Government contracts can be a great source of income for construction companies, but they are often more complicated than private projects. The rules and regulations involved in accepting government money for public work projects can be time consuming, confusing and difficult to navigate. One such requirement is the payment of fringe benefits.
Fringe benefits basics
The Davis-Bacon and Related Acts applies to construction companies that perform work on federally funded or assisted contracts in excess of $2,000. McNamara-O’Hara Service Contract Act (SCA) is a similar law that applies to service-based jobs on projects in excess of $2,500. Both laws require that prevailing wages be paid to those performing work on qualifying projects. States may also have prevailing wage laws in place.
Construction companies that do government work must pay prevailing wage rates. Prevailing wages are comprised of an hourly rate and a fringe benefit rate. This information can be found in the wage determination for each worker classification. Typically, if a project uses both state and federal funds, the higher prevailing wage applies.
Fringe benefits fall into two categories: Funded plans and unfunded plans. Funded plans are when you make irrevocable fringe payments to a trustee or an independent third party. This means the money you pay cannot be reverted back to you, like a 401(k). Unfunded plans refer to benefits from your company’s general assets, not to a trustee or third party. Vacations and holiday benefits are examples of unfunded plans.
For most companies, this comes down to either paying fringe payments as a cash payment or through qualifying benefits such as a fringe trust. Each option comes with its own pros and cons that you should consider carefully if you’re required to pay prevailing wages.
Pros of paying fringe benefits in cash
Paying fringe benefits in cash is an option that some companies use because it’s a simple solution to what can be a complicated issue. This route does meet the legal requirements set forth by regulations that govern accepting government funded work. Although there are more advantageous ways to handle fringe, some companies feel that this route is administratively easy and safe.
Another common reason a company decides to pay fringe in cash is because their employees may prefer it. Often times, employees view fringe benefits as a part of their hourly pay even though that money could be used to pay for benefits that don’t show up in each week’s paycheck. This perception can make it difficult for a company to change how they handle fringe payments.
Cons of paying fringe benefits in cash
Paying fringe benefits in cash is a simple solution, but it may not be the best option for your company. As an employer, you get to take credit for a portion of the fringe payments you make. When you pay in cash however, you don’t get to take as much credit as you may with other options. This means you are probably paying more than you need to if you’re using cash to handle fringe benefits.
If you use cash for fringe, 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. Over time, this the overpayment can be staggering for companies that do even 10-15% prevailing wage work.
Bona fide trusts such as 401(k)s, section 125 cafeteria plans, or health savings accounts (HSA)s can be a great way to meet your fringe requirements. Unlike cash payments, contributions to these types of financial instruments are exempt from annualization, workers’ compensation, federal and state unemployment taxes. The savings can be quite substantial.
For example, if you have an employee that works 40 hours a week with a payrate of $15 per hour, you may pay in excess of $3 per hour if you’re using cash to meet fringe requirements. This extra amount can be avoided by paying the required fringe through a qualifying trust.
Just make sure you select a qualifying plan that is completely compliant with all applicable laws, including:
- Employee Retirement Income Security Act (ERISA)
- Internal Revenue Service rules and regulations outlined in Section 401(k)
- Davis-Bacon and Related Act regulations
The main objection companies face when they consider paying fringe payments through a trust instead of cash is access. Employees often consider fringe benefits to be a part of their hourly pay rate. And since most trusts don’t allow employees to have easy access to their fringe benefits, this can be seen as a “pay cut”. Fortunately, there is a way for both employer and employee to win by using a trust to manage fringe benefits.
Our trust is a unique option that actually allows employees to choose traditional benefits like health, FSA or a 401 K plan or decide to have the money distributed via direct deposit or to a pay card each week. This provides companies all of the benefits of using a traditional trust, while providing employees the flexibility they demand when it comes to their fringe benefit payments.
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.