Construction companies are wasting hundreds of thousands of dollars each year by paying fringe benefits in cash. Working on government contracts requires contractors and subcontractors to abide by the Davis Bacon Act, in which companies have to pay a certain prevailing wage in cash and fringe benefits as defined by the Department of Labor. Most contractors are already paying benefits to employees as part of benefits packages, meaning that many contractors are overpaying employees when working on government projects. This lack of “taking credit” for fringe rates causes companies to waste thousands on paying unnecessary benefits in cash to employees.
It is true that paying fringe benefits in cash is administratively easier. However, with a robust cloud-based compliance management system it is simplified, allowing you to save time and money. Get it right every time! When paying fringes in cash, those fringes are all subject to 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, allocating these extra payments into a bona fide fringe trust plan, which can significantly reduce your payroll costs.
The annualization requirement ensures that contractors are not taking credit for fringe benefits provided on public works projects in order to subsidize their other private jobs. The regulation requires the employer to average out contributions to benefit plans based on overall number of each employee’s hours worked for the whole year, including work done on private jobs.
To avoid the need for annualization contractors should focus on allocating fringe benefits to plans that are exempt from annualization:
- Cash payments
- Cash payment through Sec 125(cafeteria plan)
- Contributing fringe benefits to a retirement plan that has immediate vesting
- Employer contributions to an HSA
Benefits to Your Employees
In a tight labor market, it is important to offer a competitive benefits package in order to attract top talent. A recent survey suggested that it’s more important than ever to offer these benefits to employees and potential employees — 60% of respondents said they would take a job with a lower salary for better benefits.
For businesses, allocating fringe benefits when overtime pay is involved can be complex. Under the Davis Bacon Act, fringe benefits are paid on all hours worked, which includes overtime. However in some states overtime is only calculated according to the base rate thus fringe benefits don’t have the same time and half multiplier. Check your local state prevailing wage laws for details.
However, employers paying fringes in cash would have to pay the overtime multiplier on the fringe payments as well. So an employer would pay thousands extra since they aren’t allocating the fringe payments into a bona fide fringe plan. Courts have been rejecting the exclusion of fringe benefits from the overtime multiplier.
An area of complication is whether commuter benefits can be counted as fringe benefits for employees. In some states, commuter benefits have been recognized as valid fringe benefits that employers can offer. However, the IRS has very constricting regulations on what activities actually count as commuter benefits. The laws that determine these benefits are based on the funding source of the project. On projects with multiple funding sources it can be difficult to determine which laws apply. This can make determining applicable fringe laws complex.
It is important to find a robust compliance and fringe benefits platform that is on your side. eBacon provides a comprehensive and streamlined platform for managing all aspects of your certified payroll compliance process.
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.