All merit shop construction companies working on projects for federal, state or municipal governments have to make decisions on how to satisfy the fringe supplement portion of the prevailing wage law.

The easy path has always been to pay the fringe supplement contributions as wages, in the employee’s weekly paycheck. However, as is typical in life, the easy path is not always the most cost efficient. That’s because the supplements paid as wages are subject to labor burden expenses such as payroll taxes, liability premiums, workers compensation premiums, etc.

Utilizing the fringe benefit supplements to actually pay for employer-provided bona fide benefits such as medical insurance, dental insurance, vacation, supplemental unemployment, apprentice training and retirement benefits can be more cost efficient as it avoids labor burden expenses.

However, a contractor’s ability to shift benefits out of payroll and into actual bona fide benefits is complicated by regulations that limit the credit received by the contractor for providing benefits while working on private work (non-prevailing wage work). The process of limiting credit is known as annualization.

As described on the NYS DOL website: “Annualization refers to the time frame (annual) over which contributions to benefit plans are divided to calculate an hourly credit toward the amount an employer is required to pay according to the prevailing wage schedule. Total contributions per employee are divided by the total annual hours worked by that employee, on both public and private jobs.” The federal government has similar, although somewhat less draconian rules for projects covered by the Davis-Bacon Act.

In essence, the DOL is limiting credit for the cost of benefit plans for only the periods of time when the employee is actually working on public work. This means that the employer, to receive full credit, will need to provide cost-equivalent benefits while working on private work. Depending on the amount of public vs. private work a contractor performs, annualization costs can quickly outweigh the payroll labor burden savings of utilizing fringe benefit supplements to pay for benefits. This is especially true for contractors that regularly do less than about 80 percent public work.

However, there is a way to completely avoid annualization and its related cost. This is where flexibility makes all the difference! Annualization does not apply when employees are given the ability to opt-out of employer-provided bona fide benefits. When an employee opts-out they must then receive any fringe supplements generated while working on public work as cash wages.

As you can see, there is an obvious cost advantage for the contractor to convince as many employees as possible to accept employer provided bona fide benefits. It’s also in the employees’ best interest assuming the employer is offering quality insurance and retirement programs. However, convincing the employees is the challenge.

One key to getting great participation in the benefit program is designing and offering a mix of benefits that employees both need and want.

We all know that with the Affordable Care Act employees are required to have health insurance coverage. Many employers are offering high deductible health insurance plans to help control the cost. By also offering a Health Savings Account funded with fringe supplements, employees will have no out- of-pocket expense.

As attractive as a fully funded Health Savings Account can be, in our experience, what gets most employees excited (at least those that are affected by seasonal layoff) is supplemental unemployment benefits. By offering a supplemental unemployment benefit plan that matches or even exceeds state unemployment benefits, employees will get money when they need it most! And if properly designed, they will also get big tax savings as those benefits are not subject to FICA (a 7.65 percent savings).

All of our strategies start with our third-party bona fide benefit trust fund, The DirectAdvisors Trust. A trust provides the financial structure to collect and save the fringe supplements in a compliant fashion until the benefits actually need to be paid (insurance premiums are due, paid time-off or supplemental unemployment benefits are paid, apprentice training expenses are incurred or retirement plan contributions are funded). By utilizing a trust fund, fringes can be banked to pay premiums when employees are working on mostly private work or during periods of layoff.

In summary, flexibility and creativity are the keys to success. Giving employees attractive options within a compliant framework can lead to a win-win for both the employees and the contractor.

If you have additional questions please do not hesitate to contact us or download our whitepapers – “Harnessing the Power of Supplemental Unemployment Benefit Plans” and “Working the Fringe.”

Please also view our short animated video, to see how constructing a bona fide fringe benefit plan, can move prevailing wage dollars out of payroll and reduce associated costs. Increase profits. Submit more competitive bids. Build employee loyalty.