Workshop 62 Prevailing Wage Plans Under the Davis Bacon Act - Tips, Tricks, and Traps Richard A. Hochman, JD, APM, GFS, Director, Retirement Plan Consulting Services, Actuarial Systems Corporation (ASC) 1
Agenda Common Misconceptions OVERVIEW 2
Davis Bacon Act (DBA) Enacted in 1931 Amended in 1935 and 1964 Congress revised in 2002 without substantive changes and codified as 40 USC 3141 et seq. Purpose To protect communities and workers from the economic disruption caused by competition arising from non-local contractors coming into an area and obtaining federal construction contracts by underbidding local wage levels. Requirements The Act requires that locally prevailing wages determined by the Department of Labor (DOL) be included in the bid specifications for covered contracts and paid to workers employed under such contracts. Prevailing wages include both wages and fringe benefits in the area. 3
A contractor s prevailing wage obligation may be met by any combination of cash wages and creditable bona fide fringe benefits provided for the covered worker. The total may be paid entirely as cash. Payment made or costs incurred by the contractor for bona fide fringe benefits may be creditable towards fulfilling the requirement; or A combination of cash wages paid and bona die fringe benefits may be used together to meet the total required prevailing wage. Under DBA/DBRA monetary wages paid in excess of the basic hourly rate may be used as an offset or credit to satisfy fringe benefit obligations and vice versa. 4
Fringe Benefits are: Life Insurance Health Insurance Pension Vacation Holidays Sick Leave Supplemental Unemployment Benefits Use of a company vehicle dopes not qualify. No credit may be taken for a benefit required by Federal, State or local law such as: Workers compensation Unemployment compensation Social security contributions 5
Funded Fringe Benefit Plans The contractor s fringe benefit contribution made irrevocably to a trustee or third party pursuant to a bona fide benefit fund can be credited towards meeting the prevailing wage requirement without prior DOL approval. Contributions to fringe benefit programs must be made regularly no less often than quarterly. Annual contributions do not satisfy the requirement. Payments must be made in the amount specified with respect to each individual laborer or mechanic. Can not take credit for group average. Credit may not be taken for contributions made on behalf of participants who are not eligible to participate. If the plan has an age or eligibility requirement, including last day employment, no credit is given on behalf of employees who do not satisfy the requirement(s). 6
Where an employer contributes to the plan, employees may be required to complete a certain length of service before they have a nonforfeitable right to benefits. Thus, an employee who leaves employment before completing the specified length of service may forfeit all or a part of the accrued benefit. Such forfeitures are permitted, provided the plan meets applicable requirements under ERISA, including minimum vesting requirements. Forfeited contributions may not revert to the employer, but must be reallocated to the remaining plan participants. Credit for profit-sharing or other discretionary contributions can be given if certain conditions are met. Contributions must be irrevocably made to an escrow account not less often than quarterly in an amount sufficient to meet any claimed fringe benefit credit on behalf of each employee participating in the plan. 7
Upon the annual determination of profits, monies placed in escrow are transferred to the pension trust fund and used as an offset against the contractor s obligation to the laborers and mechanics under the profit sharing plan. Any shortfall in profits which results in actual payments to the pension plan being less than the rate at which the contractor claimed Davis-Bacon credit throughout the year would have to be made up by the contractor when the account is settled at year end by paying the difference (shortfall) in cash directly to the covered workers or by making additional contributions to the pension fund in an amount to cover the shortfall. Annualization is a computation strategy used to determine the hourly rate of contribution that is creditable towards a contractor s prevailing wage obligation on DBA/DBRA covered projects. Annualization is particularly important for computing the fringe benefit credit when a contractor employs workers on both DBA/DBRA covered projects and projects not subject to DBA/DBRA coverage and makes contributions to fund fringe benefit plan(s) during the year. 8
In practice, annualization limits the Davis-Bacon credit to an amount equal to the hourly cost of the fringe benefit averaged over all hours an individual laborer or mechanic works during a year (both Davis-Bacon and non-davis-bacon hours). To compute the contractor s allowable hourly credit towards meeting the prevailing wage obligation for a covered laborer or mechanic on a DBA/DBRA project, the total annual cost of the fringe benefit must be divided by the total number of hours the individual works in a year (including work on both covered and non-covered work). 9
Exception from the annualization requirement For contributions made to defined contribution pension plans which provide for immediate participation and immediate or essentially immediate vesting schedules (100% vesting after an employee works 500 or fewer hours), a contractor may take Davis-Bacon credit at the hourly rate specified by the plan, regardless of whether the contractor makes contributions to the plan when working on non-davis- Bacon projects. Pursuant to this exception, the contractor may take credit for the full amount of contributions made to such a plan during periods of DBA/DBRA covered work without annualizing the credit claimed (even if the contractor makes no contributions to the plan during periods of non- Davis-Bacon work). The amount of contributions to such plans should be in conformance with any limitations imposed by the Internal Revenue Code and ERISA. 10
The DBA applies to all federal government contracts and DC contracts in excess of $2,000 for construction, alteration, or repair (including painting and decorating) of public buildings and public works. Runs the gamut from building entirely new buildings to paining and remodeling existing facilities. Prevailing wages are determined in advance by the DOL National Office and included in bid specifications for covered contracts. Note: Client/employer has this information available before covered work is performed and thus can be used to help in a plan s design based on the nature of the work being performed and the location thereof. Prevailing wages are based on local union contracts though these really only impact nonunion employers and their employees. Union employees are covered under contracts that deal with both wages and benefits. 11
DBA requirements apply to contractors and subcontractors; including apprentices, trainees and helpers.. Laborers and mechanics must be paid at lest prevailing wages DBA applies only to employment at the site of the work. The laborers and mechanics must be paid weekly. Persons performing the duties of laborers and mechanics must be paid the prevailing wage regardless of any contractual arrangements, e.g. an independent contractor or owner-operator. The term laborer or mechanic does not include workers whose duties are primarily administrative, executive or clerical, rather than manual. Categories of other workers normally excluded perform no manual or physical work on projects include: Architects and Engineers and Inspectors. 12
Working foremen who devote more than 20% of their time during a workweek to mechanic or laborer duties, are laborers or mechanics for the time so spent. Persons employed in a bona fide executive, administrative or professional capacity are deemed not to be laborers or mechanics. Business Owners An individual who owns at least a bona fide 20% equity interest in the business and is actively engaged in its management is considered a bona fide executive and is not a laborer or mechanic under the Davis Bacon Act. Truck drivers have special rules depending on where they are driving. 13
The DBA applies to contracts in excess of $2,000 to which the Federal Government or the District of Columbia is a party for construction, alteration or repair of public buildings or public works. In considering DBA coverage three criteria apply: The agreement is a contract to which the Federal Government or the District of Columbia is a party. The agreement is a contract for construction. The contract is a contract for the construction of a public building or public work of the United States or the District of Columbia. Within the meaning of the DBA, public building or public work includes a building or work, the construction, prosecution, completion or repair of which, is carried on directly by authority of or with funds of a federal agency to serve the interest of the general public regardless of whether title thereof is in a Federal agency. 14
Congress has extended DB prevailing wage requirements to other laws related acts which provide federal assistance for construction through: Grants Loans Loan Guarantees Insurance (As contrasted with direct federal contracts.) Many related Acts are listed in 29 CFR 5.1(a). Examples: Federal Highway Administration provides grants to states for the reconstruction of roads and bridges on federal-aid highways. US Dept. of Housing and Urban Development (HUD) finances the construction of low income residences on housing authority projects. 15
Other federal agencies which assist construction through grants, loans, loan guarantees and insurance in the Departments of Health and Human Services, Education and the Environmental Protection Agency. Certain related Acts contain specific coverage for construction supported by the federal assistance they provide. Thus, a determination of whether Davis Bacon prevailing wage provisions apply in particular circumstances requires an analysis of the actual provisions of the relevant related Act. Note: It is up to the employer or their attorney advisors to know when DBA may apply rather than the firm working doing the plan administration. It becomes more difficult when some work is subject to the rule and other work isn t. For example: DBA does not apply under provisions of the Housing and Community Development Act of 1974 to the rehabilitation of residential property containing fewer than 8 units. 16
For those working with retirement plans things are further complicated by the fact that an employer s plan can only cover employees and not independent contractors, but that distinction does not exist for Davis Bacon prevailing wage purposes. Independent contractors must still receive prevailing wages even if they are not covered under an employer s plan. Additional confusion is caused by application of the McNamara-O Hara Service Contract Act (SCA) 41 USC 6701, et seq. The SCA rules took effect in January, 1966. The SCA was intended to remove wages as a factor in the competition for federal service contracts by requiring the payment of locally prevailing wages and fringe benefits. 17
The SCA applies to most contracts entered into by the United States or the District of Columbia whose principal purpose is the furnishing of services through the use of service employees. Prevailing wage and fringe benefit compensation standards applicable to service employees working on contracts over $2,500. The Act defines service employee as any person engaged in the performance of a covered contract except those persons who individually qualify for exemption as bona fide executive, administrative or professional employees. 18
Examples of contracts covered by SCA include: Guard and watchmen security services Janitorial services Cafeteria and food service Grounds maintenance Laundry and dry cleaning Data processing Electronic equipment maintenance and operation Chemical testing and analysis Support services at government installations Drafting and illustrating and mapping services Operating, maintenance and logistical support of a Federal facility Warehousing or storage 19
Sometimes contracts are entered into with a prime contractor to operate a federal facility or program for and on behalf of the government. Because the contractor is in effect operating in the place of the government as an agent for the government. Such a contract is not subject to the SCA. However, contracts entered into by the operating contractor with secondary contractors for and on behalf of the government, that have services as their principal purpose are subject to the SCA. Though they are similar and similar plan designs can be used for contracts subject to Davis Bacon and Service Contract rules; they should not be confused. 20
COMMON MISCONCEPTIONS Common Misconceptions Plans for collectively bargained employees are eligible for certain exemptions from normal testing rules. For example, top-heavy rules are not applicable to collectively bargained plans. Employees whose benefits were subject to good faith collective bargaining, even if not actually covered by a plan can be statutorily excluded from coverage testing. 21
Common Misconceptions These exemptions are not applicable to employees subject to Davis Bacon Contract rules. There are no special exemptions from compliance testing. Common Misconceptions Prevailing wages only apply to the local wage scale. In actuality, they apply to both actual cash wages and benefits provided to local collectively bargained employees. 22
Common Misconceptions There is only one prevailing wage applicable to determine the amount owed to any one laborer or mechanic. While it is common for unionized workers to be associated with just one trade, it is not uncommon for non-union individuals performing Davis Bacon contract work to perform multiple functions requiring the application of different prevailing wages for different time periods. Common Misconceptions It is not uncommon for individuals to work on different job locations that require the application of different prevailing wages for the same function. For example, an individual could perform covered electrical work on a site in Northern New Jersey on Monday and Tuesday, in NYC on Wednesday and Thursday and return to Northern New Jersey on Friday to perform covered carpentry. In this case, three different prevailing wages would apply. 23
Common Misconceptions Retirement Plans covering Davis Bacon contract employees can only provide benefits for employees with prevailing wage amounts and only on those wages. In the example above, on Friday the individual performs non-davis Bacon contract work. Does it make sense to not provide a benefit for Friday s work or provide it to a different plan? DESIGN CONSIDERATIONS 24
The first issue to address is why not just pay the required amounts in cash rather than going through the time and expense of having a plan. This may be the approach, if the employer is not going to have a lot of covered work. (Not likely) It is important to remember that wages are subject to employment taxes and most covered employees fall below the taxable wage base. Thus, paying cash wages is more expensive than making plan contributions. Both are deductible, but the employer s wage taxes are 7.65 % of the amount paid. Benefit contributions are not subject to the additional tax, but there are costs to starting up and maintaining a benefit program. The important thing to remember is that the employer is reimbursed for all the costs of making the plan contributions, but not the employment taxes. 25
The first plan design approach is benefitting just those employees who are required to benefit under the Davis Bacon Act. However,... This does not provide coverage for other staff such as clericals or even those producing materials, and those not working on site. It likely does not benefit the business owner(s). It does not provide benefits for work not covered under Davis Bacon provisions. It is possible that if you try to have a different plan for the non-davis Bacon employees, it won t pass coverage; since all or the vast majority of HCE s will benefit under this plan. 26
The next design option is a plan benefitting all employees, not just the Davis Bacon employees. (Basic Profit-Sharing) The required contribution amounts can be used as an offset to the employer s contribution. Can benefit all of the employees, or at least those that the employer wants to benefit, (assuming pass coverage testing, if choose to exclude nonstatutorily excluded individuals.) In setting the benefit formula, the employer should address the contribution that they want to make on behalf of the employee base, not just the covered employees. It is important to remember that the employer will be reimbursed for any contributions made on behalf of covered employees, to the extent necessary to satisfy DB requirements. Not all the prevailing wage benefits have to be satisfied through a retirement benefit. The employer may also satisfy DBA requirements through other benefit programs including health insurance. In fact, due to Affordable Care Act requirements, a substantial portion of the DBA requirements may be satisfied through health insurance benefits. 27
Hypothetically, the employer can set a 5% contribution formula for all wages, including covered Davis Bacon wages. Depending on how much Davis Bacon covered work a participant performs, they may satisfy all the Davis Bacon prevailing wage requirements, or they could be over or under the targeted amount. If over, only 3% of Compensation was required to satisfy the DBA requirements, then they have provided a larger benefit than required, and they will not be reimbursed for the entire contribution amount. If under, then the plan can provide that the employer may contribute an additional amount to satisfy the DBA requirements. To satisfy DBA a contribution of 7% of compensation is required. The employer can contribute an extra 2% to just this employee. Years ago, we had to contend with the Code 415 25% allocation limit. That no longer comes into play. The additional amount is not problematic; since there is no discrimination testing under Code 401(a) between NHCEs. Just between HCEs and NHCE s. 28
Other Design Issues Eligibility Most traditional profit-sharing plans do not provide for immediate eligibility. However, for DBA purposes, if an individual is not eligible for a contribution, then they are not benefitting for purposes of satisfying DBA requirements. Thus, immediate or almost immediate eligibility is a more efficient design. Vesting - As addressed earlier in the discussion of the annualization requirement, 100% vesting is more efficient and makes administration easier. While a normal vesting schedule is allowed, it is not the most efficient design. Immediate eligibility and full vesting are common design options in a 401(k) plans. How does this play into Davis-Bacon design. 29
How can the employer work the DBA requirements to its advantage? Employer can not take credit for any employee elective deferrals as satisfying the DBA requirements. Most traditional profit-sharing plans have been replaced by 401(k) plans. Many 401(k) plans have eliminated eligibility requirements, at least for deferrals. One concern that employers have had about immediate eligibility was discrimination testing. However, at least for employee deferrals that concern has been mostly minimized. Vesting has also become less of an issue. Combined, a safe harbor design takes advantage of both immediate eligibility and vesting. 30
Safe harbor plans can be either non-elective or matching based. However, using a matching formula does not benefit those who choose not to defer, and they would still be owed additional contributions or compensation to satisfy DBA requirements. A non-elective contribution (NEC) design would clearly be preferable. Safe-harbor contributions have two requirements. Full and immediate vesting and withdrawal restrictions. Question, if withdrawal restrictions are attached, do the contributions still satisfy DBA requirements? Can distribution restrictions be applied to DBA benefit contributions. - Yes! 31
This allows the employer to avoid ADP testing and to use government reimbursements to maximize elective deferrals on behalf of the employer s HCEs. Safe-harbor non-elective contributions are subject to gateway testing in cross-tested designed profit-sharing plans. Thus, if the employer is required to satisfy DBA requirements and does so by making non-elective contributions, they can be further used to the employer s advantage in a cross-tested allocation. The hypothetical 5% profit-sharing contribution previously referenced could actually be an enhanced safe-harbor NEC. 32
This could allow the employer to maximize non-elective contributions on behalf of the HCEs. Obviously, the design does not have to go to this level, but the option is there if the employer wants to take advantage. Again, the costs of the DBA required contributions are reimbursed by the government as part of the construction contract. Thus, the employer can offer a reasonable retirement benefit to all of its employees with a lower out of pocket cost than would be incurred if they performed no DBA work. Obviously, other designs are possible, but this demonstrates an acceptable design that benefits all of an employer s employees not just those required to get additional compensation or additional compensation and benefits. 33
QUESTIONS 34