Construction workers on a grid
The Davis-Bacon Act (DBA) has long been a cornerstone of labor law in the United States, ensuring workers on federally funded construction projects receive fair wages and benefits. On August 8, 2023, the U.S. Department of Labor (DOL) published a final rule, Updating the Davis-Bacon Act and Related Acts Regulations, that sets forth rules for the administration of the law, which become effective on October 23, 2023.

DBA prevailing wage requirements are applicable in numerous other statutes, referred to as “Related Acts”, including the National Housing Act, Federal-Aid Highway Act and the bipartisan Infrastructure Investment and Jobs Act, among others. The new rules include clarification of requirements for the annualization of fringe benefits and provide an important process to request exemption for plans that meet certain defined criteria.

What is Annualization?
Annualization is a method used to calculate the hourly rate of contributions to bona fide fringe benefit plans, or reasonably anticipated costs of an unfunded benefit plan. The amount is then creditable towards a contractor’s obligation on DBA-covered projects when the contractor works on both DBA projects and private, non-DBA projects within a particular year.

How is It Calculated?
To annualize the cost of providing a fringe benefit, a contractor must divide the total cost of the fringe benefit contribution, or the reasonably anticipated costs of an unfunded benefit plan, by the total number of hours worked on both DBA projects and private, non-DBA projects during the time period to which the cost is attributable. This will determine the rate of contribution per hour, and this calculation needs to be done for each individual worker.

In instances where the creditable rate of contributions is less than the required prevailing rate, the difference must be paid to the worker as additional wages.

In most instances, annualization is a non-issue for contractors subject to a collective bargaining agreement because they are required to pay an hourly amount for benefits to the union benefit fund for all hours worked, regardless of if they are DBA projects or private work. Most states follow the DBA annualization rules for public works projects.

Exceptions to Annualization
One long standing exception to annualization of fringe benefit plan contributions has been that annualization is not required for defined contribution pension plans (DCPPs) that provide for immediate participation and essentially immediate vesting (e.g., 100 percent vesting after a worker works 500 or fewer hours).  This is a safe harbor exception that does not require further approval from the U.S. Department of Labor (DOL).

However, the DOL final rule implements a process that allows a broader range of plans to potentially be excepted from the annualization requirement, but only if they meet the below required criteria for the exception and receive DOL approval.

  • The benefit provided is not continuous in nature, meaning it’s not available to a participant without penalty throughout the year or other time period to which the cost of the benefit is attributable; and
  • The benefit does not compensate both private work and DBRA-covered work, which is when any benefits attributable to periods of private work are wholly paid for by compensation for private work.

Potential Complexities and Solutions
Complying with annualization can be quite complicated. Contractors who strategically design benefit plans that leverage the full cost of their fringe benefit plans to maximize allowable credit will have an advantage in the marketplace.

Combining bona fide health and welfare benefit plans along with annualization exempted defined contribution pension plans is often an effective strategy, however, the new rules provide opportunities for creative plan design. If they are approved, they would broaden the types of fringe benefit plans, such as supplemental unemployment benefit plans, that are exempt from annualization.

Experienced third-party administrators, such as Direct Advisors, can provide the tools necessary to manage these programs in a compliant and efficient manner.

How We Can Help
Direct Advisors, a division of HUB Retirement and Wealth Management, was established in 2001 and is located in the Albany, New York area. We provide bona fide benefit plan consulting and third-party administrative services to merit shop (non-union) construction companies that are subject to the Davis-Bacon Act and state prevailing wage regulations. Our clients are located throughout the United States.