Annualization Issues Threaten Some Supplemental Unemployment Benefit Plans

January 25th, 2016|By Jeff Bennett

Many merit shop contractors throughout the United States fund supplemental unemployment benefit (SUB) plans to satisfy the fringe benefit obligation of the Davis-Bacon Act.

In doing so, many contractors rely on exceptions given to some plan providers/administrators to the U.S. Department of Labor’s (USDOL) annualization requirement which limits the credit for contributions made to bona fide plans if the same contributions are not made on private work hours.

In October 2015 the USDOL gave notice of its intent to rescind the SUB Plans’ annualization exceptions and require plan providers/administrators that were previously granted the exception to notify all participating employers of the USDOL notice and to come into compliance within 90 days.

This change in course by the USDOL has undoubtedly caused some contractors to rethink how best to handle fringe benefit obligations under the prevailing wage law. In fact, we have spoken to several contractors who initially thought they would need to stop their SUB plan altogether and start paying the fringe benefit portion of the prevailing wage as cash wages.

Discontinuing a SUB plan under these circumstances is a decision made in haste!

Although annualization can be challenging, there are a multitude of Plan design strategies that can be easily implemented to allow contractors to continue their SUB plans and even provide additional bona fide benefit plan options while remaining compliant with regulations.

For example, many contractors have classifications of employees that work very little public work (truck drivers, etc.). With proper Plan design, it is possible to exclude those employees from a Plan, resulting in greatly reduced costs of annualization.

Another option is to make your Plan voluntary under the IRS section 125 cafeteria plan rules. This strategy requires fringe benefit contributions be included as wages to the employee, who then elects to contribute the funds to the bona fide benefit plan. Plans structured in this manner are not subject to annualization because the fringe contributions have been paid as wages. The labor burden savings realized by the contractor may be less with this type of Plan design but it is still substantial and allows employees to continue receiving great benefits.

If you have additional questions please do not hesitate to contact us or download our whitepapers – “Harnessing the Power of Supplemental Unemployment Benefit Plans” and “Working the Fringe.”

Please also view our short animated video, to see how constructing a bona fide fringe benefit plan, can move prevailing wage dollars out of payroll and reduce associated costs. Increase profits. Submit more competitive bids. Build employee loyalty.

We are also hosting a webinar on the following dates:

Wednesday, January 27th @ 11am EST  


Friday, February 12th @ 2pm EST 


Thursday, March 10th @ 2pm EST 


How we can help

DirectAdvisors, established in 2001 and located in Albany, New York provides bona fide benefit plan consulting and third party administrative services to merit shop (non-union) construction companies that are subject to the Davis-Bacon Act, Service Contract Act and state prevailing wage regulations.  Our clients are located throughout the United States and range in size from 10 to 3000 employees.

In 2015, our construction company clients contributed tens of millions of dollars of prevailing wage fringe benefit contributions to The DirectAdvisors Trust (health & welfare benefits) and retirement plans managed by our team.

Our solutions are free from any conflict of interest as we do not sell any financial or insurance products.  We work with existing agents, brokers and insurance companies.


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