In part 1, The Basics, we looked at the origin and basics of the Davis Bacon contributions; now, we’ll focus on how these amounts may be strategically deployed to enhance employee retirement savings.
Making Davis Contributions Do More Benefits of shifting the Davis Bacon fringe to a retirement plan don’t stop with payroll tax savings and ability to bid on projects more competitively. By strategically deploying Davis Bacon compensation inside of a retirement plan, you can help the business owners implement an efficient plan and/or improve/enhance their existing retirement plan program. Below are two examples of retirement plans where Davis Bacon contributions improved outcomes.
Case Study 1 – Enhance Efficiency of Current 401(k) Program This Oregon construction company employs 45 individuals: 2 owners and 43 non-owner employees. Throughout the year, employees are involved in projects that fall under the Davis Bacon Act. $79,000 of their annual compensation is attributed to the fringe benefit component of the prevailing wage. All employees are eligible to participate in the company-sponsored Safe Harbor 401(k) plan. By redesigning the plan to deploy the Davis-Bacon dollars inside of the 401(k) plan instead of passing them through to employees as taxable pay, company owners now have an opportunity to increase their contributions by $65,200 without an increase in non-Davis Bacon contribution for employees:
Contribution to owners: $52,800
Contribution to non-owners: $20,830 was contributed by the company
New Plan – Davis Bacon Contribution component added:
Contribution to owners: $120,000 ($65,200 increase)
Contribution to non-owners:
$98,871 – total
• $79,000 was offset by Davis-Bacon contribution
• $19,971 remaining was contributed by the company (about the same amount as before)
Case Study 2 – Add a Cash Balance Plan to the 401(k) Program By adding a cash balance plan, which targets owner employees and a subset of non-owner employees, the company can dramatically improve the outcome for all employees: owner contributions grow by nearly $300,000 while non-owner contribution increase by about $60,000.
New Plan – Davis Bacon Contribution component added to 401(k) plan, a new Cash Balance plan installed:
Contribution to owners (401(k) plan and Cash Balance plan):
$343,780 total (a $290,980 increase from the base line plan):
– $83,780 in the 401(k) plan
– $260,000 in the Cash Balance plan
Contribution to non-owners:
$148,000 in the 401(k) plan
$12,825 in the Cash Balance Plan:
– $79,000 was offset by Davis-Bacon contribution
– $81,825 was contributed by the company ( $60,445 increase from baseline plan)
A Few Important Plan Document Requirements In order for a retirement plan to utilize the Davis Bacon contributions, it needs to follow a set of design requirements which typically do not apply to non-Davis Bacon plans, including:
• Eligibility and entry: employees working on Davis Bacon contracts should be eligible to enter the plan immediately;
• Allocation conditions: no minimum hours or employment on last day of plan year may be required;
• Vesting: immediate 100% vesting or 100% vesting once an employee has worked 500 hours;
• Contribution Timing: contributions must be made at least quarterly.
Strategic deployment of Davis Bacon fringe benefits in conjunction with a properly designed qualified retirement plan can create opportunities to significantly improve and increase tax-advantaged contributions for owner employees and key contributors. But it doesn’t stop there, redirecting the Davis Bacon fringe benefit toward retirement savings rather than passing it through as current cash compensation helps employees to improve their retirement savings and readiness. The Davis Bacon plan becomes a true win-win scenario.
This communication is purely for informational purposes and to provide information of general interest. It is not intended to constitute legal or tax advice and should not be treated as such. Use of Davis Bacon contributions in a retirement plan may not be appropriate in every situation or for every retirement plan. For tax or legal advice, please consult an appropriate legal or tax advisor.