Fun with Fringe....Or, a DB CB

Does anyone have any experience with using Davis-Bacon / Prevailing Wage fringe amounts to fund cash balance plans for employees?

Here's the setup - Sponsor has about 100 employees, and probably 75% of them work Davis-Bacon jobs, and they get serious fringe amounts.  Like, amounts between 10k and 30k per year are not uncommon.  We use them in their 401(k) test, for instance, and the representative contribution rate for targeted QNEC purposes is a very nice 16%.

Anyway, the sponsor (or at least his CPA) was intrigued by the idea of a cash balance plan to get the owners (in their 50s) significant plan amounts.  (Actually their DC plan is standalone 401k except for the Davis-Bacon amounts.)

They don't even need all the D-B amounts in their ADP test, which would allow us to use still a bunch of them for 401(a)(4) testing between two plans.  (DC plan would have individual allocation rates, basically being the D-B amount.)

Could they steer some of those prevailing wage fringe amounts into a cash balance plan design?  Figure we'd give most staff people a 3% of pay contribution credit and a 5% interest credit each year.  For the majority of the folks, their fringe amounts would cover either or both of those additional accruals.  

Any issues preventing this?  Is it really different from funding a DC plan's allocations with the Davis-Bacon amounts?  I could imagine any particular labor regulatory board not being thrilled with funding their interest credit that way (although is that even necessarily true?), but I'm not sure I see much difference between putting $5,000 of Davis-Bacon money as a contribution credit into their DC account versus funding a cash balance contribution credit for them.

Am I missing something (obvious or not)?  Plus, the Davis-Bacon amounts are currently in the low twenties as a percentage of 404 payroll, so perhaps a CB plan alleviates some deductibility concern, too.  (And would be PBGC.)

Sponsor figures if he's got to contribute the 3% on top of what they're already going to get for their fringe, it's a dealbreaker, but if he can split the fringe between the two plans (required amount to CB, the rest as DC), he'd be more willing to proceed.

Thanks.

--bri

Couple things to consider.

1. You will need to maintain proof of meeting the fringe benefit hourly requirement in case you get questions from the DOL.
2. Employee response to the concept of waiting till NRA to receive "current wages."

I think 1 is easy, not particularly different from showing that a DC plan contribution does a similar thing.

And for 2, a parallel could be drawn to a DC plan with an NRA payout policy, too.  (Sure, nobody's plan has that any more, but it could).  It's a construction company, so turnover's pretty common.  I suppose we'd let terminees (of course we'd use 100% vesting since we'd be using D-B money) take their lump sum or equivalent annuity sooner than NRA.  (Maybe not too readily, since the seasonal nature of the industry tends to lead to rehires.)

We have done this for a client because they needed more deduction room. The owners could have also used to load up on CB benefits but interestingly chose not to do so.

You'll need to comply with prevailing wage (PW) law, so immediate entry and vesting, and deposits at least quarterly (probably same in DC). The potential downside is you have a defined contribution credit amount (3% per your thoughts) - if someone's PW was less than 3%, you still have to credit 3%. If you're leveraging for cross-tested HCE benefits, now you have to provide gateway.

For my client, we have a 5% credit because we needed the deduction room, but some people worked partially on PW projects, but mostly on non-PW, so ended up getting more than they would otherwise. This was not optimum, but was sacrifice worth the added deduction and HUGE cost savings on payroll taxes that would have been due if paid out as current compensation.

Whether in a DC or CB, employees view this money as their compensation and you'll see them requesting their distributions the day after they terminate even with the 10% penalty tax. Then, if this is a seasonal industry, the following year/season they are back working and it starts all over.

Admin on these arrangements is a bit more involved than your standard CBP. Good luck.

Our approach is to use the fringe to fund the DC part of the CB/DC combo.  I think this is really different than the DC side.  I guess you could design a CB plan formula to accommodate the Prevailing wage rules, but why?  I quote from the DOL Prevailing Wage resource book:

Quote

The contractor must make payments or incur costs in the amount specified by the applicable wage decision with respect to each individual laborer or mechanic. Thus, the amount contributed for each employee must be determined separately, and credit taken accordingly towards the prevailing wage requirement for each individual. (It is not permissible to take credit based on the average premium paid or average contribution made per employee.)

Again, it seems to work fine in a CB/DC combo, that's what we do...