Prevailing Wage

[Tom]

A client asked about making prevailing wage contributions to a 401(k) instead of paying wages.  It makes sense to save the FICA tax.  So there is no eligibility requirement, no allocation conditions, 100% vested and can be used to offset the employer profit sharing allocation if there is one.  I assume it can be included in nondiscrimination testing since it can offset PS. 

Of course this feature must be added in the Adoption Agreement.  My question is what else has to be done?  The client is already calculating the amount and paying as wages.  Does this change need to be in the service contract they are serving, the affected employees notified it will no longer be in wages?  Or can our client just make this change? 

I told the client to check with their legal counsel and/or tax advisor.  As far as us as TPA - it's pretty easy.

Tom

[Peter Gulia]

You gave the right guidance by suggesting the employer ask its lawyer.

What a contractor must, may, or must not do involves the conditions of the applicable Federal, State, and intergovernmental government-contracts laws and the contractor’s obligations under each contract.

For example, how much choice a contractor has to select components of wages and ways to use them in meeting each prevailing-wage condition turns on the details of each law and contract.

Businesses that regularly make government contracts use lawyers that focus on the laws, including prevailing-wage laws, of the kinds of government contracts the business makes. Also, some labor-relations or employment lawyers advise on prevailing-wage laws.

A further thought: Contracts with prevailing-wage conditions often involve reporting, auditing, and other means to show that the contractor met the conditions. The employer might want careful records about each contribution and the allocation of it. And the employer might want to preserve access to those records for periods longer than a TPA otherwise might maintain them.

[Tom]

Great input Peter.   That probably makes this next question moot.  The client is asking fi they can give each person the option - wages of plan contribution. Any final comments on that aspect?  

Thank you!

[Peter Gulia]

Yes, whether such an arrangement would meet the terms of a particular government (or government-funded) contract turns on the details of the contract, including the laws the contract invokes.

But if each individual has a choice between immediate money wages and the employer’s contribution to a retirement plan, isn’t that a cash-or-deferred arrangement?

Is it meaningfully different from increasing the employee’s money wages, leaving her with choices about what reductions and deductions she instructs the employer to take from her wages?

[Bill Presson]

1 hour ago, Peter Gulia said:

Yes, whether such an arrangement would meet the terms of a particular government (or government-funded) contract turns on the details of the contract, including the laws the contract invokes.

But if each individual has a choice between immediate money wages and the employer’s contribution to a retirement plan, isn’t that a cash-or-deferred arrangement?

Is it meaningfully different from increasing the employee’s money wages, leaving her with choices about what reductions and deductions she instructs the employer to take from her wages?

Agreed. It also tends to defeat the advantage of a prevailing wage provision in the plan because, if it's a CODA, the amounts are subject to all the FICA, etc, labor costs.

[Tom]

Good points - I forgot all about the old cash or deferred rule.

Thanks