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Company owners are often frustrated over their inability to use a 401(k) to save money for retirement. Generally speaking, IRS regulations limit owners and other highly compensated employees to contributing a maximum of 2 percent more than the average contributed by all non-highly compensated employees* and if hourly employees are contributing nothing, well, the math isn’t hard to do.

Business owners who do prevailing wage work and use the fringe allocation of the specifi ed wage to set up a bona fi de benefi t plan for their hourly workers can use that allocation to greatly improve their own retirement benefit. “Putting a prevailing wage retirement plan in place can really help both the company owners and the hourly workers using highly-specialized plan design,” says Fringe Benefit Group’s Regional Sales Director Karen deMontigny. She cites as an example a client for whom she implemented a New Comparability plan which, in general, lets companies establish two or more classes of employees and designate higher employer contributions to select employee groups. “This client did 70 percent prevailing wage work,” deMontigny says. “They always made profi t-sharing contributions at year-end for their employees. Under a traditional 401(k) plan, they were limited as to what they could contribute for themselves. By using the New Comparability profi t-sharing allocation, the owners were able to put away the maximum $49,000.”

There are several other ways prevailing wage contributions can be used to benefi t owners and key employees. Before further exploring these concepts, a bit of background on prevailing wage laws and the advantages of setting up a bona fi de benefi t plan may be helpful. Payroll Savings Now Federal construction contracts in excess of $2,000 are subject to the Davis- Bacon Act, which requires payment of locally “prevailing wages” including the “anticipated cost of prevailing benefi ts.” Generally this is expressed as a per-hour wage and per-hour cash equivalent value of benefi ts, and is often based on a union scale. Prevailing wages are set by the U.S. Department of Labor and are included in the bid specifi cations of covered contracts. Many contractors pay the fringe benefi t portion of the prevailing wage as additional cash wages, believing it’s the easiest way to comply with the law. But allocating this amount to a bona fi de benefi t plan or plans results in signifi cant cost savings. Benefi ts that might be included in a bona fi de benefi t plan offering are retirement, medical, dental, vision and life insurance plans.

The reason contractors save money by offering a bona fi de benefi t plan is that when the fringe portion of the prevailing wage is used to provide benefi ts for hourly workers, this amount is not subject to payroll costs such as FICA, FUTA, state unemployment taxes and workers compensation insurance. Although there are variances in the rates for the last two, conservatively these taxes represent an additional $.25 on each dollar paid as cash wages. The savings realized by allocating the fringe portion of the prevailing wage to bona fi de benefi t plans means two things for contractors: bids submitted for government work will be much more competitive, and/or their profi tability will improve. With record numbers of contractors registering to bid on federal and state contracts, competition for the opportunities presented by President Obama’s Economic Stimulus package will be fi erce. And it’s expected that compliance with government regulations will be tightened as well, given promises of accountability and transparency for the funds appropriated.

Advantages for Company Owners The combination of facilitating more competitive bids, offering quality benefi ts for hourly workers, and increasing company owners’ ability to contribute to their own retirement accounts is hard to beat. Without allocating the fringe portion of the prevailing wage to a bona fi de benefi t plan, most owners can’t contribute anything for themselves. Or they may try, only to end up getting a refund at the end of the year, on which taxes and potential penalties must be paid.

Many company owners and traditional 401(k) plan administrators don’t realize that prevailing wage contributions can be counted as elective deferrals for the hourly workers who receive them. Simply by taking advantage of this, owners of companies that do a lot of prevailing wage work can often increase their own 401(k) contributions to between 10 and 15 percent of their income. Alternatively, if your company typically makes a profi t-sharing contribution, prevailing wage contributions can count toward that amount, saving your company thousands of dollars in addition to the alreadysignifi cant reduction in payroll costs. Or if your company is comfortable with a Safe Harbor plan design, which requires a minimum company match or profi t-sharing contribution to all employees, prevailing wage contributions can be counted toward both the profi t-sharing contributions and used to increase the amount owners and highly-compensated employees can defer.

Working with a company that specializes in prevailing wage plans and can offer personalized plan design benefi ts owners on many levels. A company that does profi t-sharing can reduce the amount spent on contributions for hourly workers, and increase the amount owners can defer. The chance of getting a refund is eliminated, along with any taxes and penalties that would be owed. Tax savings are realized for both the company, which is not taxed on monies contributed; and the owner, who doesn’t pay personal income tax on the amount contributed on his or her behalf.

Some companies may still hesitate, concerned that although they may be doing a great deal of prevailing wage work one year, this may not be the case in subsequent years. However, the plan can be easily turned on and off or adjusted from year to year to meet the needs of the business owner. A company that has an existing 401(k) plan can still take advantage of a prevailing wage plan. A separate plan can be set up specifi cally for prevailing wage contributions, and at year-end the plans can be tested together for compliance. Given that most retirement providers don’t support prevailing wage contributions, look for a partner with experience in this specific industry. Getting Employee Buy-In through Education Some contractors worry their workers will object to a benefit plan when they see the reduction in their paychecks, but the current economic climate makes that unlikely. During enrollment presentations, the bidding process is explained to workers.

Implement A Prevailing W Managing People age Retirement Plan Most quickly understand that savings generated by offering the plan help the company win bids, which means they’re more likely to continue to have jobs. With so many workers unemployed, many for long periods of time, any objections usually disappear. In addition, the plan helps them put money away for retirement and provide medical insurance for themselves and their families, as well as ancillary benefi ts like vision, dental and life insurance.

In the Northeast, bidders are already competing against four times the number of contractors as they were a year ago. DeMontigny says one of her clients told her he usually sees between fi ve and seven bidders competing for prevailing wage jobs in his industry. On the last job he bid, there were twenty two. It’s more important than ever to submit the most competitive bid possible. If companies you’re competing against are saving money with a prevailing wage benefi t plan, and you don’t have one, you’re already at a disadvantage.

Many contractors view public works projects generated by the Economic Stimulus Plan as a welcome lifeline. By correctly using prevailing wage laws and contributions to their full advantage, it can also represent an opportunity for both business owners and hourly workers to build more secure futures for themselves and their families while better positioning the company to compete and grow profits.

Adam Bonsky is executive vice president of government markets for Fringe Benefit Group which helps the construction industry and related associations design and administer fringe benefi t programs since 1983. He may be reached at 800.662.6177 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

www.constructionbusinessowner.com

by Adam Bonsky