Posted on 05/26/2016 at 10:13 AM by Mike Staebell
Supplemental Unemployment Benefits (SUB) Plans provide privately funded unemployment benefits through employer trust funds established under section 50l(c)(17) of the Internal Revenue Code. These plans are marketed by financial service firms to employers such as construction contractors, whose work weeks vary due to seasons, weather conditions and other factors.
Last fall, USDOL’s Wage and Hour Division issued a letter that reversed a 13-year policy of how much credit federal contractors may take under the Davis-Bacon Act (DBA) for contributions to SUB Plans. Employers who are not aware of this change may be required to pay back wages to employees if Wage and Hour investigates.
Employers participating in SUB Plans make periodic contributions for each eligible employee, based on hours of work performed on projects covered by federal and state prevailing wage requirements. Most SUB plans also allow contributions for non-prevailing wage work, at the employer’s option. Although these contributions are fully vested when made, employees have no right to or interest in their account balance until they meet the plan’s eligibility requirements for benefit payments.
Employees eligible for state unemployment benefits who participate in a SUB Plan are usually entitled to plan unemployment benefits in addition to state unemployment compensation. In certain situations, some SUB Plan’s eligibility rules allow participating employees to receive supplemental unemployment benefits even if they are not eligible for state unemployment insurance payments.
The majority of employers make contributions to SUB plans only for the hours worked on federally funded prevailing wage contracts. The Wage and Hour Division generally bars an employer from applying 100% of its fringe benefit contributions to a plan in a given year to meet prevailing wage and fringe benefits obligations if employees also work on private projects that year for which no contributions are made. Wage and Hour calls this the annualization principle, and has historically applied it to contributions for other fringe benefits, including plans for health insurance, apprenticeship training, vacation, and defined pension benefits. This precludes the use of DBA work as the disproportionate or exclusive source of funding for benefits that are continuous in nature and are compensation for all the employee’s work, both DBA and private.
The annualization principle requires averaging the contributions an employer makes to the plan over all the employee’s hours of work for the employer in that year. For example, if an employer contributes $5000 to a plan on behalf of an employee who works 1000 hours of DBA work and 1000 hours of non-DBA work, it may claim a credit of $2.50/hr towards DBA fringes. ($5000/2000hrs = $2.50/hr.)
Contractors with SUB Plans who undertake construction projects subject to the prevailing wage requirements of the Davis-Bacon Act naturally want to take credit for the contributions they make to their plan under the DBA’s provisions for crediting employer fringe benefits costs. In 2002, the Prevailing Wage Contractors Association (PWCA) asked the Administrator of the Wage and Hour Division to rule on the validity of their SUB Plan under the DBA. In a 2002 letter, the Wage and Hour Administrator declared the PWCA Plan to be a bona fide fringe benefit plan for Davis-Bacon purposes. The letter also exempted the SUB Plan from DOL’s requirement to annualize contributions, meaning employers could receive full credit towards Davis-Bacon fringe benefits requirements for all contributions, even if they only contributed for prevailing wage work. This position was reinforced in a 2007 letter to the National Association of Prevailing Wage Contractors (NAPWC), in which Wage and Hour approved their plan and exempted it from annualization requirements.
In July of 2013, a complaint was filed by the Indiana-Illinois-Iowa Foundation for Fair Contracting requesting that Wage and Hour revoke the annualization exception for SUB plans. At about the same time, the NAPWC requested that Wage and Hour confirm the annualization exception for its SUB plan. On October 22, 2015, Wage and Hour Administrator David Weil responded to NAPWC, reiterating the bona fide nature of NAPWC’s SUB Plan as creditable towards DBA fringes, but revoking the exception to the annualization requirement. Administrator Weil concluded that it would not be appropriate to provide an annualization exception to a contractor’s contributions to a SUB plan “if the benefit is continuous in nature and constitutes compensation for both private and Davis-Bacon work”. The effective date of enforcement was set at 90 days after the date of the letter: January 22, 2016.
In November 2015, NAPWC filed a Petition for Review with DOL’s Administrative Review Board (ARB). In effect this was an appeal of Wage and Hour’s revocation of the annualization exception. As of this date, ARB has not issued its decision.
At present, any firm with a SUB Plan that contributes only for Davis-Bacon covered work and takes credit towards DBA fringe benefits for 100% of SUB Plan contributions may be incurring a liability for the claimed credit that is greater than the amount that would result from doing the annualization math as noted previously.
As we approach the 2016 construction season, if your firm has a SUB Plan and does Davis-Bacon work, you will want to stay abreast of these developments, and how the ARB rules on this matter. This is also an appropriate time to check your payroll calculations to ensure that you are properly claiming all fringe benefit credits, if you are not paying them hourly on the payroll.
Stay tuned: we will report when the ARB decision is issued.
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- Mike Staebell
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