Prevailing Wage Formula Structured as a Match?

[Purplemandinga]

Is there anything that would specifically prohibit the formula for a Prevailing Wage QNEC to be structured as a match? For example if the QNEC was allocated as follows would there be any issues: Employer will contribute a QNEC to applicable prevailing wage employees equal to 100% of prevailing wage employee's compensation deferred up to 3% of compensation deferred and will then contribute 50% of prevailing wage employee's compensation deferred greater than 3% but less than or equal to 5% of compensation deferred.

[401_noob]

FWIW, I was reading/googling PW info yesterday and came across this website that said that the PW fringe benefit can be used to offset other ER contributions to the Plan (profit-sharing, match, SH)... http://www.consultrms.com/services/prevailing-wage.html It is the third paragraph from the bottom.

I can't attest to the validity of this information as I was trying to learn information on this topic myself.

I'm interested to see what the rest of BenefitsLink has to say. 

[PensionPro]

OP is describing basic SH match formula.  We have a lot of plans that offset the SH match with PW contributions.  However, based on the language in the OP I am not certain of all the details of how it is being implemented.

[Purplemandinga]

So the prevailing wage formula is the safe harbor match formula, but the plan also has a safe harbor match which is offset by the prevailing wage formula. The catch here is the Prevailing Wage contribution is only being contributed to prevailing wage employees who elect to defer.

The rub here is our plan document doesn't give us an explicit option to contribute prevailing wage contributions as a QMAC so I'm establishing a prevailing wage QNEC formula that is essentially a QMAC. 
 

Wasn't certain if that was kosher or not. 

[PensionPro]

25 minutes ago, Purplemandinga said:

The catch here is the Prevailing Wage contribution is only being contributed to prevailing wage employees who elect to defer.

How are prevailing wage plan contributions if any made to employees who work on prevailing wage jobs but elect not to defer?

[Purplemandinga]

I would assume that if an employee elects not to defer and receive the prevailing wage contribution then the employee would end up receiving the QNEC as an increase in cash on his paycheck?

 

[shERPA]

Why?

PW has to be paid to comply with the PW contract.  If it is done as a match, then for ees who don't defer it must be paid in cash (costing the ER more money in payroll taxes and workers comp premium), or it is put into the plan via another bucket (so all the PW ees end up with the contribution whether they defer or not), effectively defeating the "match" aspect.

Why?

[John Feldt ERPA CPC QPA]

So if they defer (or don’t defer), and thus get the match as pw (or they get no match), that deferral election can also affects their wages that are required to be paid, not just their match. So the match and the wages can both be contingent upon the election to defer. 

For example, a pw contract requires $42 per hour. The plan does a pw match equal to a dollar for dollar match of 5% of pay. 

Gilligan’s pay is normally $40 per hour. He chooses to defer nothing. That election gets him $2 more per hour in wages. Next time, Gilligan elects to defer $2, and that election gets him $2 of match but no extra wages. Finally, on the next job Gilligan defers $1 per hour. This deferral election turns into both $1 of match and $1 of extra pay.

IRC 401(k)(4)(A): Benefits (other than matching contributions) must not be contingent on election to defer.

The amount of extra wages required to satisfy the contract, are contingent upon deferrals. Does that violate 401(k)(4)? It’s not a problem with the pw contract, certainly any type of employer contribution can be used to satisfy that. To me it’s a tax qualification question. IMO, the most solid ground here would be to have a document that has IRS approval for using prevailing wage as a match. Maybe that’s too cautious?

[PensionPro]

On 7/27/2018 at 10:35 PM, John Feldt ERPA CPC QPA said:

So if they defer (or don’t defer), and thus get the match as pw (or they get no match), that deferral election can also affects their wages that are required to be paid, not just their match. So the match and the wages can both be contingent upon the election to defer. 

For example, a pw contract requires $42 per hour. The plan does a pw match equal to a dollar for dollar match of 5% of pay. 

Gilligan’s pay is normally $40 per hour. He chooses to defer nothing. That election gets him $2 more per hour in wages. Next time, Gilligan elects to defer $2, and that election gets him $2 of match but no extra wages. Finally, on the next job Gilligan defers $1 per hour. This deferral election turns into both $1 of match and $1 of extra pay.

IRC 401(k)(4)(A): Benefits (other than matching contributions) must not be contingent on election to defer.

The amount of extra wages required to satisfy the contract, are contingent upon deferrals. Does that violate 401(k)(4)? It’s not a problem with the pw contract, certainly any type of employer contribution can be used to satisfy that. To me it’s a tax qualification question. IMO, the most solid ground here would be to have a document that has IRS approval for using prevailing wage as a match. Maybe that’s too cautious?

Let's say a pw contract requires $100 per hour.  Everyone gets paid $100 in cash except for those who elect to defer who will as example receive $90 in cash, they defer $5, and receive $5 match.  There may be a tax qualification issue but I am not quite sure.  I would be wary if the eligibility requirements are not immediate for deferrals and match meaning some of the pw employees are eligible, and others are not.

On 7/27/2018 at 9:17 AM, Purplemandinga said:

The rub here is our plan document doesn't give us an explicit option to contribute prevailing wage contributions as a QMAC so I'm establishing a prevailing wage QNEC formula that is essentially a QMAC. 

I would feel uncomfortable proceeding when the plan provisions are inconsistent.

[Kevin Plymyer]

My advice is to seek assistance from an ERISA Attorney.  If there is ambiguity in the language of the Plan Document, or inconsistencies, it would be money well spent.  Another argument to seek out an attorney's advice would be to have someone to rely on if you received bad guidance.  

PW can be tricky and has its pitfalls, so you would want to make sure you get advice from a qualified professional.

[ACK]

An Employer can decide how it wants to discharge its prevailing wage obligation, which could include making a matching contribution.    What you are describing really doesn't make sense (unless I am misunderstanding) because it will actually serve to discourage deferrals in the plan.  The employer has to pay the prevailing wage in some manner.  If an employee defers, then his prevailing wage fringe is paid as a "match".  I assume, then, that if he doesn't defer then the prevailing wage would be paid to him in cash.  If that is the case, many employees will choose not to defer, so that the prevailing wage is paid to them in cash.  The only time I see prevailing wage taking the form of a match is when an employer has a match obligation to all participants - either safe harbor or non-safe harbor - and for the prevailing wage employees, the employer uses the prevailing fringe to offset what is due for the matching.  

[Purplemandinga]

Thanks guys, I felt uncertain myself and the IRC 401(k)(4)(A) argument really made me question the validity of it. I think the best course of action is to avoid for now.