Most companies offer fringe benefits in some form, from healthcare and vacation time to retirement plans. For prevailing wage construction companies, fringe benefits take on a new meaning because they fall under requirements set up by Davis-Bacon and Related Acts(DBRA) and McNamara-O’Hara Service Contract Act (SCA). These are complicated laws that come with specific guidelines regarding how fringe benefits must be administered.
Even if you deal with fringes every payroll cycle, you probably have some questions about how they work and what your options may be. Today we’re going over some of the most common fringe benefit questions we hear, along with answers to some of the less talked about aspects of fringe benefit management.
What are fringe benefits?
Fringe benefits, sometimes called “perks”, are something offered above and separate from a worker’s salary. In relation to prevailing wages, fringe benefits are mandated by law for people working on eligible government funded contracts. These are provided in order to help workers improve their financial stability and access to options like health care.
According to the Department of Labor, bona fide fringe benefits include:
- Contributions irrevocably made to a trustee or third party pursuant to a bona fide fringe benefit fund plan or program.
- The rate of costs incurred in providing bona fide fringe benefits pursuant to an enforceable commitment to carry out a financially responsible plan or program, which was communicated to the employees in writing.
What benefits are acceptable forms of fringe benefits?
Any type of payment that is required by federal, state or local law cannot be considered fringe benefits. So money paid toward workers’ comp or social security is not considered a fringe benefit. Apart from that, fringe benefits can be paid in cash or through eligible options including:
- Life insurance
- Health insurance
- Sick Leave
It’s important to understand that some fringe benefits are subject to annualization, so a company cannot subtract the full amount of the fringe benefit from the amount they are required to pay.
What does annualization mean?
Some fringe benefits are subject to annualization. This means that the amount a company can claim toward their fringe obligation is reduced based on the time a worker spends doing prevailing wage work. So if you pay $5,000 per year in medical benefits to an employee that only spends 25% of their time on prevailing jobs, you can only take $1,250 of credit for fringe benefits. Even if you increased the contribution to $10,000 a year, in this situation you still would only be able to take $2,500 in credit.
There are some benefits that are exempt from annualization and allow companies to take 100% credit on your costs. While annualization-exempt benefits vary, they typically include cash, some HSA and 401(k) contributions. Cash is not annualized, but you do have to pay taxes, workers’ compensation and general liability, making it an expensive way to handle fringe.
Just remember, laws vary and how each benefit is managed can affect if you’re compliant and how much credit you can claim.
What are the ways fringe benefits can be paid?
Fringe benefits are typically either paid directly on a worker’s paycheck or through they are paid through a 3rd party bona fide trust. First, employers take credit for allowable benefits they are already providing by subtracting them from the overall fringe amount, Next, the remaining amount that is owed can be put on the worker’s paycheck or placed in a fringe trust. If they are put onto a paycheck, they are subject to taxes, workers’ comp and possibly overtime, depending on the state. If they are put in a qualifying trust, you do not have to pay certain expenses like payroll taxes and workers’ comp.
Can fringe benefits be paid in cash?
Yes, fringe benefits can be paid in cash. Some companies do this because it is administratively simple and will keep you compliant as long as you are paying the correct rate. And although it is an easy way to manage fringe benefits, it is the most expensive. If you use cash for fringes, you’re also required to pay workers’ compensation and other taxes on the entire amount. This can be a significant payroll expense that could be avoided if fringe benefits were handled differently.
What is a fringe trust?
A trust is a relationship where a trustor allows a trustee to hold title to property or assets for the benefit of a third party, or beneficiary. Trusts have been around since the 1930s, and are very common. If you have a 401(k) you are already using a trust to manage your assets! In terms of fringes, trusts can help employers comply with prevailing wage laws while saving on FICA, SUTA, state unemployment and workers’ compensation. This is because employers do not have to pay these expenses on fringe dollars placed into a qualifying trust. This makes a fringe trust a more affordable way to manage fringe benefits.
To qualify as a tool for fringe benefit management, all contributions must be irrevocably made to a trustee or third party pursuant to a bona fide fringe benefit fund plan or program.(Source) Learn more about fringe trusts.
What is a “fringe credit”?
You’ll hear the term ‘fringe credit’ when you read about fringe benefit management. This refers to a company’s ability to count something they offer as a fringe benefit and to subtract it from their overall fringe obligations. For prevailing wage construction companies, fringe benefits are a part of hourly pay requirements. Construction companies required to pay fringe benefits will take credit for allowable fringes and subtract that amount from what they are required to pay. This is not always a direct dollar to dollar amount, because some benefits are annualized. Understanding your options and what is allowable under the law is critical to staying compliant.
What is a Supplemental Unemployment Benefit (SUB) plan?
SUB plans are a Section 501 (c) (17) plan or trust sometimes used to handle fringe benefits. Previously, SUB plans were thought to be exempt from annualization, so some construction companies used them to manage fringes. In 2015, however, the DOL ruled that they are NOT exempt. This makes them far less desirable as a fringe management tool. It may also mean that companies relying on them as a tool for handling fringes could be found liable for back taxes, penalties and interest.
Read the official DOL Brief on SUB annualization here.
What is the best way to pay fringe benefits?
How you handle fringe benefits depends on a number of factors, including how much prevailing work you do and how large your workforce is. Cash is an option but is the most expensive way to pay fringes. SUB plans are not exempt from annualization, so they no longer provide the tax benefits they were once thought to offer. This means for many companies, using a compliant trust is the best option for fringe management because it provides benefits for employees while offering companies significant tax, workers’ comp and general liability savings.
Regardless of how your company handles fringe benefits, you should consider your options from time to time. Here are a few resources to help you stay informed on fringe benefits and the laws governing them.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.