Workers’ compensation (workers’ comp) insurance is an expensive, yet important part of your overall HR compliance requirements. Workers’ comp costs are calculated based on the total pay for an employee — these costs can add up if employees are doing riskier work.

The Davis Bacon Act and state prevailing wage laws also require contractors to pay an applicable prevailing wage based on classification and a predetermined fringe rate. Many contractors elect to pay these fringe benefits to employees in cash versus allocating it into a bona fide fringe plan. By doing so, your company is not only wasting thousands in taxes payments, but also in workers’ comp insurance costs.

Workers’ comp premiums are calculated based on wages paid to your employees. So, if you are paying fringe benefits in cash, these extra payments count toward the wages paid. This can make your workers’ comp costs unnecessarily expensive. By using a bona fide fringe plan, fringe benefit allocations are shielded from being part of the wages used in calculated workers’ comp premiums, saving your company thousands in workers’ comp costs. Fringe benefits must be allocated into a trust that qualifies under the IRC Section 401(a) and 501(a).

Workers’ comp premium calculations don’t include fringe benefits in addition to:

  • Expense reimbursements
  • Expense allowances (with proper documentation)
  • Employer contributions to welfare benefits

Allocating fringes correctly can allow your company to realize significant savings in not only payroll but workers compensation costs.

Reach out to eBacon to better manage your workers comp and fringe benefits, saving money for your business.

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.

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