Profit Sharing Plan for Davis Bacon wages

[Guest zacunni]

Can a profit sharing plan designed for prevailing wage/Davis-Bacon type fringe benifites have vesting requirements? I have resurched the USDOL and Washington State Labor Dept. codes and the information is both confusing and conflicting. The law does state that contributions are to be irrevocable.

[Mike Preston]

I've never seen a Davis-Bacon plan where anything other than 100% vesting was used. It seems illogical to allow anything other than 100% vesting.

[Kirk Maldonado]

I think that Mike raises a good point.

I've seen the same issue surface where an employer tried to take credit for contributions to a flexible spending account. Because the amounts could be forfeited if the employee did not incur sufficient expenses during the year, the arrangement was challenged. Unfortunately, I no longer represent the client, so I don't know how the issue was ultimately resolved.

[Mike Preston]

Interesting. Which side were you on? I think I'd side with the employer on that one. It seems that if the employee had the choice between cash and making the contribution to the flexible benefit plan, at the point in time when it was contributed it lost its flavor, so to speak.

[Guest RBeck]

Most DBA plans use full and immediate vesting, because the contractor cannot claim the amount left behind when a partially vested employee leaves as an employer contribution toward the DBA required fringe. So, if the contractor can't "re-use" the forfeitures, why not vest 100%

[mal]

I work on multiemployer trusts and have some experience in prevailing wage problems. I rarely see immediate vesting of any DBA payments...but I also don't have any true profit sharing plan experiece.

I would say that there are a significant number of nonunion contractors who make the contribution to a DB plan knowing that many employees will never vest. Typically, an employer will hire local workers for the duration of the job and then leave town. Very few of the local employees will travel with the contractor to the next job.

This issue has been raised in a few states (with respect to their mini-DBA statutes), but to my knowledge has never met with success. In Ohio for example, the statute of limitations to file a prevailing wage action would pass before we would know if a person ever became vested in the benefits.

The same problem took place in the 60's and 70's with union work, but almost all Taft-Hartley plans in the construction industry now use reciprocal agreements that allow an participant to send his contibutions back to his "home" fund.

If anyone has any authority requiring immediate vesting I would love to get my hands on it.

[Steve72]

I agree with Mal. I have seen several Davis-Bacon plans with vesting schedules that prevent the participants from ever vesting.

I know the DOL is aware of, and doesn't like, the issue, but they don't appear to be able to do anything about it.

[Guest DOM]

I also agree with Mike's answer, in so far as I haven't seen a Davis-Bacon/Prevailing wage plan with other than 100% vesting. I would be interested in learning how a DBPW plan could have other than 100% when the employer has to certify on the Sch. A he is required to complete each week that he has paid the prevailing wage to the mechanic for each hour worked and then by not vesting that contribution he would in fact not have paid what he certified. What am I missing?

[Everett Moreland]

The internal manual used by the DOL wage and hour division allows a plan to require 500 HOS to vest. I used this in a pension plan because the plan was accumulating lots of very small vested accounts for former short-term employees. The plan was amended to vest upon accruing 500 HOS or a $500 accrued benefit, or on death, disability, or normal retirement age. The plan was also amended to provided that forfeitures are allocated to other prevailing wage participants and do not reduce the amount of the employer's required contributions to the plan.

[Kirk Maldonado]

Mike Preston:

WHAT SIDE WAS I ON? Don't you know I'm an attorney? I'm always on the side of my client!

Fortunately for me, my clients are almost always corporations or partnerships

[Mike Preston]

;-)

[mal]

I took another look at the DB regulations over my morning coffee. (Somebody already had the sports page.)

The regs mention "bona-fide fringe benefits." They contain the usual requirements: plan must be in writing; contributions must be irrevocably made by employer; contributions must be made to 3rd party; plan must be communicated to employees, etc. However, I cannot find anything that deals with vesting.

The one glimmer of hope the regs provide is that the employer may not be a "simulation or a sham for avoiding compliance with the act." Therefore, if one could identify a truly abusive practices with respect to vesting, I assume it would be subject to challenge.

Unfortunately (from the employee perspective), if you work short-term for a national contractor and simply don't have enough years of service to vest, I think you are out of luck.

Like I said above, I think many employers are wise to this. Even though the state and federal prevailing wage laws allow the employer to put the value of the contribution directly on an employee's check, very few contractors are willing to do this.

[mbozek]

If the DBA does not require full and immediate vesting why should the plan be required to provide it? Employers make contributions to multiemployer plans as a condition of a contract with the union- its the cost of doing business. About 10 years ago a Fed. appeals ct held that employees who worked on the Alaska Pipeline were not eligible for the pension benefits established under a multi-employer plan funded by the contractors because they did not meet the vesting standards of the plan (e.g., 10 year cliff vesting). As a result 95% of the participants did not receive a vested benefit and the plan was grossly overfunded. The employees made the argument that because they were hired for the duration of the project they would never accumulate the required service. Since the plan was established for their exclusive benefit the vesting provisons should be reduced to give them a benefit. The Ct said since the plan met the vesting requirement of ERISA it was not required to provide faster vesting.

[IRC401]

The answer depends on how you want to use the contributions for calculating the Davis-Bacon required wages. [Keep in mind that if the client screws this up, he is more likely to have a Davis-Bacon problem than an ERISA or IRC problem.]

If a client has a regular run of the mill profit-sharing plan and contributes for a participant based on his total (not just Davis-Bacon) wages, the plan may have a vesting schedule. However, the employer may count toward the Davis-Bacon requirements only contributions based on Davis-Bacon work. Therefore, if the employer contributes $1000 for the plan year, but the employee worked only 25% of his time on Davis-Bacon projects, the employer gets a credit for $250 (not $1000) toward meeting the Davis-Bacon requirement.

The DoL regs were written based with this kind of retirement plan in mind.

If the employer wants to contribute based only on wage payments for work on Davis-Bacon projects and wants to count all of the contributions to the plan against his Davis-Bacon requirement (even for employees who do not work 100% of their time on Davis-Bacon requirements), he is doing something that the DoL did not consider in its regs and the DoL opposed until it lost the Mistick case (and the DoL probably still doesn't like).

If your client wants to have the latter type of plan, he should think of the plan contributions as wage payments, which means that they should be vested immediately. In addition, if he wants to use the contributions for 401(a)(4) testing or wants to charge administration fees against the contributions, he should look very closely at the prohibitions against diverting the contributions for his own benefit or making contributions that he is otherwise required to make by law.

For example, if an employer is required to make certain contributions in order to keep the plan in compliance with 401(a)(4), I question whether he can take 100% Davis-Bacon credit for those contributions (for employees not working 100% of their time on Davis-Bacon projects). Of course, it is highly unlikely that DoL auditors will have this issue on their checklists.

I don't claim to be an expert on wage an hour issues; so, if someone can show me the error of my reg. interpretation ways, I'd love to see it.

[Guest DOM]

I agree with the logic in the reply from "IRC401" and I think he makes a strong argument to have seperate plans when a contractor wants { and they usually do } to provide benefits for both Prevailing-wage employees and non or partially Prevailing wage employees, including himself. This way there isn't any confusion or the neccessity to develop a ratio of qualifying PW work hours and non PW hours. The contractor completes his certified payroll { schedule A } each week and he makes a DBPW contribution based on the hours shown for each employee at the appropriate rate. I can't see where there would be any 401 A 4 or other discrimination issues upon audit since there should not be any Keys or HCE's eligible for the plan.