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A Contractor’s Hidden Tool – The Davis-Bacon 401(k) Plan

August 13th, 2019 | Written by

The buzz around Davis-Bacon 401(k) Plans is becoming too loud to ignore.  If you are a contractor bidding on government projects and are required to pay a prevailing wage rate, the Davis-Bacon Plan can help your company and employees save a significant amount of money in payroll taxes and insurance costs each year.

What is a Davis-Bacon 401(k) Plan?

The Davis-Bacon Act is not new.  It dates back to 1931 and was put into law to avoid unfair labor practices on non-union jobs in the construction industry. 

The Davis-Bacon Plan is a feature that can be added to a company’s 401(k) plan with a simple amendment.  If you are a contractor bidding on government projects, you are required to pay out 100% of the local “Prevailing Wage Rate” as wages.  However, you have the option to pay only the “base rate” directly to your employees and contribute the excess “fringe benefit” into a bona-fide Davis-Bacon 401(k) Plan.

Why contribute to a Davis-Bacon 401(k)?

Contributing the excess fringe benefit into a properly structured Davis-Bacon 401(k) Plan, allows a business to reduce payroll taxes and insurance cost. A contribution to the Davis-Bacon Plan will be not be subject to federal, state, social security or Medicare taxes.  It will also lower workers’ compensation premiums.  This contribution will also help to minimize general liability insurance premiums.  Other benefits to the contractor and business typically include an improved cash flow and often the ability to provide more competitive bids. 

Drawbacks and Benefits for the Employees

If your employees are looking for that excess fringe benefit in their paycheck, they will be disappointed as this fringe benefit will be deposited into the Davis-Bacon 401(k) Plan on their behalf.

The benefits of the Davis-Bacon 401(k) Plan to employees can be profound. The employees are not paying payroll taxes on the benefit deposited into their Davis-Bacon 401(k) Plan. And let’s not forget about the retirement savings to the employee.  This automatic contribution of the excess fringe benefit into the 401(k) helps the employees step-up their retirement savings efforts and work toward becoming more retirement ready.

A Fit for You?

As a contractor you are busy managing projects, employees, costs and a host of headaches every day.  It’s easy to find a million other things to tend to rather than reviewing your current retirement plan.  If the Davis-Bacon 401(k) Plan sounds like something that may be a fit for you, please consult with your financial planner and tax team.  The long-term benefits to you and your employees may just be like “hitting the nail on the head.”


This article was originally published in the Baltimore Business Journal on July 5th, 2019

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    This information is not intended to be used as the only bases for investment decisions, nor should it be constructed as advice designed to meet your particular needs. You are advised to seek the advice of your financial advisor prior to making any decision based on any specific information contained herein.
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