Contractors and subcontractors that do prevailing wage work must follow strict rules that govern how laborers and mechanics are paid on qualifying jobs. These regulations are found in various prevailing wage laws, including Davis-Bacon and Related Acts(DBRA) and the Service Contract Act (SCA). Additionally, some states and municipalities have prevailing wage laws in place.
These laws mandate the paying of prevailing wages on qualifying projects, which includes an hourly wage plus an hourly fringe benefit rate. Adherence to these regulations is mandatory, but you do have a few options when it comes to how you handle fringe benefits.
What are fringe benefits?
Government funded projects that fall under prevailing wage laws, including the Davis-Bacon and Related Act (DBRA) and the McNamara-O’Hara Service Contract Act (SCA), require that bona fide fringe benefits be paid. These are hourly rates added to a base prevailing wage rate. Both prevailing wage rates and fringe rates are set by the U.S. Department of Labor and published online. In some instances, state prevailing wage rates also apply.
The goal of fringe benefits is to provide workers access to benefits that can improve their overall 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.
Some examples of bona fide fringe benefits include life and health insurance, pension and vacation pay. It’s important to note that payments required by federal, state or local law can not be counted as a fringe benefit. So required payments to Social Security, unemployment and workers’ compensation can not be counted toward required fringe payments.
Read more about qualifying fringe benefits from the DOL.
Fringe benefit options
Paying fringe to eligible workers on qualifying public works projects is mandatory, but there are a couple of options when it comes to how you handle them, in cash or through a trust.
Fringe benefits in cash
Many construction companies pay fringe benefits in cash because it’s administratively simple. By adding the required fringe amount, in full, to the prevailing wage rate, companies can stay compliant. This method is easy to track and report on, which is required by law. While it’s easy from an admin standpoint, paying fringe in cash is the most expensive way to handle fringe benefits. In fact, it costs construction companies thousands of dollars every month.
This happens for a few reasons, starting with the potential for overpaying. Many contractors are already providing some qualifying benefits through benefits packages. While not everything will count as fringe, by failing to take credit for benefits that do qualify as fringe, you’re probably overpaying. This is not as simple to handle as cash though, because it requires a deeper understanding of the law and the ability to precisely calculate and track benefits and fringes.
Another reason paying fringes in cash is so expensive is that cash fringes are subject to all payroll taxes, including Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as state unemployment taxes and workers’ compensation. For every dollar paid out in wages, about 25 cents is taken out in taxes. This can really add up, especially if you have multiple employees working on prevailing wage projects.
Fringe trusts are a great way to pay fringe benefits because they can provide significant employer-side savings. Unlike cash fringes, payroll taxes like FICA, SUTA, state unemployment and workers’ compensation are not owed on fringe dollars that go into qualifying, irrevocable bona fide trusts. For the employer, this can add up to thousands of dollars in savings every pay cycle.
Even though the savings can be huge, some construction companies shy away from utilizing them. One reason for this is that setting up a fringe trust can seem difficult and requires a third-party administrator (TPA). Another reason is because workers often come to count on fringe payments as a part of their regular hourly wage, even though it isn’t. Making the switch to a trust can be perceived as a cut in pay since traditional trusts do not allow people to have regular, easy access to funds.
eBacon fringe trust
Traditional fringe trusts do not allow workers to have access to their fringe dollars every week, making them less appealing to construction companies and their workforce. Since there have not been other options on the market, companies have leaned toward more simple, but more expensive, methods of fringe management, like cash.
Our fringe trust, however, actually does allow workers to have easy and convenient access to their fringe dollars every week. We can do this because we’re a third-party administrator and a software company. This allows us to automate the administrative work, distribute and deliver funds in a way that other companies cannot.
And our bona fide fringe trust is a traditional 401(k) that complies with the Employee Retirement Income Security Act (ERISA) & the IRS. This makes it a legal and safe way for companies to save on payroll taxes.
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.