Employee Benefits for Prevailing Wage Contractors

Transcription

1 Employee Benefits for Prevailing Wage Contractors Companies bidding on prevailing wage government contracts could benefit from creating an employee benefits program funded with fringe benefit contributions. Regulatory compliance is complex, but creating a benefits program can help companies control labor costs. 44 benefits magazine november 2013 Benefits Magazine v50 no 11 Nov 2013 pp 44-49

2 by Samuel A. Henson, CEBS E mployers working on prevailing wage contracts are, in many respects, the same as any other employer. But having government so heavily regulating their business as well as the competitive nature of contracting creates many unique issues. Whether an employer is new to prevailing wage contracts or it has been working under one for several years, the questions and issues related to employee benefits are nonetheless complex because of the many rules and regulations. Many employers have chosen to avoid these issues altogether, but doing so can be costly. What Is a Prevailing Wage Contract? A prevailing wage contract is an agreement between a government and a private contractor to perform work on behalf of the government whether it be a federal, state, county or munovember 2013 benefits magazine 45

3 nicipal governmental entity. The majority of prevailing wage contracts are performed for the U.S. government, which outsources massive amounts of work each year. Either the Davis-Bacon and Related Acts (DBRA) or the McNamara-O Hara Service Contract Act (SCA) generally governs U.S. contracts. DBRA governs all contracts valued over $2,000 to which the United States is a party for the construction, alteration or repair of public buildings or public works. Some of the most common DBRA types of contracts involve the construction and renovation of federal buildings, military installations and interstate highways. SCA governs all contracts in excess of $2,500 to which the United States is a party and for which the principal purpose is to provide services to the United States. Common SCA subject contracts may involve mail hauling for the U.S. Postal Service or private security and maintenance at federal facilities. Many states and lower-level governments have adopted laws similar to DBRA and SCA. What Are the Requirements of a Prevailing Wage Contract? Prevailing wage laws historically came about because public works contracts were awarded to the lowest bidder. Lawmakers believed it was in the best interest of the government and workers to make sure tax dollars were not spent on unscrupulous contractors that pay substandard wages and no benefits to undercut and obtain contracts. These laws were enacted to level the playing field when companies were bidding for the same government contracts. Essentially, the laws put bidding employers on equal footing by requiring that all contracts include basic rules governing learn more >> From the Bookstore The New Health Care Reform Law: What Employers Need to Know A Q&A Guide, Fourth Edition James R. Napoli, and Paul M. Hamburger. Thompson Information Services Visit for more details. wage rates, apprenticeship and trainee programs, withholding, payrolls, record retention, and liabilities and penalties for violations. All contractors and subcontractors on a prevailing wage contract are required to pay wages equal to the wages they would pay for work on similar private construction projects in the same geographic locale. This prevailing wage requirement is broken up into two components: 1. Basic hourly rate paid by the employer to the employee 2. A fringe benefit intended to cover reasonably anticipated cost of providing employee benefits. For example, a DBRA contract governing construction of a highway may require a cement mason to be paid a basic hourly rate of $20 per hour and a fringe benefit in the amount of $10 (which is intended to provide a benefit such as health care coverage or retirement). The amount each worker must be paid is specified by the U.S. Department of Labor in a wage determination. A wage determination is included in the contract and must be strictly adhered to, as it lists the wage rates and fringe benefit rates for each classification of worker on the particular contract. What Options Does a Contractor Have for Paying Fringe Benefits? Under a prevailing wage contract, the employer generally has the choice of how to pay the fringe benefit. One option is to pay the fringe benefit amount directly to the employee as cash wages in addition to his or her basic wage rate. Paying the fringes in cash is the simplest and easiest option administratively. In the case of the cement mason mentioned previously, he would be paid an hourly rate of $30 ($20 regular plus $10 fringe). However, paying the fringe benefit in cash can be very costly to the employer. All cash wages paid as part of an employee s take-home pay is subject to the payroll liabilities of FICA, FUTA, SUTA, workers compensation and state unemployment. These payroll liabilities can result in an employer expense burden of almost 25%, which means that for every dollar paid, the employer pays $0.25 out of pocket to cover its payroll liability. For the cement mason working 40 hours a week, paying his fringes in cash could cost his employer an extra $100 per week. 46 benefits magazine november 2013

4 An employer with hundreds of workers on a contract that lasts several months or years could recognize considerable payroll costs associated with paying fringes in cash. Not only is this costly, it can also significantly impact the employer s ability to bid competitively for future contracts. This payroll burden must be incorporated into the employer s bid for contracts, and in the ultracompetitive world of government contracting where in many cases the lowest bidder wins, paying fringes in cash can be a difference maker. An alternative approach to paying fringe benefits in cash is to use it to fund an employee benefit program. Under prevailing wage laws, an employer is permitted to offset its cost of providing employee benefits by the amount of fringe benefits earned by an employee. Eligible benefit programs include health insurance, retirement benefits, life insurance, disability and sickness insurance, vacation or holiday pay. The employer can meet its fringe benefit obligation by using the fringe benefits earned by its employees to pay for a benefit program. Practically speaking, the employer may already have benefit plans in place and would simply offset its employer-paid portion of the cost of providing the benefit by the amount the employee earned in fringes. For example, if an employer sponsors a group health plan with a monthly employer-paid premium cost of $400, the employer may retain $400 in fringes earned by the employee receiving the coverage to offset its premium cost. TABLE Pay Fringe in Paycheck vs. Pay Fringe to Bona Fide Plan Base Wage $34.52 Base Wage $34.52 Fringe $10.33 Total Wage $34.52 Total Wage $44.85 Payroll Burden (25%) $8.63 Payroll Burden (25%) $11.21 Bona Fide Plan $10.33 Bid Cost $56.06 Bid Cost $53.48 The table gives an example of the bid cost difference between an employer that pays the fringe directly to employees and one that pays the fringe to an employee benefit plan. In addition to the payroll liability costs associated with paying fringes in cash, it is not uncommon to see these same employers also paying to provide employee benefits. An employer that pays fringes in cash and pays out of pocket to provide benefits on its prevailing wage contracts is at a huge cost disadvantage. Simply using the available fringe benefit to offset the employer s cost of providing already established benefits can greatly decrease the labor costs for bids. Designing an Effective Employee Benefit Program An employer has a myriad of options for designing a benefit program for employees covered by prevailing wage contracts. Because in many cases the amount of fringes earned each month will exceed the cost of any single benefit, a well-designed program will feature several different types of benefits. For example, the cement mason above is making $1,600 a month in fringe benefits ($10 per hour for an average of 160 hours). Determining how to spend down the fringes and provide a benefit that is desirable to the employee will take some planning. A common approach is to start with health insurance. The emergence of health care reform legislation and the 2015 requirement that employers with more than 50 full-time employees provide health insurance for their workers or face a penalty will force prevailing wage contractors to analyze the impact of choosing not to offer coverage. At a minimum, many employers will use the fringes to fund some level of coverage to meet the minimum standards under the Affordable Care Act. Most health care coverage is unlikely to result in a $1,600-a-month employer cost, so coordination with other benefits will be necessary. It is fairly easy to incorporate an inexpensive dental, vision and life insurance benefit in addition to health care coverage, but doing so may still not result in monthly spending of $1,600. One of the best solutions is to use a defined contribution retirement plan to catch the remaining fringe benefit amounts. The fringes can be incorporated into almost any existing defined contribution plan that is designed as a monthly qualified nonelective contribution (QNEC). It can be used to offset november 2013 benefits magazine 47

5 takeaways >> The majority of prevailing wage contracts are performed for the U.S. government, which annually outsources massive amounts of work. By requiring all contractors and subcontractors to pay the same wages as would be paid for a private construction project in a geographic area, prevailing wage laws put all employers on equal footing when bidding for government contracts. An employer can pay for fringe benefits by giving money directly to an employee, but that will be very costly to the employer. The alternative is to use the money to fund an employee benefit program. Eligible benefit programs include health insurance, retirement benefits, life insurance, disability and sickness insurance, vacation or holiday pay. Keeping detailed records is especially important. an employer s safe harbor nonelective contribution, matching contribution or profit-sharing contribution. The benefit of making the contribution to the retirement plan, aside from providing savings for the employee, can be significant for the employer. Many employers, especially in the construction industry, struggle to get employees to participate in their retirement plans. Low participation results in higher plan costs and fewer investment choices. It also may prevent executives and highly compensated employees from being able to maximize their deferrals and, in some cases, result in deferrals having to be refunded. The use of fringe benefits to fund contributions on behalf of employees can boost participation rates, encourage savings for retirement and allow more employees to take full advantage of the deferral limits. Employer contributions to a qualified plan not only help a company avoid employer payroll liabilities, but also increase participation rates and create tax benefits (because the contributions are tax-deductible). All of these result in a more profitable business model, a workforce that is better prepared for retirement and the ability to submit more competitive bids on contracts. What Hurdles Must an Employer Navigate? Detailed recordkeeping is the employer s most important task when funding benefits under prevailing wage contracts. Both the Wage and Hour Division and Employee Benefits Security Administration of the U.S. Department of Labor will closely scrutinize employers using fringe benefits to fund benefit plans. The essential obligation of the employer is to show that for each hour worked, the employee was paid the proper fringe benefit rate and, to that end, received a benefit from the fringes. Although fringe benefits are an employer contribution, the employee must not be able to forfeit his or her right to the benefit. From a recordkeeping standpoint, the employer must be able to document the proper fringe rate being earned and demonstrate where each dollar went to the employee s benefit. This will require human resources and payroll departments and the benefits administrator to work closely with the carrier, payroll provider and plan recordkeepers to have a method to track the fringes. One of the biggest hurdles of establishing an employee benefits program for prevailing wage employees is what is known as the annualization requirement. Annualization requires that public money may not pay for the costs of private benefits. For example, because prevailing wage employees derive their health care benefit 24/7 (even when not working on a prevailing wage job), their benefit must be annualized in how it is paid for. Generally speaking, the employer determines the amount of fringes that may be used to fund the benefit cost by multiplying the monthly health care premium by 12 months (this provides the yearly cost of the insurance). The yearly cost is then divided by the number of available standard work hours in a year; 2,080 hours is the common standard based on 40 hours per week over 52 weeks. The hourly cost is the amount an employer is permitted to credit against the employee s fringe benefits earned. The purpose of annualization is to allocate the cost of the benefit between government and private work. For other types of benefits (e.g., a defined contribution retirement plan), annualization is not a factor if the plan provides for immediate eligibility and immediate vesting of the employer fringe benefit contribution. 48 benefits magazine november 2013

6 Compliance Is Complex, but the Future Is Bright Compliance with a request to establishing a prevailing wage-funded employee benefit program can be complex. An employer looking to establish a program should seek out a service provider that is knowledgeable about the intricacies and complexities of government contracting. The time and effort involved in partnering with a trusted advisor can help reap significant cost savings and ultimately help the employer be more competitive in the market. The future of government contracting is extremely bright. As all levels of government attempt to shift their costs to private employers for services and construction, contractors will continue to have steady and lucrative business opportunities. In order to win these contracts, employers must take every step available to submit the most cost-efficient and comprehensive bid. << bio Samuel A. Henson, CEBS, is vice president senior ERISA counsel for Lockton Retirement Services. He serves as the in-house expert to help retirement plan clients meet their legal and regulatory obligations under ERISA. Henson spent nearly ten years with the U.S. Department of Labor s Employee Benefits Security Administration as a senior investigator, conducting more than 100 civil and criminal investigations. He earned his J.D. degree at the University of Missouri Kansas City School of Law. Henson serves on the ISCEBS Professional Development Committee. Nominate a Great Apprenticeship Fund The International Foundation is seeking nominations for its one-of-a-kind 2014 Excellence in Apprenticeship Training Award. If you know of a jointly managed apprenticeship and training program that should be honored, let us know! This award seeks to highlight excellence in training and apprenticeships. We welcome nominations for funds that have demonstrated overall excellence or best practices in the following areas: recruitment, retention and instructor training. Recipients of the award will be honored at the Trustees Institute for Jointly Managed Training and Education Funds, being held February 3-5 in Rancho Mirage, California. Fully completed nominations, with training program details for the 2014 program, are being accepted through December 2. For more information, contact Bryan Zoran, CEBS, at [email protected] or (262) A full nomination form is at november 2013 benefits magazine 49