Prevailing wage plans

[Guest Jane Freeman]

We have a client that sponsors a prevailing wage plan. The client would like to make the prevailing wage contribution as a QNEC and use it in the ADP test. The client would also like to use that QNEC towards the profit sharing allocation. In other words, if the client makes a 5% profit sharing contribution, those employees that received a prevailing wage QNEC will receive a lesser or no profit sharing contribution. Is that acceptable?

Any help would be appreciated.

[AndyH]

Yes, if the document permits such an offset, it is acceptable, but you might have non-uniform allocations resulting in the requirement that the plan be general tested under 401(a)(4).

If you have no HCEs, it's a non-issue, and that may also be true if no HCE receives a higher total allocation (as a percent of pay) than any NHCE.

[Everett Moreland]

It violates the prevailing wage law to reduce other compensation or benefits on account of prevailing wage compensation or benefits.

[AndyH]

I don't know if that is right or not.

I have in front of me an article which is part of ASPA's C-4 exam required reading. The article, in part, says, within the context of other employer plans, and employees who have both prevailing wage and non-prevailing wage income:

"One common method of effectively limiting the amount that Davis-Bacon employees receive as contributions to the non-prevailing-wage plan is to draft that plan document so that contributions made to the Davis-Bacon plan offset contributions made to the office staff plan".

The article is entitled "Pension Plan Compliance: Davis-Bacon and Other Prevailing-Wage Plans". The author is J. Michael Pruett. The article says nothing about any prohibited offsets.

Does this not conflict with the last statement?

[Everett Moreland]

Sorry for not being clearer. We're probably both right. Prevailing wage employees often perform nonprevailing wage work for the same employer. What is prohibited is offsetting the profit sharing allocation for nonprevailing wages by allocations under the prevailing wage plan. For example, assume an employee earns $100 in nonprevailing wage work and $100 in prevailing wage work and, before the offset, would have $10 allocated under the profit sharing plan (5% of $200) and $20 under the prevailing wage plan ($20 for the $100 of prevailing wage work). Only $5 of the pre-offset profit sharing plan allocation can be offset, not the entire $10.

[AndyH]

Thanks for the clarification. A followup question if I may:

Does this mean that a prevailing wage plan cannot be permissively aggregated for general testing a staff plan under 401(a)(4) and/or 410(B) if the test would fail if not for the aggregation? Isn't this an offset in a sense?

In theory, flunking the test might require an expansion of benefits or contributions to other employees, including prevailing wage employees.

[AndyH]

And another question ....

Would this offset prohibition as described not make the CODA provision of a 401(k) plan illegal? I guess I'm questioning where the line is drawn.

[Kirk Maldonado]

AndyH:

Do you have a cite for that article you mentioned? There is a dearth of articles on Davis-Bacon plans.

[AndyH]

Yes, it is reprinted in Panel Publishers "Current Topics for the Retirement Plan Consultant" Fifth edition, section 4D page 553.

It's noted as a reprint from Journal of Pension Benefits, Panel Publishers, Summer 1998.

[Kirk Maldonado]

Thanks.

[Guest gaham]

In answer to your first question, I don't see any reason why you can't treat the prevailing wage contribution as a QNEC as long as it satisfies all QNEC requirements. Also, you can generally offset profit sharing contributions by prevailing wage contributions.

[AndyH]

Offset issue-anything new, any cites or anything in print?

I just looked at a takeover MP/PS situation where a MP plan consisting exclusively of prevailing wages is, according to the terms of the profit sharing plan, used as a direct offset to profit sharing allocations. There are some people with small non-prevailing wages who would, but for the offset, receive a profit sharing contribution.

According to Everett's comments, this is not acceptable. Is there anything in print that I can point to? Does anyone agree or disagree?

[Everett Moreland]

29 C.F.R. Section 5.5(a)(1)(i) and (a)(3)(ii)(B)(2) require prevailing wages to be paid "without subsequent deduction or rebate on any account" (5.5(a)(1)(i)),

"without rebate, either directly or indiirectly" ((a)(3)(ii)(B)(2)).

Some years ago I considered these regulations in the context of a profit-sharing plan that offset the profit sharing allocation for prevailing and non-prevailing wage work by the full amount of the (higher as a percentage of compensation) money purchase allocation for prevailing wage work. I concluded that these regulations do not allow the full offset. (I think this conclusion is common sense.) I then called the local wage and hour division and a representative there confirmed my conclusion.

[AndyH]

Thank you, Everett, got it. I'm not sure this is completely clear, but I do agree that it makes sense.