In an attempt to satisfy fringe benefit requirements for projects that require a prevailing wage, you might begin to offer more generous benefits to your employees. However, it is important to remember the annualization requirement for certain fringe benefit payments.
Most benefits are subject to “annualization”, which means that the credit is reduced based on a percentage of prevailing hours each employee works. For example, if you pay a $5,000/year medical benefit for an employee that works 25% (520/2080 hours) on prevailing jobs, you can only take $1,250 of credit. If you increased the contribution to $10,000/year, you would just increase the disallowed credit from $3,750 to $7,500.
Alternatively, you can provide certain benefits that are exempt from annualization and take 100% credit on your costs. While annualization-exempt benefits vary by state, they typically include:
- “Cash” payments (but you pay taxes, workers’ compensation (WC) and general liability)
- “Cash” payments with a Section 125 cafeteria plan (exempt from taxes and sometimes WC)
- Hourly fringe HSA contributions (limited to $7,000/yr for employees with a family HDHP medical plan)
- Hourly fringe 401(k) contributions
There are a lot of fringe trusts options to choose from as an employer, but be careful when making decisions about trusts. As an example, the Department of Labor (DOL) determined in 2015 that Supplemental Unemployment Plans (SUPs) were no longer exempt from annualization. Health trusts are also subject to annualization and some even keep leftover funds when an employee’s hours are more than needed to cover insurance costs.
Depending on a client’s needs, we typically set them up with a multi-purpose trust with Section 125, cash fund, and 401(k) components. This provides the largest company tax savings while giving each employee a configurable mix of retirement, tax-reduced spending, and available cash as they need it.
If you do set up a trust, you may consider reducing some general benefits that would be subject to annualization. For example, an employer contributing 100% to employees’ insurance may want to reduce to the state’s minimum requirement (usually 50%).
We’re here to help you
Understanding different requirements of prevailing wage laws, such as annualization, can be difficult. Fortunately, we’re here to help our clients navigate these regulations to ensure their payroll and employee benefits are set up optimally.
Contact an eBacon representative today to find out how we can help you maximize your fringe credits.
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.