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 changes and clarifications of requirements for the use of unfunded plans to satisfy the fringe benefit requirements of the law.

Funded vs. Unfunded Plans
All fringe benefit plans fall into two categories: “funded” (29 C.F.R. §§ 5.26-5.27) or “unfunded” (29 C.F.R. § 5.28). 

Funded plans are those where the contractor’s fringe benefit contributions are made irrevocably, meaning funds cannot revert back to the contractor, a trustee, or independent third party. These contributions can be credited towards meeting the prevailing fringe benefit requirement without prior DOL approval. 

Unfunded plans, on the other hand, are those where the contractor funds certain benefits from the company’s general assets rather than by payments to a trustee or third party. Vacation and other paid-time-off benefits are the most common types of unfunded plans. It’s also common for self-insured medical plans to be unfunded. 

The cost of providing unfunded plan benefits may be credited towards meeting the DBA prevailing wage fringe benefit obligations only if certain requirements are met:

    • It can reasonably be anticipated to provide bona fide benefits as described in the DBA;
    • It represents a commitment that can be legally enforced; 
    • It is carried out under a financially responsible plan or program; and 
    • The plan or program has been communicated in writing to the affected employees.

    U.S. Department of Labor Approval
    The DOL noted in the new rules that for payments made as part of an unfunded plan or program to be credited as fringe benefits, contractors and subcontractors must submit a written request for approval and the benefits proposed to be provided as “bona fide” and consistent with the DBA.   

    The type of information the DOL will require in order to make the determination of whether an unfunded plan meets the requirements include the following: 

      • Identification of the benefit(s) to be provided;  
      • Explanation of the funding or contribution formula;  
      • Explanation of the financial analysis methodology used to estimate the costs of the plan or program benefits and how the contractor has budgeted for those costs;  
      • Specification of how frequently the contractor either sets aside funds in accordance with the cost calculations to meet claims as they arise, or otherwise budgets, allocates, or tracks such funds to ensure that they will be available to meet claims;
      • Explanation of whether employer contribution amounts are different for DBA and non-prevailing wage work;  
      • Identification of the administrator of the plan or program and the source of the funds the administrator uses to pay the benefits provided by the plan or program;  
      • Specification of the ERISA status of the plan or program; and 
      • Explanation of how the plan or program is communicated to laborers or mechanics.

    Potential Complexities and Solutions
    In our experience, Direct Advisors has found many contractors and subcontractors have not submitted requests for approval to the DOL for their unfunded plans, especially those for vacation and other paid-time-off benefits. This is likely due to them being unaware of the requirement or because of the complexity involved in developing the materials required for approval, as outlined above.   

    Unfunded medical plans are by far the most complex in terms of administration and recordkeeping. Determining the cost of coverage for medical plans involves a multitude of variables such as continuous claims for medical and pharmacy care, plan administration, stop-loss insurance and other factors. These costs must be allocated to each individual employee in a non-discriminatory manner in order for it to be credited towards the fringe benefit requirements of the DBA and must also comply with other laws such as ERISA.  

    Subsequent to receiving DOL approval, contractors and subcontractors will need to maintain records to substantiate the credit they take towards the prevailing wage fringe benefit requirements, including proper annualization when they work on both DBA covered projects and non-DBA, or private, projects.  

    One potential solution to simplify administration and eliminate the need for approval is for contractors to convert unfunded plans to funded plans. Unfunded plans can be converted to funded plans by adopting an irrevocable trust fund managed by an independent trustee or third party, such as Direct Advisors, pursuant to a fund, plan, or program. Knowledgeable third-party administrators 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.