Self-Insured Health Plans as “Bona Fide Fringe Benefit Plan” under Davis Bacon and State Prevailing Wage Laws
Self-insured, or self-funded health plans, are popular with employers that have a large, diverse workforce. Often, the claims under self-insured health plan will be paid from the employer’s general assets, creating an “unfunded” promise to pay benefits. Although permissible, an unfunded health plan can invite more scrutiny by federal and state prevailing wage investigators. In addition, an unfunded plan must be submitted to the U.S. Department of Labor National Office for a determination whether the plan is a “bona fide fringe benefit plan” under the Davis-Bacon Act or Service Contract Act (SCA). Many state prevailing wage laws follow Davis-Bacon Act principles.
As described in the U.S. Department of Labor (U.S. DOL) Prevailing Wage Resource Book, for an unfunded plan to be a bona fide fringe benefit it must meet all of the following criteria:
- It can be reasonably anticipated to provide benefits described in the Davis-Bacon Act;
- Remember, the contractor’s general assets can be attached by creditors, making the benefits less secure.
- It is a legally enforceable commitment;
- Unpaid health claims are a high priority “administrative” claim in a Chapter 11 bankruptcy, but an employee may have to file a proof of claim.
- It is carried out under a financially responsible plan or program;
- The contractor can take credit only for the actuarially determined “premium equivalent” each month, regardless of the claims amount.
- The plan or program has been communicated in writing to the workers.
To ensure that such plans are not used to avoid compliance with the Act, the DOL may require the contractor to set aside, in an account, no less often than quarterly, sufficient assets to meet the future obligations of the plan.
There is a better way. When a health benefit plan is funded by an irrevocable trust, the entire prevailing wage contribution is credited towards meeting the prevailing fringe benefit requirement when deposited. Claims are allocated in a uniform and nondiscriminatory way across the employees’ accounts under the trust. Direct allocation of the claims to the account of the employee who incurred the claim is not permitted.
Even better, no prior approval by the U. S. DOL is required. When a contractor makes an irrevocable contribution to a trust that is regulated by the Internal Revenue Code (e.g., an IRC §501(c)(9) voluntary employees’ beneficiary association (VEBA) or to an independent trustee regulated by applicable state or federal banking law, the “bona-fide” nature of the plan is readily apparent. The trust assets are protected from the claims of the contractor’s creditors. Claims payments are drawn from the trust assets and transmitted to the third-party health claims administrator, which pays the doctor, hospital etc. And, the additional participant protections of ERISA that apply to the self-insured / self-funded health plan seems to be comforting to DOL Wage and Hour examiners, both federal and state.