For contractors working on prevailing wage projects, deciding how to handle fringe benefit dollars can raise an important workforce question:

What happens when employees would rather receive those dollars as cash?

It’s a common concern. Employees may be accustomed to seeing fringe dollars in their paycheck, and contractors may worry that directing those dollars into retirement or other bona fide benefits will be viewed as money being taken away.

To address that concern, some fringe benefit arrangements focus on accessibility: contributing fringe dollars to a benefit program while giving employees a way to access some of those funds later. It may sound like the best of both worlds.

Before choosing a strategy based primarily on access to cash, however, contractors should understand what happens between contribution and distribution, and the questions they should be asking along the way.

Can prevailing wage fringe benefits be paid in cash?

Yes. Under the Davis-Bacon and Related Acts (DBRA), a contractor can generally satisfy its prevailing wage obligation by paying the required amount entirely as cash wages, providing bona fide fringe benefits, or using a combination of the two.

Bona fide fringe benefits can include retirement plans, health insurance and other qualifying benefits. Contributions made to qualifying benefit arrangements may also help contractors manage certain labor-related costs differently than when the entire fringe is paid as additional cash wages.

That can make benefits an important part of a contractor’s overall prevailing wage strategy, making it important to understand how the benefit works, how employees access it, and the long-term implications of its design.

Retirement money and cash wages aren’t the same thing

A retirement contribution isn’t simply a paycheck routed through another account.

Qualified retirement plans are governed by plan documents and federal requirements that determine when participants can receive distributions. While the IRS permits certain distributable events, individual plans are not required to offer every distribution option allowed under the law.

When employees access fringe contributions, they’re taking a 401(k) distribution

In many prevailing wage arrangements, employee access to fringe contributions ultimately occurs through a 401(k) distribution. While the ability to access those funds may sound appealing, it’s important to understand the rules and potential costs involved.

Qualified retirement plans are governed by plan documents and federal regulations that determine when distributions can be made. Although the IRS permits certain distributable events, individual plans are not required to offer every distribution option allowed under the law.

For employees under age 59½, withdrawals may trigger a 10% IRS early withdrawal penalty. Federal income taxes generally apply as well, and state income taxes, plan fees, and distribution fees may further reduce the amount received.

As a result, when employees hear, “You can still access your money,” it’s important that they understand the full picture.

Rather than focusing solely on whether the money can be accessed, employees should be asking:

• When can I access it?
• Under what circumstances?
• What taxes and other costs could apply?
• What plan fees and distribution fees am I subject to?
• How much will I actually receive?

Understanding these considerations can help employees make more informed decisions about their retirement savings and better evaluate the true value of their fringe benefit dollars.

The long-term cost of repeated withdrawals

Taxes aren’t the only consideration. Money withdrawn from a retirement account is money that is no longer invested for retirement. The IRS specifically cautions participants considering hardship distributions that withdrawals permanently reduce the amount remaining in the plan for retirement. For construction employers trying to build a benefits strategy that supports their workforce, that’s worth considering.

When fringe dollars are contributed to a retirement plan and then withdrawn shortly afterward, employees may lose some of the long-term value those contributions were intended to provide. By contrast, a retirement program designed to encourage long-term savings can help workers build greater financial security over time.

Why plan design matters for prevailing wage contractors

Prevailing wage retirement plans operate within a broader Davis-Bacon compliance framework. The U.S. Department of Labor has established requirements for bona fide fringe benefits and rules governing how benefit contributions may be credited toward prevailing wage obligations.

One key concept is annualization, which generally affects how much of a benefit contribution can be credited when employees perform both covered and non-covered work. Certain defined contribution plans may qualify as an exception if specific conditions are met.

While employee access to retirement funds is not inherently problematic, contractors should understand how a plan’s design and distribution provisions align with prevailing wage requirements rather than focusing solely on the promise of easy access to cash.

Ask more than “How much can we save?”

Using bona fide benefits instead of paying the entire fringe obligation as cash can provide legitimate advantages to contractors and employees.

For example, IRS guidance states that employer matching and nonelective contributions to qualified retirement plans generally aren’t subject to Social Security or Medicare taxes, while cash compensation generally is.

But a successful fringe benefit strategy should be measured by more than cost savings alone. Businesses should also ask: “Are we using our fringe dollars in a way that supports our business while providing meaningful value to our employees?”

Employee communication may be the better solution

Another reason some employers favor easy-access arrangements is concern that employees may view benefit contributions as a reduction in take-home pay.

That’s a real communication challenge, but it doesn’t necessarily require designing a benefit strategy around withdrawals.

When employees understand where their fringe dollars are going, the benefits they’re receiving and how those benefits support their financial and physical well-being, the conversation often changes from “Where did my money go?” to “Here’s what my benefits package provides.”

That requires education, transparency and a benefits strategy built for the realities of the construction workforce.

Build your fringe strategy around more than the next paycheck

Prevailing wage benefits can do more than satisfy a requirement on a wage determination. When thoughtfully designed, they can help contractors manage labor costs while providing benefits intended to create longer-term value for employees.

The right approach won’t look identical for every contractor or every workforce. Before changing how your company handles fringe dollars, look beyond the immediate savings or promise of easy access to cash. Understand the plan design, distribution rules, potential employee costs, Davis-Bacon requirements and long-term impact on your workforce.

Not sure what questions to ask about your current prevailing wage benefit strategy?

Beneco can help contractors understand how retirement, health and other bona fide benefits fit into a broader prevailing wage strategy. We can help you review your current approach, identify questions worth asking and better understand the options available to your business and employees.

This material is provided for general educational purposes and is not intended as legal, tax or investment advice. Plan requirements and prevailing wage obligations vary based on plan design, applicable law and individual circumstances. Contractors should consult appropriate legal, tax and benefits professionals regarding their specific situation.