Sunday, April 15, 2018

Prevailing Wage, Benefits and Compliance Overview

by Mike Bottinelli, Fringe Insurance Services

Prevailing Wage Overview
The wage determination belongs to the contractor (not the employee) with the mandate that it be spent for the employee's benefit in some combination of wages and bonafide third party administered benefits (ie health insurance, qualified retirement plans, flexible spending accounts, vacation plans and severance pay plans).
In California, the base wage must be paid out as cash compensation. Contractors not governed by a collective bargaining agreement may re direct some or all of the fringe portion into the aforementioned plans at their discretion. The employee has no say in how the fringes are allocated. These monies are viewed by DOL and the IRS as employer contributions - not employee elective contributions.
A Merit Shop contractor has enormous flexibility in allocating fringe dollars (absent a Project Labor Agreement (PLA)) to include allocating some or all of the fringes as an add on to wages. In addition, these allocation choices can be made on a job by job and labor classification basis. As a result, if it is advantageous to pay additional cash wages to compete for labor or attract certain trades on a particular job, there is latitude to do that.
Because of the discretionary nature of fringe allocations, benefit plan designs can be
customized to meet a contractor's individual needs. This flexibility often allows benefit plans to operate off the same platform for work performed in both the private and public sector. Conversely, prevailing wage drive benefit plans can be established to operate concurrently with existing core benefit plans.
The ability to redirect fringe dollars into benefit plans affords a significant tax and cost savings to both the employer and employee. Since these dollars don't flow through payroll they are not subject to payroll taxes (FICA, Workers Compensation, FUTA, SUTA or General Liability Insurance (based on payroll) nor are they subject to income tax at any levelAdditionally, they can be used to directly offset medical insurance costs. These advantages level the playing field when bidding jobs.
How these savings are applied is at the total discretion of the contractorThey can be used to lower bids and/or increase profits and that decision can be made on a job by job basis.

Benefit Plans

Qualifed Retirement Plans:
Retirement plans in a wide range of platforms capable of addressing virtually any design requirements and/or demographics can be offered.
Plans are available on a bundled (administration and investment provider the same entity) or unbundled (administration firm independent from investment provider) with a wide range of investment and third party administration options.
Health and Welfare Plans:
Available programs include fully insured plans (HMO, PPO, HSA) from all major carriers, partially self insured plans, levefunding plans and actuarially designed stop loss self insured plans and can be designed to desired specifications.
If necessary, prevailing wage employee groups may be isolated and offered dedicated plan designs without impacting other employee classifications currently covered by existing core benefits,
Vacation Plans:
Merit Shop contractors are not required to provide vacation pay. If they choose to offer this benefit they can put additional monies on the check for that purpose or accrue it in a third party trust. If they accrue it, they can only offset their cost with fringes dollars based on the ratio of public to private work. An in-house sponsored accrual plan is not allowed in California, while it is allowed in a Federal Davis Bacon or Service Contract Act.  In either case there is no tax savings - if it goes on the check it's subject to tax, if it goes into an accrual plan it merely defers the tax until the employee is issued a vacation check.

Hour Bank Plans
Participants become eligible for coverage by accumulating a minimum required hours of work credit. For example, if eligibility for benefits is based on working 130 hours per month, each 130 hour increment of work credit provides a subsequent calendar month of benefit for the participant (and dependents if family coverage is elected).
The hourly equivalent for monthly premiums is determined by dividing the participant's
monthly premium by the hour bank level (ie. $390 monthly premium divided by 130 hour bank level equals a $3.00/hr equivalent).
Once the participant has completed the necessary 130 hours of work credit, they will be
covered effective the 1st day of the following month (ie. if contributions started September 1st coverage would begin October 1st). Participants accumulate hours of work credit for excess hours worked (ie. participant worked 160 hours in a month, the participant will accumulate an excess of 30 hours of work credit for the month (160 hours worked minus 130 hours required equals 30 hours excess credit toward future coverage).
If a participant falls below the required amount of hours of work credit, they or their employer can make up the difference. If not, then a COBRA notification will be issued. Once the minimum required hours have been reached again, benefits will resume the 1st of the following month.
Upon termination of employment the cash equivalent of any remaining hours may be used to offset COBRA premiums or refunded to the participantRefunds are subject to income tax and a 1099 will be issued to them at the end of the calendar year.

Hour Bank Plan Advantages
Hour Bank Plans solve the problem of contractors paying medical insurance premiums for employees as though they were working full time when they are often working less than full time.
Using this methodology, premiums are paid on a retrospective basis. The traditional method pays premiums at the beginning of each month with no way of knowing how many hours an employee will actually work that month. As a result, a contractor is either overpaying or underpaying. Hour Bank Plans remedy this situation with the added benefit of providing a method for reconciling monthly premiums to an hourly rate equivalent for compliance purposes.
Advantages from Employer's Perspective:
Employees learn coverage has to be earned
Addresses "lack of value" perception of benefits by employees
Aligns cost of benefits with bidding/job costing
Affords flexibility in amount of cost employee pays on private work
Advantages from Employee Perspective:
Helps cash flow issues when not working
Dollars vest immediately
Simple to understand - work an hour get paid a benefit for one hour
Earn extra benefits by working extra hours

Wage Determinations:
On Federal jobs, the fringe is expressed as a lump sum. On State and Municipal jobs the fringe is designated in a "line by line" format ( ie. pension, health & welfare etc).
The Unions' various collective bargaining agreements determine the hourly rates by labor classification and the fringes are allocated in their trusts based on the various job classifications and area jurisdictions.
Merit Shop contractors are not bound by collective bargaining agreements and can allocate fringe dollars at their discretion (with the exception of training or when performing work governed by a Project Labor Agreement) in any combination of cash or bonafide third party administered benefit programs (ie. retirement plans, group medical insurance, vacation plans, flexible spending accounts and severance pay plans).
Employer Obligation:
Wage determination dollars belong to the contractor, not the employee. This is the basis for them not being subject to payroll taxes.
The contractor's obligation is to spend the money for the benefit of the employee on a per hour/per employee basis in some combination of cash and/or bonafide benefit plans with the base rate required to be paid in cash.
In an audit, the contractor does not have to prove the employee received a benefit from fringe dollars allocated to bonafide third party administered benefit plans. It is assumed the employee received the benefit of dollars allocated to these plans.

In order to take full credit with the fringe to offset medical insurance plans, the contractor must pay on every hour an employee works in a pay period (both public and private). The rationale for this rule being since Union contractors must pay into their trusts on every hour worked, not requiring it of Merit Shop contractors would give the an unfair advantage by giving them the potential to subsidize benefits provided on private work with dollars accumulated from fringes on public works.
The only exception to this rule is contributions to a qualified retirement plan because they are 100 vested immediately and, as such, are viewed as a "cash in kind" benefit.
Credit Calculation:
Determining Hourly Rate:
Monthly premium divided by hours worked in previous month on per employee basis, or
Annualized premium divided by 2080 hours on a per employee basis
Ratio of public to private work:
Monthly premium = $260/130 hours worked = $2.00/hour 
80 hours worked on PV job - 80 hours worked on private job
80 hours x $2.00/hour = $130 credit


25                Number of Employees
$20 per hour     Fringe Rate
160 per month   Hours Worked
$80,000         Contribution per Month
20               Payroll Burden (FICA, FUTA, SS, Comp)
$16,000         Savings per Month

You Save:
FICA contributions
Workers Compensation premiums
General Liability premiums(if based on payroll)
                         - You become more competitive
You increase your contract volume
You generate higher profits

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