A Davis Bacon Retirement Plan?

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To appreciate the benefits and advantages of a Davis Bacon Retirement plan, it’s helpful to understand its history.

The Davis Bacon Act (DBA or prevailing wage law), named after its authors- a Pennsylvania Senator James Davis and a New York Representative Robert Bacon, was passed amid the Great Depression in response to the plea of local workers who were frequently and systematically displaced by lower paid out-of-state migrant workforce as contractors fiercely competed to win public projects. In addition to federal statute, over time 32 states have passed their own version of the prevailing wage law.

What Davis Bacon Act Requires

The Act requires that contractors and subcontractors hired for federal construction projects pay to their workers wages equal to the local wages paid for similar private projects. This wage is known as a prevailing wage.

Who It Affects The requirements of the Act apply to companies with contracts involving federal government for construction, alteration, improvement of public buildings or works, e.g. highways, roads, bridges, airports, landscaping, sewers, power stations, etc. The prevailing wage requirements apply to ‘laborers and mechanics,’ i.e. individuals whose job duties are manual and physical in nature. Supervisors, clerical, and professional employees are generally exempt.

How It Works The prevailing wage is set by the Department of Labor (DOL); it varies by location, year, nature of project, and the types of workers. It has two components, the hourly pay rate– typically paid to the employee- and the hourly fringe benefit which can be paid to the worker in cash or contributed for eligible fringe benefits. For example, the DOL may determine that a local prevailing wage for a given project and occupation is $35 per hour; a contractor may comply with this requirement by paying $35 as cash wages, or $25 in cash wages and $10 in fringe benefits, or $23 in cash wages and $12 as a fringe benefit.

What is an Eligible Fringe Benefit? DBA lays out specific requirements for the types of fringe benefits which may be used as eligible prevailing wage pay. They include health, vision, dental, life insurance, contributions to health reimbursement accounts, and retirement plans such as 401(k), profit sharing, and pension plans.

Why Using Fringe Benefit to Fund a Retirement Plan Pays Off When the fringe benefit is paid as compensation, it is subject to all applicable employer payroll taxes and burdens, which may range from 14% to 25%.

Since retirement accounts are among the eligible fringe benefits, all or a part of the prevailing wage’s fringe component may be used to fund a company retirement plan. Plans designed to receive such contributions are known as Davis Bacon or a Prevailing Wage retirement plans. Neither employer nor employees are required to pay payroll taxes on fringe benefits deposited to the plan. Here’s an example for a company that has 30 employees working on a Davis Bacon project with a prevailing wage of $35: $25 hourly wage and a $10 fringe benefit.

By directing the fringe benefit to fund a retirement plan instead of paying it as a taxable wage, the company is able to recognize substantial payroll tax savings. Employees will never have to pay their portion of social security and Medicare tax (7.65%) since retirement plan distributions are exempt from payroll tax:

Number of employees 30
Annual hours on a Davis Bacon Project per employee 1100
Davis Bacon fringe benefit per hour $10
Total Davis Bacon fringe benefit amount $330,000
Employer payroll tax savings at 14.45%* $47,685

* FICA/Medicare; FUTA; SUI; Liability Insurance; Workers Compensation

Making Davis Contributions Do More Yet, 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 DB compensation inside of a retirement plan, you can help the business owners implement an efficient plan or improve/enhance an 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:

Old Plan

New Plan

Contribution Allocation 401(k) Plan   401(k) Plan Davis-Bacon Contribution Non-Davis-Bacon Contribution
Owners $52,800 72% $118,000 $0 $118,000 86%
Non-owners $20,830 28% $98,871 $79,000 $19,871 14%

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.

Old Plan

New Plan

Contribution Allocation 401(k) Plan   401(k) Plan Davis-Bacon Contribution Non-Davis-Bacon Contribution
Owners $52,800 72% $118,000 $0 $118,000 86%
Non-owners $20,830 28% $98,871 $79,000 $19,871 14%

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 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.

Retirement Services is available to consult with you concerning these and other retirement topics. The rules are complex and to succeed you need to either become an expert or align yourself with the right partner. We are available to be an extension of your team. Retirement solutions consultants are ready to partner with you in presenting solutions to your clients and prospects. But we don’t stop there; we help you implement and maintain the plan in partnership with nationally-recognized recordkeeping vendors to offer a complete plan solution. Call us at (888) 926-0600 or click here to connect online.