For companies with workers subject to Prevailing Wages, which is at a record high today and expected to double by 2030, 401k plans can unlock significant annual savings. For the firms working on construction of the new Buffalo Bills stadium, savings could equate to tens of millions of dollars alone.
What are Prevailing Wages?
The 1931 Davis-Bacon Act requires the payment of “prevailing wages” to laborers and mechanics on all federal and most state & local government construction projects. Prevailing wages are defined as the average wage paid to similarly employed workers in a specific occupation in the area of intended employment – in practice, the Department of Labor sets these rates with the assistance of state and local government agencies. The goal is to ensure workers are paid fairly, prevent contractors from underbidding each other by cutting labor costs, encourage unionization, and keep local contractors competitive with national firms.
Prevailing Wages are Becoming More Common than Ever
The federal Inflation Reduction Act and Bipartisan Infrastructure Act are expected to create more than one million prevailing wage jobs each. Even more impactful for ACSI’s clients and partners is the push by the New York State Legislature and Governor Hochul to both expand the number of local workers covered by the standards and expand the job classifications that fall under the standards (e.g., clean energy).
How 401k Plans Can Help
Prevailing wages consist of both an hourly rate and a separate supplemental rate. The supplemental rate, while commonly called the “fringe”, is anything but insignificant. While fringe rates had historically only been a small fraction of the hourly component, it is now common for the fringe component to be 75-100% of the hourly rate. For example, electricians working on the Bills stadium are subject to an hourly rate of $40 and a fringe rate of $31.55 per hour.
Instead of paying out the fringe rate as wages, companies are able to contribute some or all of this amount into a 401k plan as an employer contribution.
Benefits of these contributions include:
- Cost Savings to the Employer: since employer contributions aren’t subject to payroll taxes, this provides immediate cost savings. In addition, employer contributions made to 401k plans don’t count towards determinations of workers compensation premiums providing even more significant reductions in labor costs. In total, the contribution of this fringe to a 401k plan, in lieu of paying it as wages, results in an average savings of 25-33%.
- Competitive Advantage: decreasing labor costs allows employers to be more aggressive in their bids for federal/state/local projects and better compete with national firms.
- Offer a More Robust 401k Plan: fringe contributions can be made to a regular 401k plan and there is no need to create a second retirement plan. In addition, these contributions can offset or help meet other employer contributions, including profit sharing, matching contributions, and safe harbor. Utilizing the prevailing wage dollars to meet a portion of these contributions allows you to offer more retirement benefits to all your employees at a reduced cost to the company.
If your company is subject to prevailing wages, please contact Mark Brand (mbrand@acsi-ny.com) and/or James Brand (jbrand@acsi-ny.com) to discuss this opportunity further.
