Annualization is the one most commonly misunderstood concepts in the Davis-Bacon Act and state prevailing wage laws. However, knowledge about how annualization works, and how it affects a contractors’ financial obligations for benefit plans, is critical for all businesses engaged in public works.
As stated in the U.S. Department of Labor Prevailing Wage Resource book, “Annualization is a computational method used to determine the hourly rate of benefit plan contributions that are creditable towards a contractors’ prevailing fringe benefit obligation on covered projects.”
The broad purpose of annualization is to ensure that contractors are not taking credit for benefits provided disproportionally on public work, compared to private work.
Contractors that work predominately on public works projects subject to prevailing wage regulations are largely unaffected by annualization. However, contractors that have a significant amount of non-public work hours need to be pro-active in managing their benefit plans to address the annualization rule.
Fortunately, there are several exemptions from the annualization rule. The exceptions include:
- Paying the fringe benefit rate as cash wages
- Providing benefits through a cafeteria plan (IRS Section 125 Plan). Using a cafeteria plan is the same as paying the fringe benefit rate as cash wages because employees are given the fringe as cash wages and then make a voluntary election to purchase benefits.
- Contributing the fringe benefit rate to a defined contribution retirement plan that has immediate eligibility and is fully vested. (Caution: Some states do not recognize this exemption)
It is very common for contractors to calculate an hourly amount for health insurance, deduct that hourly credit while working on prevailing wage projects from the prevailing wage fringe rate and pay the difference as cash wages. Alternatively, rather than paying the difference as cash wages, the contractor can pay the difference to a fully vested defined contribution retirement plan.
A more sophisticated hybrid plan design may be to utilize both a cafeteria plan (for health insurance premiums) and a fully vested defined contribution plan for any remaining fringe benefit obligation. This would eliminate annualization and the need to calculate an hourly credit.
Using a cafeteria plan in conjunction with a fully vested defined contribution plan can be more cost effective than taking an hourly credit because it allows the entire cost of health insurance premiums to be paid with the required fringe benefit rate contributions.
How we can help
DirectAdvisors was established in 2001 and is located in Albany, New York. 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, Service Contract Act and State Prevailing Wage Regulations. Our clients are located throughout the United States and range in size from 10 to 3,000 employees.
In 2018, our construction company clients will contribute tens of millions of dollars of prevailing wage fringe benefit contributions to The DirectAdvisors Trust (health & welfare benefits) and retirement plans managed by our team.
To be clear, we do not sell any financial or insurance products. Therefore, our solutions are free from any conflict of interest. We work with existing agents, brokers and insurance companies.
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 do the following:
- Move prevailing wage dollars out of payroll.
- Reduce associated costs.
- Increase profits.
- Submit more competitive bids.
- Build employee loyalty.