Prevailing Wage (Davis Bacon) Plans | Qualified Plan Design

Prevailing Wage (Davis-Bacon) Plans

Geared towards non-union companies required to pay a prevailing wage for employees working on government projects. May be able to sponsor both a 401(k) and profit sharing plan.

The Davis Bacon Act generally requires that a contract, between a private party and governmental entity of the United States, is entered into for construction/repair by mechanics or laborers which must meet certain prevailing wage and benefit requirements.

The policy underlying the Davis Bacon requires a non-union contractor win a government contract to provide wages and fringe benefits that are 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 workers’ compensation premiums (since the fringe benefits are not considered part of the payroll)
  • Reduced general liability premiums
  • Improved company cash flow (3 to 90 day float on as much as 25% of payroll)
  • Flexibility for company to 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 Workers' 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   Month
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.

For more information on Prevailing Wage Plans, contact one of our Pension Consultants or complete our online Proposal Request Form.  Your Pension Consultant can get you on the right path to win more bids!