Payment of fringe benefits on prevailing wage jobs frequently cause a lot of confusion – such as the question submitted below from a reader.
My boyfriend is being told that the company he works for will be taking half his pay each week to put in a 401k HALF!!! I wanted to know if this is legal—they say if he doesnt sign the paper he will be fired so it is mandatory. Is this legal? He is in construction and works for a prevailing rate. Thank you very much – Janelle
Hi Janelle
There may be some confusion and/or miscommunication going on here and NOT knowing the full details I can only provide you with basic information.
When an employee works on a prevailing wage job {rate job}, he has to be paid a specific dollar amount that is made up of two pieces – a base hourly rate of pay AND an hourly fringe benefit amount – which is usually comparable to what union employees are making. This rate is also usually more than what he is normally paid when working on other jobs; even when he is performing the same type of work.
Companies that work on prevailing wage jobs have various ways that they can pay the fringe benefit portion:
- If they are a Union Shop, they MUST pay the fringe benefit amount to the Union Hall on behalf of the employee
- If they are a Non-Union shop {which by the sounds is the type of company your boyfriend is working for} they have the option
- To pay the employees an hourly rate that is equal to the base rate PLUS the fringe rate {this means higher taxes for everyone}
- To put the hourly fringe rate into a bona fide plan {like a 401k} on the employees behalf {this means LESS taxes for everyone, the money still belongs to the employee {your boyfriend} but he can’t touch it until he retires {unless there are special provisions in the plan setup}
- To pay a portion of the FULL fringe benefit rate to a bona fide plan and then the balance in cash as part of the employees rate of pay
Yes, this is legal, and while it may “seem or feel” like the company is taking half of his paycheck, in reality he will be getting more money {even though he can’t spend it right away} when the fringe rate is put into a 401k.
More and more companies that work on prevailing wage jobs are opting to use the fringe portion of the prevailing wage to legally purchase bona fide fringe benefits, that they might otherwise not be able to afford to do, for their employees. In addition to putting the fringe dollars into an employee 401k they may also purchase health insurance for their employees and put the balance into a Supplemental Unemployment Benefit Plan {which is then used to pay employees for short work weeks}.
I contacted my good friends Jim Proffitt of Prevailing Wage Contractors Association and Steve Kuzmack of Fringe Benefit Experts and they both feel that companies should take the fringe benefit portion of the prevailing wage and purchase health insurance, establish pension plans, and then put the balance of the fringe money into a Supplemental Unemployment Benefit Plan.
Many companies are not familiar with a Supplemental Unemployment Benefit (SUB) Plan. Unlike a 401k or other pension plan; a SUB Plan pays you when you need it the most, while you’re not working or have missed some time. The SUB Plan can pay employees when they have a short work period, which is defined as working less than 40 hours in a week or less than 173 hours in a month. Short work periods can be caused by layoffs, bad weather, illness, lack of work, equipment down time or any number of reasons.
If you would like more information about Supplemental Unemployment Benefit (SUB) Plans please feel free to contact Jim, Steve, or myself – indicating that you found this information on our blog.
Take a look at this article on my blog that shows the difference between paying the fringe to the employee vs. putting it into a bona-fide plan – http://blog.sunburstsoftwaresolutions.com/2011/05/25/the-benefits-of-paying-prevailing-wage-fringes-to-a-bona-fide-plan/#.Tvx9Mo7330c
I hope you found this article to be helpful, if so please take a moment to either leave a comment or share this information on your favorite social networking site – prevailing wage laws and fringe benefits can be very confusing.
Payroll is a complex part of every bookkeeper’s job, new requirements for 2012 include showing company paid health insurance premiums on employees W-2′s; making things even more complex. See this question asked by a reader of our blog.
I have a question that I’ve been searching for an answer to, I’ve even asked our Tax Accountant about it. In 2012 it is mandatory that we show the company share of employee health insurance on W-2′s, do you know if there is there a way in QuickBooks to track this on a regular basis, so that it shows on the employees paystubs and then have it flow through onto the W-2 at the end of the year? Thanks, Kathleen S.
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Answer:
Hi Kathleen,
Yes, you can set QuickBooks up to track employer paid health insurance contributions, have those contribution amounts appear on employee pay stubs and then have the full yearly contribution appear on the employee’s W-2. I’ve been doing this for a long time – thankfully the QuickBooks payroll module is pretty flexible, the hardest part is the setup – and then the maintenance.
Important things to take into consideration prior to setting up QuickBooks to track this information – OR the planning stages:
- Health insurance premiums for all employees are usually paid on a monthly basis in one lump sum made up of a specific amount for each employee based on the type of plan or coverage each employee has. The chances are that you pay your employees more often than that – so you want to set up a method of tracking company contributions for health insurance based on how often you pay your employees – so that the contribution is done automatically for you when you run your payroll rather than having to “remember” to do something once a month.
- Will the company pay 100% of the cost of health insurance or will the employee also pay a portion through a payroll deduction?
- How many pay periods your company actually has during the year.
- When does your company health insurance policy renew?
- Will you also be using/taking credit for company paid health insurance against the full fringe benefit amount that must be paid when employees work on prevailing wage jobs?
We’ve put together a video demonstrating the required QuickBooks setup and a free Excel Spreadsheet for tracking the costs of 100% company paid health insurance.
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Information from the IRS regarding Employer Paid Health Insurance Reporting:
Employer-Provided Health Coverage — Not Taxable; Reporting is Voluntary for All Employers for 2011 and Small Employers for 2012
Starting in tax year 2011, the Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. To give employers more time to update their payroll systems, Notice 2010-69, issued last fall, made this requirement optional for all employers in 2011. IRS Notice 2011-28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them at least for 2012 and continuing this optional treatment for smaller employers until further guidance is issued. Notice 2011-28 also includes information on how to report, what coverage to include and how to determine the cost of the coverage.
The 2011 Form W-2 is available for viewing on IRS.gov. This is the W-2 that most employees will receive in early 2012. The form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan. {Currently, as of 12/12/2011, you will report Health Insurance Costs in Box 12 of the W-2 using code DD}.
This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable.
What types of health care coverage must be included in the amount reported on the Form W-2?
A. Employers are required to report the total cost of all “applicable employer-sponsored coverage” provided to an employee. For any employee, “applicable employer-sponsored coverage” is coverage under a group health plan that the employer makes available to the employee that is non-taxable to the employee (or that would be non-taxable if the coverage were employer-provided).
Certain types of coverage are excluded from the definition of applicable employer-sponsored coverage and are not included in the amount reported. These types of coverage are:
- coverage only for accident, or disability income insurance, or any combination of these coverages;
- supplemental liability insurance;
- liability insurance (including general liability insurance and automobile liability insurance);
- workers’ compensation or similar insurance;
- automobile medical payment insurance;
- credit-only insurance; and
- other similar insurance coverage specified in regulations, if the benefits for medical care are secondary or incidental to other insurance benefits.
In addition, employers should not include the following amounts in calculating an employee’s total cost of coverage:
For additional information on this topic, visit these links:
- Affordable Care Act Tax Provisions - http://www.irs.gov/newsroom/article/0,,id=220809, 00.html
- 2011 Form W-2 - http://www.irs.gov/pub/irs-pdf/fw2.pdf
- IR-2011-31 - http://www.irs.gov/newsroom/article/0,,id=237870,00.html
- Notice 2010-69 http://www.irs.gov/pub/irs-drop/n-2010-69.pdf
- Notice 2011-28 http://www.irs.gov/pub/irs-drop/n-11-28.pdf
- Employer-Provided Health Coverage Information Reporting Requirements – Q & A - http://www.irs.gov/newsroom/article/0,,id=237894,00.html
- IRS YouTube Video – Health Care: W-2 Health Insurance Reporting - http://www.youtube.com/watch?v= TFepqFnEj5I&feature= youtu.be
- IRS Webinar - Reporting of Employer Healthcare Coverage on Form W-2 - http://www.irsvideos.gov/ReportingEmployerHealthcareCoverage/
- New Info added 1/3/2012 – IRS Notice 2012-09 – http://www.irs.gov/pub/irs-drop/n-12-09.pdf – Interim Guidance on Informational Reporting to Employees of the Cost of Their Group Health Insurance Coverage
We hope that you’ve found this post informative, if so please take a moment to leave a comment or share it on your favorite social network.
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Update 12/16/2011 – Intuit Releases Payroll Update 21201
Late yesterday afternoon Intuit released Payroll Update 21201, which includes revised tax tables and several form updates. Included in this update is the option for reporting Health Insurance under Code DD on employee W-2′s.
When creating or editing an existing Company Contribution item type for Employer Paid Health Insurance, when you get to the Tax Tracking Type window, from the drop down list, select Health Coverage Cost, as shown in the screenshot below:
Right click on the image to enlarge it
We will be updating our video by the first of the year to reflect the actual selection of the correct tax tracking type.
Payroll and holiday pay can be confusing and overwhelming and here we are right at the height of the upcoming holiday season! I found these great tips from HR Matters and wanted to share them with you. These tips provide answers to common questions such as: Do you have to provide paid holidays? What about for new employees? Do you have to pay overtime to employees who have to work on a holiday?
We’re officially heading into the holiday season with Thanksgiving coming up next week and Christmas and the New Year just around the corner. If you are like most employers, you may be dealing with holiday pay issues. To help you out, the HR Matters E-Tips Editors have put together the top seven holiday questions that they answer on a regular basis. (You also can find the answers to these and many more holiday questions in the HR Matters Tools and Resource Center online, Policy Manual, Holidays, Chapter 503.)
1. Do we have to provide paid holidays?
Absent a collective bargaining agreement or other contract providing paid holidays, federal law does not require you to pay nonexempt employees for holidays that they do not work. Most organizations offer a limited number of paid holidays to create employee goodwill. According to the Society for Human Resource Management 2011 Benefits Survey, 97% of responding employers provide paid holidays to their employees.
Note, however, that if you do not provide paid days off for holidays, you should pay exempt employees for any holidays that your organization is closed. (As a reminder, the Department of Labor (DOL) regulations implementing the Fair Labor Standards Act (FLSA) provide that the following categories of employees are exempt from the overtime and minimum wage requirements of the FLSA: (1) bona fide administrative, executive, or professional employees; (2) workers employed in outside sales; (3) highly skilled computer-related employees; and (4) certain “highly-compensated” employees.)
Although the DOL regulations implementing the FLSA do not specifically address unpaid holidays, they do provide that an employee will not be considered paid “on a salary basis” if deductions are made “for absences occasioned by the employer or by the operating requirements of the business.” Unpaid holidays generally are considered the type of absence “occasioned by the employer.” According to a DOL Wage & Hour Opinion Letter dated 5/27/99, the DOL indicated that an employee will not be considered to be paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer, such as being closed on certain holidays, or the operating requirements of the business. Further, the regulations recognize only a limited number of instances when an employer may make deductions (or “dock”) for absences of a full day or more without jeopardizing the exemption and thus incurring overtime liability. But, holidays do not fall under any of those exceptions.
2. Can we require employees to complete an introductory period before becoming eligible for holiday pay?
You most likely can exclude new nonexempt employees from holiday pay. If there is no collective bargaining agreement or other contract specifying that new employees are eligible for holiday pay, then it is up to your organization’s policy. Many employers exclude new employees from certain benefits granted to longer-term employees until completion of the introductory period.
However, new exempt employees should not be covered by this policy and should receive pay for holidays. As explained in # 1, above, if you do not pay exempt employees, new or old, for holidays they do not work, you may jeopardize their exempt status.
3. Can we require employees to work on holidays?
Since paid holidays are a discretionary benefit, you may require employees to work holidays according to the operating needs of the organization (and assuming no collective bargaining agreement or other contract prohibits this work). We recommend that employers’ holiday policies should include language that indicates employees may be required to work on holidays. For example, our HR Matters Tools and Resource Center, Policy Manual, includes the following provision in the model Holiday policy in Chapter 503: “The Company may schedule work on an observed holiday as it considers necessary. Normally, work on an observed holiday will be paid as if the day were a regularly scheduled work day. Employees will be given the option of receiving additional pay for the day or a “floating” holiday that may be taken, with the prior approval of their supervisor, at another time during the year.”
Note that you generally are not required to pay nonexempt employees for time and one-half for holiday work unless the employee has already worked 40 hours in the week (see # 4, below) or to provide a paid floating holiday at a later point. However, the model policy provides these extra benefits in recognition of the extra burden for employees who work on holidays.
4. Do we owe nonexempt employees overtime if they work on holidays?
The FLSA requires you to pay overtime to nonexempt employees at time and one-half their regular rate of pay for all hours actually worked over 40 in a single workweek. Accordingly, you will owe nonexempt employees who work on holidays overtime only if the employees end up working more than 40 hours because they are working on the holiday.
So, for example, if an employee has worked four 10-hour days (40 hours) and then works on a designated holiday that same week, then the employee should receive overtime for all of the holiday work hours. But, if the employee works four 8-hour days (32 hours) and then works an additional eight hours on the holiday, for a total of 40 hours worked in the week, then that employee is not entitled to overtime for the holiday work hours. (Note, however, that a limited number of states, such as Rhode Island, require payment of at least time and one-half for employees who work on certain holidays, so be sure to check state law, too.)
As an aside, if you voluntarily pay a premium of time and one-half (the equivalent of overtime) for work on a holiday, the FLSA regulations generally allow you to credit this extra compensation towards any overtime that might actually be earned in the same week.
5. If an employee works 40 hours in a week and then takes a paid holiday, do we owe the employee overtime?
No. As discussed in # 4, above, nonexempt employees must be paid overtime only for all hours actually worked over 40 in a single workweek. Thus, in calculating actual working hours for a nonexempt employee, you do not have to count any paid time off in the overtime calculation if the employee did not perform any work during the time off.
So, even if a nonexempt employee works a full 40-hour workweek and also takes a day of paid holiday and is paid for 48 hours that week, the employee is not entitled to overtime pay since he did not actually work more than 40 hours in the workweek.
6. What if an employee is on FMLA leave when a holiday occurs? Should they receive holiday pay?
The answer depends on your policy. You generally do not have to pay an employee for holidays that occur while the employee is out on unpaid FMLA leave if it is not the employer’s policy to provide this benefit during other types of unpaid leave. Similarly, if an employee’s work schedule is reduced for intermittent FMLA leave, you may reduce proportionately the employee’s benefits, such as holiday pay, if the employer’s normal practice is to base this benefit on the number of hours an employee works. However, you may not eliminate the full-time employee’s benefits because the employee is working a part-time schedule if part-time employees normally are not eligible for these benefits.
7. How do we pay nonexempt employees who work a compressed workweek, working four days a week, ten hours a day? Should these employees receive holiday pay if the holiday falls on a day that they are not scheduled to work?
Whether the nonexempt employees working compressed workweeks qualify for holiday pay depends on the terms of your holiday policy and how it has been implemented. Employers using compressed schedules (such as employees working four days/ten hours a day) generally take three basic approaches to eligibility for holiday pay.
(Download free Holidays model policy including best HR practices and legal background. Will require that you create a free account.)
Some employers pay only for holidays occurring on the employee’s regularly scheduled work day. Another more common approach is to allow compressed workweek employees to take off a day on which they would otherwise be scheduled to work. For example, if the employees normally work four days, they work only three days during weeks with holidays. Still other employers prefer to have compressed workweek employees on the job at least four days a week and pay for the holiday even if the employee is not scheduled otherwise to work that day, giving the employees an extra day of pay. This last practice, however, may lower the morale of employees who work a regular schedule and thus receive less pay for the holiday week.
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About HR Matters:
HR Matters E-Tips is a free service of Personnel Policy Service, Inc. To subscribe, go to: http://www.ppspublishers.com/ezsignup.htm
© 2011 Personnel Policy Service, Inc. All Rights Reserved. HR Matters is a registered trademark of: Personnel Policy Service, Inc., 159 St. Matthews Ave., Suite 5, Louisville, KY 40207 Tel: 1-800-437-3735 – Fax: 1-800-755-7011
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We hope you’ve found these answers to 7 holiday pay questions to be helpful; if so please take a moment to leave a comment or share this with others on your favorite social networking sites.
As described in press release IR 2011-31, the IRS issued interim guidance to employers, Notice 2011-28, on informational reporting of each employee’s annual Form W-2 of the cost of health insurance coverage they sponsor for employees. The IRS is also requesting comments on this interim guidance.
The new reporting to employees is for their information only – to inform them of the cost of their health coverage, and does not cause excludable employer-provided health coverage to become wages or income to be subject to tax. The cost will be reported in Box 12 wit Code DD on Forms W-2.
The Affordable Care Act provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. Notice 2010-69, issued last fall, made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012).
Notice 2011-28 provides relief for smaller employers (those file with the SSA fewer than 250 Forms W-2 for the previous year) by making this requirement optional for them at least for 2012 Forms W-2. Therefore, any employer that files fewer than 250 Forms W-2 for 2011 (generally furnished in 2012) will not be subject to the requirements for 2012 Forms W-2. the relief for small employers will continue until further guidance is issued.
Other types of relief that will apply for 2012 and until further guidance include exceptions for:
- multiemployer plans
- separate dental and/or visions plans, and
- Forms W-2 that are furnished to employees who terminate before the end of a calendar year and request a Form W-2 before the end of the year.
For employers that are subject to the reporting requirement for 2012 Forms W-2 (or choose to report the cost of health care coverage on 2011 Forms W-2), the notice explains:
- how to calculate the cost of coverage, generally including amounts paid by the employer and employee, but also covering methods for self-insured plans;
- how to treat salary reductions for health flexible spending arrangements; and
- that employers will not be required to issue a Form W-2 to anyone to whom the employer would not otherwise issue one (such as retirees with continuing health benefits).
More information about the tax provisions in the Affordable Care Act is on the ACA page of IRS.gov.
The benefits of paying the Prevailing Wage Fringe Benefit portion to bona-fide plan is often misunderstood by employers and employees alike.
Prevailing wage jobs, those jobs that are subject to the Davis-Bacon Act and/or State Prevailing Wage Laws, require that all laborers and mechanics {including tradesmen such as carpenters, equipment operators, painters, pipefitters, plumbers, etc.) who perform work on the jobsite are to be paid a set base rate of pay PLUS an hourly fringe benefit rate.
Union contractors automatically pay the total hourly fringe benefit rate to the union hall on behalf of the employee, usually splitting the full hourly rate into specific “funds” – Health & Welfare, Pension, Vacation, etc. When this happens the Union contractor doesn’t pay payroll taxes, worker’s compensation, or general liability insurance on this amount.
Non-Union contractors, on the other hand, can pay the fringe benefit rate to the employee in addition to the stated base rate of pay OR they can pay it into a bona-fide plan on behalf of the employee.
We’ll look at the differences and discuss the benefits to both employees and employers.
In the following examples we’ll be working with a base rate of $41.51, fringe rate of $18.72, a Worker’s Comp experience rate of $10.70 per hundred dollars in wages, and a General Liability Insurance Experience rate of $0.636 per hundred dollars in wages and a standard 40 hour work week.
When the fringes are paid in cash – included in the employees base rate of pay
As an employee you are paid $60.23 per hour ($41.51 + 18.72) x 40 hours = $2,409.20 gross with a net of $1,512.38. As an employee you are paying $896.82 in taxes – see sample paycheck below:
Right click on the image to enlarge it.
As an employer you pay $560.99 in payroll taxes, worker’s comp and general liability insurance in addition to the $2,409.20 gross wages for a total of $2,970.19 to have the employee on the jobsite for 40 hours.
When the fringes are paid to a bona-fide plan on behalf of the employee
As an employee you are paid $41.51 per hour x 40 hours = $1,660.40 gross with a net of $1,101.47 PLUS $748.80 is contributed to the bona-fide plan on your behalf for a total of $1,850.27. As an employee you are paying $558.93 in taxes {in reality that is a savings of $337.89 in taxes) – see sample paycheck below:
Right click on the image to enlarge it
As an employer you pay $1,135.96 in bona-fide plan contributions, payroll taxes, worker’s comp and general liability insurance in addition to the $1660.40 in gross wages for a total of $2,795.86 to have the employee on the jobsite for 40 hours – that’s a savings of $174.33.
Many employers and employees are rightfully cautious about the cost of setting up a bona-fide plan. Many times setting up a traditional 401(k) or 403(b) plan is costly (one customer recently told me that it would cost them $5,000.00 to initially set up the plan) and then the employees must wait until legal retirement age before being able to start withdrawing the money.
The Supplemental Unemployment Benefit Plan (SUB Plan) offered by Prevailing Wage Contractors Association (PWCA) has a start up cost to the employer of $200.00; and provides employees access to the money when they need it most – when they are not working or have missed some time. The SUB Plan can be used to pay an employee when he has a short work period; which is defined as working less than 40 hour in a week or less than 173 hours in a month. Short work periods can be caused by layoffs, bad weather, illness, lack of work, equipment down time or any number of reasons.
For additional information about the SUB Plan offered by PWCA, visit their website – or contact Nancy Smyth.
