Revenge of the Service Contract Act--Vesting of non-elective contributions

[Guest erisafried]

I have recently had the misfortune of getting another Service Contract Act fringe benefit issue dumped in my lap, and I wondered if anyone has had any practical experience with this one. I suspect I know the answer to my own question, but I have a luke-warm opinion of counsel from another law firm and the likely absence of any black-letter rules to overcome.

Background: A federal contractor subject to the SCA sets up various benefit plans (401(k), health, LTD, etc.) for the employees working on the contract. The DOL issues a wage determination about the appropriate hourly rate for fringe benefits. Contractor incorporates a special provision in the K plan whereby any shortfalls in the fringe benefit contributions deriving from employee elections (i.e., if the employee doesn't elect enough fringe benefits to "use up" the full hourly fringe benefit contribution by the contractor) are trued-up on a quarterly basis via additional non-elective contributions.

The question: Although the non-elective contributions are fully vested at present, the contractor would like to subject them to a vesting schedule. Can these contributions--which are essentially part of the hourly fringe benefit allocation required by the wage determination--be subject to forfeiture?

Discussion: Contractor has an opinion of counsel from a decent law firm that indicates that because the non-elective contributions cannot revert per ERISA and the Code, the fact that they are forfeited doesn't offend the SCA and the wage determination. The argument goes that even though particular employees might forfeit money, the overall group of employees will receive the fringe benefit contributions required by the wage determination.

I know that under the Davis Bacon Act, there is an annualization requirement for non-vested K plan contributions that are not fully vested when made. There does not seem to be a similar rule for the SCA, however. I have heard (thanks to Mr. Maldonado) that the Wage & Hour folks at DOL have raised issues with the use-it-or-lose-it rule for 125 plans where employer contributions are not used up at the end of a year. The SCA rules seem to be concerned with ensuring that individual employees receive the minimum fringe benefit allocation based on their hours worked. If a contribution has significant strings attached or is subject to forfeiture, I am having a hard time believing that the DOL would count that towards the minimum fringe benefit contribution required by a wage order.

There is not, so far as I am aware, a formal rule one way or the other on this.

Any thoughts?

[GBurns]

The rules controlling Davis-Bacon are usually referred to as DBRA rules. ! of the RA (Related Acts) is the Service Contract Act. The rules that govern "bona fide" welfare plans etc, wages and fringe benefits are the same for all DBRA which makes them the same for SCA as for DB.

There have been many explanations (determinations, advisories etc) published by the DoL on the issue.

The entire amount of the wage determination is fully and irretrievably vested. The 401(k) should not have a vesting schedule although I have to admit that I have seem many that have a vesting schedule and which passed audit for the time being. Having a vesting schedule would only be a de facto reversion of wages. Remember it could have been paid fully in cash. Fringe benefits are only a means to reduce the employer costs.

A section 125 plan used with DBRA should only be used for elective employee contributions and not for the fringe benefits that are part of the hourly wage determination so as to avoid any confusion. The logic is that if the entire wage determination had been paid as cash the employee could very well elect to contribute to an FSA and that amount would be subject to "use it or lose it" but on the other hand no portion of the wage determination amount can be subject to "strings" or forfeiture since it is subject to the wage order in its entirety. So having a section 125 election complicates the processing and auditing of certified payrolls, so steps have to be taken to keep the various items separate.

[Kirk Maldonado]

erisafried:

Did you know that there is a Q&A column on BenefitsLink devoted to Davis-Bacon Act? There are some questions there that might be worth reading.

[Guest erisafried]

Thanks Kirk. I did some research over on that board and found some helpful info. In addition, the WHD folks have all sorts of helpful things on their website (the Field Operations Handbook, in particular). There is also some useful info available at the Office of Administrative Law Judges website (my former employer)--cases and a handy ALJ benchbook.

I think that I am in agreement with GBurns on the vesting issue, but there is not a specific regulation or pronouncement that states as much. As I mentioned, I need to overcome an opinion of counsel that says that vesting schedules are permissible, but the best I may be able to do is infer things from the informal guidance and regs. Given the idea behind the DBA and SCA, subjecting the hourly fringe benefit contribution to vesting clearly seems to be a take-away. GBurns is exactly right about that: it's taking money that would otherwise have been paid in cash or vested benefits and attaching strings. That said, vesting for pension plans within the parameters specified by ERISA and the Code are permitted under the DBA but forfeitures cannot be reused to cover minimum contributions for other employees (this is double-dipping) and the employer might be required to annualize the contributions subject to vesting.

There is also some discussion about vesting for vacation benefits, but I am not sure that you can safely extrapolate from those rules in the pension context.

[Everett Moreland]

erisafried:

Would you please post links to where you found the Field Operations Manual and the ALJ benchbook?

[GBurns]

These should get you everything that you might ever want:

http://www.oalj.dol.gov/libdba.htm

http://www.dol.gov/esa/whd/FOH/index.htm

http://www.dol.gov/esa/programs/dbra/index.htm

http://www.dol.gov/esa/whd/contracts/sca.htm

erisafried,

I wish that I had the time to dig into my old files. It has been quite some time since I had anything to do with DBRA but I know that I have some info from the DoL on this exact subject. I remember that in the 1990s the main fringe benefits that were marketed were MPP or 401(k) plans. Vesting schedules were used for the sole purpose or reverting the money to the employer. The schedules were set so that no employees would be ever vest anything of consequence (of any match). This coupled with terminations of employees and plans ensured reversion to the last standing employee who was of course the contractor (owner) himself. Between 1994 and 1999 the DoL prompted by ABC etc came down very hard on this and started enforcing their requirements for "bona fide" plans and fringe benefits.

Maybe ABC or Fringe Benefits has this material available.

[Kirk Maldonado]

There is an issue as to whether those contributions can be made to a medical expense reimbursement account that is part of a cafeteria plan. I had a client get audited by the DOL on this point, but I switched law firms before it got resolved, so I never knew how it came out.

The DOL argued that because the person would only get reimbursed if they incurred the expense, there might be an impermissible forfeiture.

I had two counter-arguments:

1. Based on the underlying theory of the reimbursement accounts announced by the IRS, the contribution to the accounts was analogous to the purchase of insurance. Nobody (other than maybe the DOL) would argue that there is a forfeiture if you buy insurance but don't have any claims.

2. As a practical matter, people can always come up with ways to spend the money in their reimbursement accounts. My analogy to the DOL was that if you tell people you have $100 to spend, but you must spend that money in the next two months or you will lose it, most people will figure out a way to spend those dollars.

Does anybody know if this issue was ever resolved?

[Everett Moreland]

GBurns:

Thank you for the terrific links.

[Guest erisafried]

UPDATE:

To my surprise, I spoke with the enforcement staff at the WHD today, and they don't seem to have a problem with vesting schedules in qualified plans under the SCA. In essence, they told me that they rely on ERISA's (and the Code's) vesting and service crediting rules to determine if a retirement plan is a bona fide fringe benefit program. The fact that the 401(k) contributions are irrevocably paid over to a trustee seems to be sufficient to satisfy the WHD even though individual employees might forfeit amounts from time to time. Since this was counterintuitive (the government...doing something that is nice to employers?!?), I asked the question about 5 different ways and got the same answer every time.

I also discovered that it is risky to try to import the DBA guidance into the SCA context because of the difference between the types of work they regulate. The DBA covers construction contracts mostly while the SCA covers service contracts (janitorial services, etc.).

Finally, and this should come as no surprise to people who work with benefit plans, you have to "RTFWD" (read the friendly wage determination). The wage determination is apparently much like a plan document and is therefore often the source of much enlightenment (and/or confusion).

[GBurns]

erisafried

Are you sure that they have no problem with the wage related fringe benefit or is it the employer matching contribution that they have no problem with? Vesting schedules are expected with employer match but not with employee contributions that are part of the wage. I suggest that you make sure what it is they do not have a problem with.

Look at the last line of this link:

http://www.fibi.com/ret.asp

FIBI is by far the oldest and largest provider of bona fide fringe benefits plans for use in complying with the DBRA and SCA requirements. Notice that they even comment on the vesting in this last line.

There is really no difference between DB and SCA as far as rules go, the fact that 1 is construction and the other is service has mainly to do with the job classifications and related items such as the definition of "job site" "drivers" etc. If all were put together all the time items such as the WD would be to large to handle. Union relationships are also different, construction is heavily unionized while Service is not.

[Guest erisafried]

GBurns: Thanks for that link--very helpful.

I must admit that I am having a hard time squaring what I heard from WHD with the SCA regulations. It doesn't seem like you ought to be able to get away with forfeitures relating to minimum fringe benefit contributions, at least not unless the wage determination allowed for average hourly rates for the covered employee group (and the WDs I am looking at don't). I have a call into another WHD person to see if I get the same story from her.

BTW, the WHD person I talked to mentioned that she was really more of a Davis-Bacon expert. I posed the question whether the DBA regs and interpretive materials would be helpful in analyzing SCA issues, and she cautioned against it. I agree with you--the rules are clearly trying to hit similar targets, but she was of the opinion that the differences between the service and construction industries made things like annualization make sense in the DBA context when it wouldn't in the SCA context. I took from this that I wouldn't necessarily want to be citing DBA regs as a basis for making definitive conclusions under the SCA. Don't bring a club to a knife fight, I guess. I am taking her advice with a grain of salt nonetheless.

[GBurns]

Let me make a suggestion. I do not know the exact nature of your work but this should get you some help.

Call FIBI and pose the question to them. The should do this in house but might refer you to the senior rep in your area. They might refer you solely for the purpose of establsihuing a relationship with you in the hope of getting some business. They do not expect that many TPAs would venture to handle DB and SC plans and even if a TPA did FIBI will eventually pick up that client after an eventual DoL or other regulator audits any plans that that TPA has.

FIBI has been through hundreds possibly thousands of audits. They also maintain an extensive library of audit and research material and of almost anything that the DoL or any other Prevailing Wage regulator has ever put out.

If this issue has ever been addressed in any way shape or form, FIBI has it in writing.

If you run into a wall because they might know of you as a TPA who tries to handle Prevailing Wage plans and do not want to help, just find out who is the Rep in your area and call him/her. If you have a problem drop me a line and I will find out for you.

[Guest Pensions in Paradise]

GBurns - so how much does FIBI pay you for being their salesperson? Davis-Bacon plans aren't black magic. Once a TPA does a little homework, they are actually not that difficult to administer. Although companies like FIBI would lead you to believe otherwise.

P.S. - and yes, I am a TPA who handles a few D-B plans, and a couple of those have been audited with no problem.

[GBurns]

I wrote my first plan for FIBI in 1986/7, I wrote my last plan in late 1999. I do not get renewals or anything from FIBI. I have not been a FIBI agent since 2000.

I also mentioned ABC. How come you did not ask about ABC?

I have been through 3 audits with FIBI and read the results of many other FIBI audits of DB, SCA and municipal PW plans. I have seen the results of 4 audits of non FIBI clients. As a result I have some basis of comparison of the level of audit support needed and provided, both by FIBI and others. I also have a basis for having some idea regarding who stands the better chance of being compliant and maintaining compliance.

It is not black magic, but the problem is that when/if the TPA does not get it right, the client pays. The TPA always thinks that they have it right until they learn otherwise. DB etc Plans are seemingly no different than any other plan, be it pension, health or section 125. If all these are so easy to know after a little homework etc Why then do we get so many posts regarding problems and failures? Why does any plan fail if the TPA had it right? It is very difficult to know that you do not know that you do not know.

I have (had) extensive knowledge of FIBI material, ABC material ( these 2 probably cover 90% of the market) and others whom I cannot recall right now. My knowledge is based on multiple sources and their extensive resources and not on that of a less experienced source. As a result I have a basis for comparison regarding the thoroughness etc of the material, both sales and support.

I referred erisafried to FIBI because of their extensive resources and experience, which is what would help him/her. I know of no other Prevailing Wage TPA with either the resources or structure that would be able to give him/her a definitive answer that could be supported by actual documents. I did not refer erisafried to ABC because it would be more difficult to get an answer from them as a stranger.

Who or What would you have suggested to him/her and Why? Or is it that you think that it would serve erisafried better if I gave no tips or suggestions?