Boost Profitability with Prevailing Wage

Growing up, my dad worked with contractors through the government. In addition, my husband has worked as a contractor for 20 years, running a plumbing business. So, needless to say, construction companies and workers have always been near and dear to my heart. I speak the language, I understand the mentality, I see the potential. That’s why I’m so passionate about prevailing wage plans and how they can help construction employers and employees. Since working with these plans, I’ve seen them save businesses, allowing companies to stay open through difficult economic times. How? Let’s take a look.

Prevailing wage plans help retain quality employees, bid jobs more competitively, and provide an opportunity for retirement savings. Yet, to take advantage of all the benefits possible and avoid penalties, these plans require a knowledgeable third party administrator (TPA) with experience in this area. In this post, we’ll explain what prevailing wage is, the common, costly errors associated with these plans, and how to avoid them.

Prevailing wage plans: how they work

The Davis-Bacon Act of 1931 established prevailing wage, which was created to protect the rights of contractors and subcontractors and their pay. Governed by the Department of Labor, prevailing wage includes two parts – the base pay and a separate, per-hour wage, called fringe. The fringe can either be given to contractors as part of their wage in cash, OR it can be used to fund bona fide benefits, including a qualified retirement plan. Utilizing a retirement plan to redirect some of those fringe dollars to a retirement plan can save the contractor a lot of money. When the fringe dollars are funded into a retirement plan, those dollars are exempt from all payroll taxes.

Common costly errors found in prevailing wage plans

Sound like prevailing wage might be a good option? That’s because it is. However, it’s easy to make costly errors if employers don’t enlist the proper TPA that fully understands prevailing wage plans. Below are a few examples that we see frequently.

Exceeding Plan Contribution Limits

The IRS places restrictions on retirement plan contributions each year. These restrictions include an employer contribution limit of 25 percent of total eligible compensation. This means that prevailing wage sourced contributions, matching contributions, profit sharing contributions, and any other employer contributions in total cannot represent more than 25 percent of total eligible compensation.

Therefore, the employer is responsible for ensuring no more than 25 percent of total eligible compensation is being funded into the plan. Part of that responsibility includes determining how much fringe can be redirected from payroll into the plan.  So, it’s important to consider the amount of prevailing wage work they do and what percentage of prevailing wage jobs they contract so they can determine an appropriate amount to redirect. At EGPS, we may recommend the employer start with a smaller contribution at first. Then, they can evaluate the percentage selected based on that contribution, and adjust as needed.

Why is it important to be cautious? If the plan exceeds this 25 percent limit, the employer will owe a 10 percent penalty tax to the IRS on the excess contribution. In addition, the excess contribution amount will be carried over to be deducted in the following year. Thus, the amount of prevailing wage fringe allowed the next year will be limited even further.

Covering Highly Compensated Employees

We will typically advise clients to exclude highly compensated employees (HCEs) from the prevailing wage portion of the plan. Why? Once an HCE is provided a prevailing wage benefit, additional non-discrimination compliance testing is required.

If this test doesn’t pass, the employer will be held liable for making unexpected contributions to the plan in order to satisfy the conditions of the test. If HCEs are not included, no testing is required, eliminating this costly risk.

Treating prevailing wage deposits as employee instead of employer contributions

One common misconception when employers use the fringe to fund a retirement is that these funds entering the plan are employee contributions. These fringe funds are directed from the payroll by the employer, so they are employer contributions. 

Therefore, it’s important that these funds are not deposited into the employee salary deferral (401(k)) source. If this is done accidentally and not reversed quickly, employers could be subject to potential corrections and penalties.

So… what next?

Prevailing wage plans come with numerous benefits for employers. These plans save employers money and provide attractive benefits for employee retention. However, they must be designed and implemented by an experienced and knowledgeable administrator. Otherwise, benefits aren’t maximized and the errors above, as well as a number of others, can easily occur.

At EGPS, we have prevailing wage experts with years of industry experience. Our team consistently updates and corrects numerous prevailing wage plans with errors that come to us from other providers. Our knowledgeable team prevents costly fines and optimizes the benefits available to employers.

Interested in more resources on prevailing wage plans? Fill out the form below and we’ll send you our prevailing wage guide and answer any questions you may have!

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About the author

Regional Vice President, Sales & Consulting

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