Retirement Plans
Plan Types
Prevailing Wage (Davis-Bacon) Plans
The Davis Bacon Act generally requires that a contract between a private party and government of the United States for construction/repair by mechanics or laborers must meet certain prevailing wage and benefit requirements.
The policy underlying the Davis Bacon Act in which a non-union contractor that wins a government contract must provide wages and fringe benefits that is similar to the wages and fringe benefits that would be provided if a union contractor won the contract.
Contractors have the option of paying the fringe rate as additional compensation to the worker or actually use the hourly rate to provide qualifying retirement plan benefits.
» Contact a Pension Consultant to find out how you can win more bids!
Characteristics of Prevailing Wage Plans
Employers that sponsor and contribute the fringe benefit to a qualified prevailing wage retirement plan enjoy:
-
Savings in payroll taxes (FICA, Medicare, and Federal and State unemployment);
-
Lowered worker’s compensation premiums (since the fringe benefits are not considered as part of the payroll);
-
Reduced general liability premiums;
-
Improved company cash flow (3 to 90 day float on as much as 25% of payroll);
-
Allows the company to flexibility to tax deduct contributions to a tax-deferred plan for key employees with little or no contribution required for other employees;
-
Ability to provide more competitive bids!
Example
- ABC Transportation Company’s contract with the Federal Government stipulates $18.00 an hour prevailing wage be paid to employees working on the government contract.
- The contract allows that $2.75 of the $18.00 hourly wage may be used for “bona fide fringe benefits” such as health insurance or a qualified prevailing wage retirement plan.
- If the employer deposits the fringe portion to a qualifying retirement plan, they do not have to pay FICA, SUTA, FUTA or Worker’s Compensation on whatever portion of the $2.75 is contributed to the plan.
| $2.75 |
Prevailing Wage Fringe Benefit |
| x 160 |
Hours Per Month |
| x 12 |
Months |
| x 30 |
Employees |
| $158,400 |
Annual Prevailing Wages |
| x 31% |
Employer Payroll Tax |
| $49,104 ANNUAL SAVINGS |
Other Considerations
Some employers opt to combine the Prevailing Wage Plan with a 401(k) Plan. This allows all employees (including non-prevailing wage employees) to reduce personal income taxes by contributing a portion of their gross paycheck on a pre-tax basis to a retirement plan that has tax-deferred earnings.
Some employers with existing Safe Harbor 401(k) Profit Sharing Plans may want to add a Prevailing Wage plan in order to utilize the prevailing wage fringe to offset the required Safe Harbor contribution.