10/18/2016
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)
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Agenda
• Overview
• Common Misconceptions
• Design Considerations
OVERVIEW
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Overview
• 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.
Overview
• 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.
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Overview
• 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
Overview
– 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.
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Overview
• Fringe Benefits are:
– Life Insurance
– Health Insurance
– Pension
– Vacation
– Holidays
– Sick Leave
– Supplemental Unemployment Benefits
Overview
• 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
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Overview
• 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.
Overview
– 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).
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Overview
– 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.
Overview
– 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.
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Overview
• 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.
Overview
• 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.
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Overview
– 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).
Overview
– 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).
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Overview
• 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-DavisBacon projects.
Overview
– 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 nonDavis-Bacon work).
– The amount of contributions to such plans should
be in conformance with any limitations imposed
by the Internal Revenue Code and ERISA.
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Overview
– 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.
Overview
• 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.
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Overview
– 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.
Overview
• 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.
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Overview
• 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.
Overview
• 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.
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Overview
• 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.
Overview
– 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.
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Overview
• 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.)
Overview
• 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.
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Overview
– 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.
Overview
• 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.
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Overview
• 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.
Overview
• 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.
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Overview
• 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.
Overview
• 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.
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Overview
• 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
Overview
– 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
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Overview
• 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.
Overview
• 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.
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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.
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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.
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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.
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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
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Design Considerations
• 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.
Design Considerations
– 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.
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Design Considerations
• 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.
Design Considerations
– 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.
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Design Considerations
• 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.)
Design Considerations
– 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.
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Design Considerations
– 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.
Design Considerations
• 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.
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Design Considerations
• 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.
Design Considerations
– 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.
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Design Considerations
• 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.
Design Considerations
• 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.
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Design Considerations
• 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.
Design Considerations
• 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!
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Design Considerations
• 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.
Design Considerations
• 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.
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Design Considerations
• 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.
Design Considerations
• 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.
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QUESTIONS
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