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.
Creating office policies for your small business can be difficult, as most of us are well aware. How do you handle sick time, vacation time, personal time, or a death in the family? Better yet, how do your clients and/or customers handle it when it happens to you?
I was reading a very interesting article yesterday about “Can You Require Sick Employees to Stay Home“? My first reaction was “Wow! Good question” quickly followed by “as a small business owner I should be able to”. After all, it is officially cold and flu season and already every where you go people are coughing and sneezing; do you really want them bring that to work? I know I don’t want that to happen!
Sunburst, like many other small businesses consists of my husband Ben, myself, and Cheryl {who works 2 mornings a week}. It’s a given that if I get sick so will Ben and vice versa – but what about Cheryl? Does she need to come to work and end up with “whatever” we have, take it home and “give it” to everyone that she comes into contact with? Or should she come to work and we end up getting “whatever” it is she has?
Coming to work when you are sick isn’t any fun for anyone – you, the people you work with in your office, or your clients and customers. When we’re sick we just don’t perform our job duties with our usual amount of professionalism, courtesy, or speed – as a matter of fact I know I get downright crabby when I’m sick; mainly when I can’t think as fast as usual and especially if I have to repeat things to the same person multiple times during the same conversation.
There are no federal laws which specifically address whether or not employers can require employees to say home and not come to work; however, the Americans with Disabilities Act {ADA} does prohibit employers from discriminating against the disabled, although having a cold or the flu is not considered being disabled.
Encouraging employees to take a paid sick day and stay home when they have a fever, is often a common practice for larger companies and might be something that you want to consider having in place as an “office policy”. I’m sure many of you are gasping at this point and thinking “I can’t afford that!”, but think about it – which is cheaper – paying a sick employee to stay home so that others don’t get sick OR letting them come to work and you all end up getting ill? Just a thought….
In the ever increasing 24/7 connected world we live in – expectations run high – and sometimes people overlook that fact that people are sick, are away on vacation, at a Doctor’s appointment, or have had a death in the family. When we are connected 24/7 we fall into that immediate gratification or I gotta have it now trap and when those expectations are confronted by someone being unavailable some of us become very intolerant.
When you are the chief cook and bottle washer {or there is only yourself and perhaps a part time person} for your small business, it’s certainly difficult to justify taking time off; I know it is for us. Most years we are hear every day except major holidays, occasionally we are out of town {or out of state} on business, and if we are lucky once a year we take a week in vacation.
How do you handle situations such as sick time, vacation time, personal time, or a death in the family in your business? Do you have written policies in place or do you pretty much just “wing it” and handle it the best that you can at the moment? How do your customers or clients handle your being unavailable or away?
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.
12/17/2010
I just received the following email which is of interest to ALL employers and payroll personnel.
Payroll Tax Cut to Boots Take-Home Pay for Most Workers; New Withholding Details Now Available on IRS.gov
WASHINGTON – The Internal Revenue Service today released instruction to help employers implement the 2011 cut in payroll taxes, along with the new income-tax withholding tables that employers will use during 2011.
Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two (2) percentage point payroll tax cut for employees, reducing their Social Security (FICA) tax withholding rate from 6.2% to 4.2% of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.
The new law also maintains the income-tax rates that have been in effect in recent years.
Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than January 31, 2011. IRS Notice 1036, released today, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on http://www.irs.gov in a few days.
The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than January 31, 2010.
For any Social Security tax over withheld during January, employers should make an offsetting adjustment in worker’s pay as soon as possible but NOT later than March 31, 2011.
Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.
As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or a large refund at the end of the year may want to consider submitting revised W-4 forms. IRS Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.
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For those of using an Intuit/QuickBooks Payroll Subscription – DON’T PANIC – Intuit will revise our payroll software to include these new changes and will release the changes through a payroll update. Just don’t expect it to be available on January 1, 2011, as they will having to make the coding changes – and that isn’t as easy as one might think. Intuit is already aware of this, see an article on their Payroll Support website.
Notice 1036 indicates that ONLY the employee Social Security (FICA) percentage is being reduced to 4.2% – employers will still contribute 6.2%.
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12/28/2010 an update:
It is my understanding that Intuit will be releasing payroll update 21102 beginning today – December 28, 2010 – you’ll just need to download the update. This update includes modifications to the Federal withholding tables, the Nonresident Alien withholding tables, and the reduction of the Social Security withholding tax rate to 4.2% (employee portion). This change will ONLY be effective for paychecks dated AFTER 1/1/2011 – paychecks dated BEFORE 12/31/10 will reflect the standard 6.2% employer & employee contributions.
Other key things that will take place:
- Making Work Pay Credit will expire on December 31, 2010. This was the credit of $800 for a married couple filing a joint return and $400 for other taxpayers. For details, see see About the impact of the American Recovery and Reinvestment Act of 2009 to small businesses.
- Advance Payment of Earned Income Credit (AEIC) will expire on December 31, 2010. Individuals eligible for the EIC may still claim it on their personal income tax returns. Employers may no longer advance a portion of the credit with each paycheck. For details, see Advance Earned Income Credit (AEIC) eliminated.
I would like to thank Yvonne Leiser, CMA for the following information:
Please be aware that employees making LESS THAN $20,000 per year will see a DECREASE in their take home pay.
Making Work Pay gave each worker a $400 reduction in taxes on their first $6,452 of wages. This ended at the end of 2010. It has been replaced with a 2% reduction in Social Security Taxes. Unfortunately, workers earning less than $20,000 will see a DECREASE in their take home pay.
