Prevailing Wages Issues

This is actually a 2 part question for me:

1. I have a client in which a certain class of employees earn regular wages from the company as well as prevailing wages from the contract company. I know that since prevailing wages and the regular wages are part of the W-2 income, the plan cannot exclude prevailing wages. However, prevailing wages can be used to offset employer contributions. Will the prevailing wages used to reduce employer contributions also reduce the total reported income on the W-2?

2. When combining the regular wages and prevailing wages, some of these employees will be classified as HCEs (solely based on compensation) when their YTD total wages are prorated. Is there a way for these people to remain NHCEs? I'm trying to reduce/eliminate as many issues so that the plan can operate smoothly.

The prevailing wages was quite the bombshell when I found out about it.

1. Employer contributions don't increase or reduce W-2 wages but may be reported on the W-2 in the "other" box but are not required to be reported. 

2 If their gross wages for the plan year were over the compensation limit last year, they are HCEs this year - similar logic for next year. Doesn't matter whether or not those wages are regular, overtime, bonus, prevailing wage, etc. and it doesn't matter if those wages are used for allocation purposes. You could see if the TPG election improves your testing results and makes some of them NHCEs even if they are over the comp limit. 

Agreed - PW compensation is compensation under any safe harbor definition, and although it could be excluded by specific provision I think it would be a rare instance that such would satisfy nondiscrimination testing. PW fringe benefit dollars may be "paid" in a variety of ways - as retirement, as a health and/or welfare benefit, or as direct compensation, in which case it is treated as such. As noted, if retirement contributions, they can be used to offset other required employer contributions but the plan document should specify. These are 401(a)contributions subject to all those rules for coverage and nondiscrimination and, as Lou noted, HCEs and NHCEs are determined by definition and lookback year gross compensation.