offsetting a safe harbor non-elective contribution, matching
contribution, or profit sharing contribution. In most cases, the
401k is an excellent plan to deposit any remaining fringes,
with maximum annual contributions for 2017 at $54,000.20
In addition to providing savings for the employees, retirement plan contributions can be significant for the employer,
as many contractors struggle to get employees to participate
in their retirement plans. Low participation results in higher
plan costs, fewer investment choices, and may prevent executives and highly compensated employees from being able to
maximize their own contributions; in some cases, low participation can even result in contributions being refunded.
However, the use of fringe benefits to fund contributions on
behalf of employees can boost participation rates, encourage
savings for retirement, and allow more employees to take
full advantage of the deferral limits. From a transparency
standpoint, the employee can easily recognize the value of
the fringe benefit from his or her quarterly retirement plan
Depending on the plan, they may even be able to access the
use of the fringes via a participant loan or hardship distribution in times of need. Since employees are always 100%
vested in the fringes, their account balance is fully portable
to an IRA or another employer’s plan in the event employment is terminated.
What Recordkeeping Obligations Exist?
Detailed recordkeeping is an employer’s most important
obligation when funding benefits under prevailing wage contracts. Both the DOL’s Wage and Hour Division and Employee
Benefits Security Administration closely scrutinize employers
that use fringe benefits to fund benefit plans.
An employer is obligated to show that the employee was paid
the proper fringe benefit rate and received an actual benefit
from the fringes earned for each hour worked. Although
fringe benefits are an employer contribution, the employee
must not be able to forfeit his or her right to the benefit (i.e.,
an employee is always 100% vested in that benefit).
From a recordkeeping standpoint, the employer must be able
to document the proper fringe rate being earned and demonstrate where each dollar went to the employee’s benefit. This
requires human resources, payroll, and the benefits administrator to work closely with the carrier, payroll provider, and
plan record-keepers to track the hours and fringes earned.
Can the Fringes Be Used for a Self-Funded
Group Health Plan?
One of the most common misconceptions is that a self-funded group health plan is not considered a bona fide
fringe benefit for Davis-Bacon and the SCA. The confusion
specifically arises from SCA rules requiring a bona fide plan
to be funded.21
Generally, a plan in which the contractor makes out-of-pocket
payments to pay claims rather than making irrevocable
contributions to a trust or other funded arrangement is not
considered a funded plan, and therefore is not bona fide. 22
What is the reasoning behind this rule? If the fringes are
held in the employer’s operating account and the employer
were to go out of business, then the fringes are not protected
from creditors and the claims of the employees who earned a
benefit may not be paid.
While there are special requirements to navigate, self-funded
group health can be used to offset the fringe benefits. To
accomplish this, a self-funded plan must address the following DOL concerns: 23
The primary purpose of the plan must be to provide benefits to
employees for illness, injury, medical expenses, wellness visits,
preventative care, prescription coverage, and hospitalization.
COMMUNICATED IN WRITING
The plan should be administered in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA).
The plan provisions and guidelines should be communicated
in a summary plan descriptions (SPD) available to all employees. In addition, the process for requesting an appeal of a
medical coverage decision must clearly be established in the
SPD. Finally, the plan should provide employees detailed
information about the medical plan options, and their associated paycheck costs, to assist them in selecting their benefits.
The plan must demonstrate an established funding arrangement with the claims payer to withdraw funds from the
operating account every month in order to cover the medical
program costs. The payments provided to the claims payer
must be non-negotiable and irrevocable. The employer must
also demonstrate it is financially responsible for the payment
of claims and administrative expenses up to the specific and
aggregate reinsurance stop loss thresholds.