Choosing the right retirement plan can be difficult, especially when it comes to understanding the ins and outs of every option available today. In recent years, Davis-Bacon 401(k) retirement plans have been on the rise in popularity specifically for individuals working on federal projects requiring a prevailing wage rate. The Davis-Bacon plan is a good choice not only for the company but the employee as well for saving money in payroll and insurance each year.
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The History of the Davis-Bacon Act
The Davis-Bacon Act was enacted in 1931 to prevent unfair labor practices in non-union situations. Enforcement of this act is overseen by the Department of Labor. The act is a federal prevailing wage law that applies to contractors who perform work on federal contracts. On these types of jobs, a prevailing wage is defined as the hourly wage and benefits, paid to the majority of workers within a particular area.
When working on federal building projects, contractors are responsible for paying the prevailing wage for each project. The fee consists of the prevailing wage itself as well as the prevailing wage fringe in which the contractor must choose how they wish to fulfill the Davis-Bacon commitment. This is where the option for the Davis-Bacon 401(k) retirement plan can come into play.
What is the Davis-Bacon 401(k)?
Similar to other 401(k) retirement plans, the Davis-Bacon 401(k) is a plan established by employers where employees can make an elective deferral on a pre-or post-tax basis.
The difference between traditional 401(k) plans and the Davis-Bacon plan lies in understanding the prevailing wages. When deciding how to fulfill their Davis-Bacon prevailing wage obligation, contractors can choose to contribute to their retirement in the process.
Instead of paying out 100% of the prevailing wage rate to their employees, government contractors can pay only the base rate to the employees and contribute the remaining fringe amount to the Davis-Bacon 401(k).
Benefits for Contributing
The main benefit for contributing the excess fringe wage into a structured 401(k) plan allows the business to reduce their payroll taxes and insurance cost. This also lowers workers’ compensation premiums and general liability premiums since the contribution does not accrue federal, state, social security or Medicare taxes.
As for the employees, they may be disappointed to not see the additional benefit in their weekly paycheck but will be happy to hear that it is instead going toward their Davis-Bacon 401(k) on their behalf. The benefit is also not subject to payroll taxes on the benefit that is being deposited into their 401(k) account. The automatic contribution allows employees to increase their retirement savings efforts and begin their journey to becoming more retirement ready.
It’s easy to see why Davis Bacon 401(k)s have become popular for business owners bidding on government projects. For contractors who are required to pay a prevailing wage rate under the Davis-Bacon Act, this retirement plan can help them save a significant amount of money in payroll taxes and insurance costs each year. Using a specialized plan design, a Davis-Bacon enables employers to offer a quality benefit to workers, while increasing company owners’ ability to contribute to their own retirement accounts.
