Minimizing Costs (Maximizing the Benefits) of Prevailing Wage Benefits
Despite the ever-increasing costs of payroll taxes, health care, and retirement benefits there are opportunities to decrease labor costs, increase the bottom line, and attract and retain good employees by offering an additional fringe benefit program. As a result of the Davis-Bacon Act (DBA) and various state prevailing wage laws, companies that perform contract work with governmental entities are subject to prevailing wage regulations. The Department of Labor (DOL) sets prevailing wage rates for federally funded projects, while individual states determine their own wage rates and fringe benefit amounts. For each job, the prevailing wage is divided into a minimum hourly base rate and a fringe benefit amount. The prevailing wage regulations require contractors to pay employees the base rate in cash, however, the fringe benefit portion can be paid in cash or in the form of a “bona fide” fringe benefit plan. The benefit plan may be designed to fund a variety of fringe benefits including retirement contributions, disability insurance, life insurance, health insurance, dental and vision insurance, health savings accounts, vacation days, and other paid time off supplemental unemployment benefits.
Paying the entire prevailing wage in cash is generally simpler and entails less administrative and compliance complexities. However, cash wages paid to employees are subject to payroll taxes – Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as state unemployment taxes and workers’ compensation. Paying the benefit portion in cash wages results in an increased labor burden which can range anywhere from 15-40% of payroll. By electing to contribute the fringe benefit portion of pay to a qualified benefit plan, significant cost savings are achieved through the decreased labor burden.
In today’s competitive and costly environment, contractors need to continually think of ways to retain a skilled and satisfied work force. Offering additional benefits can provide a competitive advantage and differentiate you from competitors when competing for current and potential employees. By offering a “bona fide” benefit plan that allows the fringe portion of an employees’ prevailing wages to be allocated to retirement savings, supplemental unemployment benefits and insurance, employees are provided with reliable savings and a consistent cash flow. Supplemental unemployment benefits are especially useful for contractors that experience seasonal interruptions in workload and a reduced need for labor. Supplemental unemployment benefits are not considered wages, so laid off employees are able to collect both supplemental unemployment benefits and state unemployment benefits. These types of plans will help employees save more for retirement and pay medical and insurance expenses.
While the benefits of tax savings to businesses are important in today’s tight labor market, employers are also adopting benefit plans as a tool to attract and retain valuable employees. If you are interested in learning more about these types of plans and potential savings opportunities please contact Kaitlyn Hensler CPA, CFE at firstname.lastname@example.org.