Government contractors assume certain obligations as part of doing business with the federal government. Under the McNamara-O’Hara Service Contract Act (SCA), service employees employed on contracts that provide services to the federal government are entitled to payment of prevailing wage rates and fringe benefits. It is important for government contractors who are interested in setting up employee benefits, to fully understand the requirements they must follow by law to prevent hefty penalties.
What Is the Service Contract Act?
The McNamara-O’Hara Service Contract Act of 1965 is a U.S. labor law that mandates fair wages for workers. The SCA applies to certain contracts entered into by the U.S. or the District of Columbia and its primary purpose is to provide services to the United States using service employees.
The Act requires all government general contractors and subcontractors that perform services on federal contracts of more than $2,500 to pay their service employees fair fringe benefits and wage rates based on the prevailing rates set by the U.S. Department of Labor, or the rates established in a former contractor’s collective bargaining agreement.
Meeting Fringe Benefits Obligations
Under the SCA, a monetary wage must be paid in cash and employers cannot satisfy this requirement through fringe benefits. Currently, the required SCA health and welfare fringe benefit rate is $4.54 per hour, according to the U.S. DOL.
For a full 40-hour workweek, this equates to $181.60 per week or $786.93 per month. This amount can be paid in benefits or the cash equivalent of benefits. There are several types of fringe benefits that can be used to satisfy SCA requirements, such as health coverage.
Some employers choose to pay their employees’ fringe benefits in the form of cash instead of actual fringe benefits. Although this is a legal approach, there are factors to consider.
Fringe benefits paid in cash do not deliver the same tax advantages as traditional fringe benefits since cash payments are subject to income tax withholding and payroll taxes. A contractor may choose to pay fringe benefits in cash to avoid the hassle of maintaining benefit plan coverage for employees.
Employers can meet their obligation to provide employees with fringe benefits by making a contribution to a third party or trustee in accordance with a “bona fide” fringe benefits fund. For a fringe benefit to be truly “bona fide,” the fund or plan must meet certain criteria.
First, a fringe benefit plan should be in writing and any contributions made by employees must be voluntary. In addition, contributions made by employees cannot be counted to satisfy fringe benefit obligations. The plan must also include a formula for determining the contractor’s contribution amount and a formula for determining the benefits received by each employee who agrees to participate in the plan.
The main objective of a fringe benefit plan is to pay for employee benefits on account of disability, death, retirement, advanced age, hospitalization, illness, medical expenses and similar events.
Fringe benefits may include a variety of benefit types, such as medical plans, vision plans, dental plans, long-term disability, life and ADD insurance, contributions made to retirement plans that are 100 percent vested and holiday and vacation benefits. Any contributions made by contractors must be paid irrevocably to a third person or trustee and be paid at least quarterly.
Since contributions must be irrevocably paid to a third party, the contractor does not have control over the contributions.
There are also certain benefits that are not deemed to be “bona fide” fringe benefits under the SCA, including any benefits that are required by other federal or state laws, such as social security, workers’ compensation or unemployment compensation. Any contributions made to health FSAs are also not considered bona fide fringe benefits as they are not irrevocable.
Requirements for Self-Funded Plans
If a government contractor has a self-funded plan and wishes to meet their fringe benefits obligations through a medical plan, the self-funded plan must be funded by a trust or have approval from the Department of Labor-Wage and Hour Division to ensure that the plan meets fringe requirements.
When submitting an unfunded or self-funded plan to the DOL for review, an employer should include documentation that explains the contribution or funding formula, the financial analysis method used to determine the cost of plan benefits and should outline the frequency of employer contributions to the plan.
Documentation must also be presented that identifies the administrator of the plan, identifies how the plan will be communicated to employees and advises of the plan’s ERISA status.
What Is the Davis-Bacon Act?
When learning about employee benefits requirements for government contractors, it is also important to become familiar with the Davis-Bacon Act of 1931.
This Act requires contractors and subcontractors who work on federally-funded jobs to pay employees wages and benefits that are no less than what others locally pay their laborers for similar projects. As with the McNamara-O’Hara Service Contract Act, contractors can pay this wage out as a combination of fringe benefits and cash.
The Davis-Bacon Act typically applies only to contracts in excess of $2,000 and includes contracts with the U.S. Government or District of Columbia. The Act covers construction, repairs or alterations to public works or public buildings.
Under this Act, the contractor or subcontractor is required to display the relevant wage scale at the worksite. The U.S. Department of Labor is responsible for setting and maintaining Davis-Bacon wages over time.
Speak with an Employee Benefits Consultant To Lean More About Government Contractor Employee Benefits
Up to 78 percent of contractors have been audited and found to be non-compliant by the Department of Labor in recent years, according to AXIM Fringe Solutions Group, LLC. Today, government contractors are more focused on remaining compliant by staying up-to-date on current laws and regulations.
Gaining a solid understanding of employee benefits requirements for government contractors is critical to avoid the costly fees and penalties of noncompliance.
To learn more about employee benefits requirements for government contractors or to speak with an experienced employee benefits consultant, request a consultation with the experts at Business Benefits Group.