns $15/hr.

4. The employer makes a 4% p/s contribution ($1200)for the employee.

The DOL will (or at least they used to) take the position that because all employees received a 3% contribution, only 60% of the first 3% P/S contribution counts toward the prevailing wage requirement. [60% of the first $900, plus the additional $300 (4th %) = $840. $840/2000 hrs = $0.42] Therefore, the employer gets to count 42 cents per hour toward meeting his prevailing wage requirement. If the employer needs all $1200 ($0.60/hr) to meet prevailing wage rules, then he is in violation of the prevailing wage rules (but I don't think that the plan has a qualification problem, assuming that the allocations are actually made in accordance with a definitely determinable allocation formula in the plan document).

I don't see any problem putting Davis-Bacon employees in the same plan as other employees, but keep in mind that contributions that are intended to count 100% toward the prevailing wage requirement are subject to special rules, such as 100% vesting and an independent trustee. Furthermore, there will be (at least) two different allocation formulas that need to be tested under 401(a)(4). [ In the above example, I don't regard the first 3% as a Davis-Bacon contribution. ]

I doubt that Davis-Bacon contributions could be used for cross-testing, 401(k) safe harbors, or meeting top-heavy minimums. Guessing wrong on these issues could create qualification issues.(although I doubt that there is any clear authority on point and I doubt that any IRS or DOL auditor would look for the issue).

In any event, the overlap of the IRS and DOL rules is complicated enough that any employer attempting this should get some good advice.