October 6, 2021

Leveraging Prevailing Wages to Benefit Workers and Executives

By Warren Hennagin, Partner, Assurance Services

Construction

On March 3, 2021, the Associated Builders and Contractors (ABC) released a statement to coincide with the 90th anniversary of the Davis-Bacon Act (DBA) calling it an archaic and flawed policy far past its expiration date.¹ As long ago as April 27, 1979,² the comptroller general of the United States stated that Congress should repeal the act due to significant changes in economic conditions and the economic character of the construction industry since the act was passed in 1931.

The DBA was originally meant to preclude non-unionized Black and immigrant workers from receiving jobs on federal construction projects, in order to prevent their financial exploitation. It requires employers performing construction work for the federal government valued at more than $2,000 to pay their laborers a prevailing wage and fringe benefits, at levels set on a regional or local level by the U.S. Department of Labor.³ Many states have also adopted the DBA for state-funded projects. Noncompliance can potentially lead to severe penalties, including suspension, debarment, and even False Claims Act civil and/or criminal liability.⁴

In President Biden’s proposed $2 trillion infrastructure plan, the term “prevailing wages” is mentioned no fewer than six times in reference to federally funded projects. The DBA is not directly mentioned, but the frequent reference to “prevailing wages” suggests that non-unionized construction leaders considering work funded by the American Jobs Plan (assuming it is passed into law) should start to familiarize themselves with the DBA and its requirements.

Marcum’s construction clients come from both union and non-union shops. We have conducted seminars with the ABC on prevailing wage accounting.

Contractor clients that pay prevailing wages can leverage fringe benefits paid to field employees to benefit office employees, as well as the company. In most cases, the DBA or prevailing wage is similar to the union scale plus fringe benefits in the area. If a contractor that pays a prevailing wage fully funds the pension benefit to an approved pension plan or defined contribution plan at the maximum of 25% of compensation, the contractor can derive significant savings with payroll taxes, general liability insurance, and worker’s compensation insurance. In the end, this will allow the contractor to win more bids. Pension benefits are not subject to payroll taxes, worker’s compensation insurance premiums, or general liability insurance premiums.

Some contractors don’t want to deal with the paperwork and administrative tasks involved with the Davis-Bacon Act, so they pay the entire prevailing wage in cash to field employees. But paying the benefit in cash is a problem if your construction company has both prevailing wage and non-prevailing wage contracts. Field employees only want to work on prevailing wage contracts. By funding a defined benefit program, you can manage the hourly wage or cash wage paid to the field. If you can balance the cash wage similarly for both prevailing and non-prevailing contracts, you won’t have an issue with field employees only wanting to work on prevailing wage contracts. You can indicate to the field staff which contracts pay a pension and which do not. However, this pension benefit is available to the field employee because it must be 100% vested when paid. If the field employee wants to take their 100% vested benefit immediately, the benefit will be subject to income tax and early withdrawal penalties. Many times the employee will lose 50% of the pension benefit if paid early.

Using a prevailing wage plan can also benefit office employees. Under current pension rules, the company can grant a safe harbor pension contribution to eliminate some of the top-heavy and non-discrimination testing inside a pension plan. Since the prevailing wage contribution could be 25% of compensation, whereas the safe harbor contribution is generally 3-4% of compensation, the company can use the larger benefits paid to field employees to offset the required safe harbor contribution.

What this means for office employees is that someone with a high salary would not be limited in the amount they could contribute to a 401(k) plan. It also provides opportunities for management to increase the pension benefits for company executives. The construction company might be able to layer a defined benefit plan on top of the pension plan, which could provide significant benefits to certain executives of the company.

Marcum has worked with construction companies to provide many executives with a pension contribution plan that can significantly increase benefits. These benefits are a current deduction for the construction company, and not taxable to the employee. Marcum can assist your company with prevailing wage accounting, executive compensation, and defined benefit plans. We can tailor a plan that provides significant tax savings and benefits to both the company and its owners.