For Construction Business Owners
Retirement Plan Design Secrets for the Commercial Construction Company
When we consult with construction executives about designing their firm’s retirement plan, one of the first questions we ask is whether the company does prevailing wage work. If they do, there is a particularly significant benefit to a well-designed retirement plan!
Many federal and state-administered construction projects are subject to prevailing wage laws as specified in the Davis-Bacon Act. These rules require that the wages and fringe benefits paid to construction workers (generally not administrative, executive, or clerical staff) be at least as high as those specified in the applicable schedule of prevailing wages. (Note that these are “fringe” benefits, not “French” benefits (whatever they are), as we’ve sometimes heard them called - although if offered the choice, some construction workers might choose the latter.) Fringe benefits can be paid either as base pay or to provide benefits which might include things like health, life, disability insurance, and paid time off, but can also be used to fund a retirement plan.
Benefits to paying this fringe into the retirement plan:
- Saves FICA (6.2% of pay for Social Security + 1.45% for Medicare) for EMPLOYER
- Saves FICA (6.2% of pay for Social Security + 1.45% for Medicare) for EMPLOYEE
- Generally saves the employer Workers’ Comp, Unemployment Comp, and General Liability Insurance costs
- Prevailing Wage funding creates excellent opportunities for business owners to maximize their own retirement savings because contributions made from the fringe portion have a significant positive effect on passing plan testing
- These retirement plans build substantial savings for employees (and business owners)
- Reduced overhead allows more competitive bidding and higher profit margins
For contractors who do both prevailing wage and non-prevailing wage jobs, these plans can provide another hidden benefit. If you traditionally split your crew and send half to a prevailing wage job and half to a regular job, you will often hear a lot of grumbling from the workers being sent to the regular job knowing they will receive lower take-home pay than their fellow workers on the prevailing wage job. If however, employees see less of a difference in their paycheck whether they are on a prevailing wage job versus a traditional job and instead have the fringe compensation deposited in a long-term retirement savings plan, that grumbling often disappears.
Whether a construction business does prevailing wage work or not, rewarding and retaining employees, maximizing tax benefits, and maximizing savings for owners are typically still key priorities. An effectively designed retirement plan can allow business owners to put significant funds away on a tax-favored basis into a retirement plan with creditor protection (protecting those assets in the event of a bankruptcy), while providing a powerful tool to attract and retain employees. Could your company benefit from a plan like this? Reach out to us! We’d be happy to help you evaluate whether it is right for you.