Understanding Fringe Benefits Under Davis-Bacon: Cash vs. Bona Fide Plans

Fringe Benefits: A Major Component of Prevailing Wages

When most people think about Davis-Bacon wages, they focus on the hourly cash rate. But the fringe benefit component often represents a significant portion of the total prevailing wage — sometimes 30% to 50% or more of the overall obligation.

Misunderstanding how fringe benefits work is one of the leading causes of underpayment violations on federal construction projects.

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The Two Ways to Meet Your Fringe Obligation

Option 1: Pay Fringe Benefits in Cash

The simplest approach is to pay the fringe benefit amount directly to the worker as additional cash wages. If the wage determination lists a basic rate of $35.00 and a fringe rate of $18.50, you would pay the worker $53.50 per hour in cash.

The fringe portion paid in cash is subject to all applicable taxes (FICA, federal and state income tax, unemployment), which increases your actual labor cost above the stated fringe rate. On the WH-347 Statement of Compliance, this is reported by checking Box 4(b).

Option 2: Contribute to Bona Fide Benefit Plans

Alternatively, contractors can meet the fringe obligation by making contributions to bona fide fringe benefit plans on behalf of the worker. The DOL defines a bona fide plan as one that is a genuine benefit program — not a scheme to avoid paying prevailing wages.

Qualifying plans include:

• Health insurance: Medical, dental, vision
• Retirement plans: 401(k), pension, defined contribution plans
• Life insurance: Group or individual policies
• Disability insurance: Short-term and long-term
• Vacation and holiday funds: Paid time off programs
• Apprenticeship training funds: Registered programs

Option 3: A Combination of Both

Many contractors use a combination approach — contributing a portion of the fringe obligation to benefit plans and paying the remainder in cash. For example, if the fringe rate is $18.50 per hour and your health insurance plan contribution amounts to $12.00 per hour, you would pay the remaining $6.50 per hour in cash to the worker.

On the WH-347, this is reported by checking Box 4(c).

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Understanding Annualization

One of the trickiest aspects of Davis-Bacon fringe benefits is annualization — the process of converting a benefit that is paid on a non-hourly basis (such as a monthly health insurance premium) into an equivalent hourly rate to determine how much of the fringe obligation it satisfies.

How Annualization Works

To annualize a benefit, you take the total annual cost of the benefit and divide it by the total number of hours the employee is expected to work in a year. The DOL generally accepts 2,080 hours (52 weeks x 40 hours) as a standard full-time year for annualization purposes.

Important Annualization Rules

• Actual contributions only: You can only take credit for contributions actually made — not planned or promised contributions.
• Individual worker basis: The benefit must be provided to the individual worker for whom you are claiming the credit.
• No legally required benefits: You cannot take credit for benefits that the employer is legally required to provide (Social Security, workers' compensation, unemployment insurance).
• PTO documentation: Paid time off (vacation, holidays, sick leave) can count only if it is part of a bona fide plan and the employer can document the cost.

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What Does NOT Count as a Fringe Benefit Credit

The DOL is specific about what does not qualify as a creditable fringe benefit:

• Employer's share of FICA: Social Security and Medicare taxes are legally mandated employer obligations, not fringe benefits.
• Workers' compensation insurance: Required by state law and not creditable.
• Unemployment insurance (FUTA/SUTA): Also legally required and not creditable.
• Tools, equipment, or supplies: Providing workers with tools is not a fringe benefit.
• Company vehicles for commuting: Generally not creditable unless part of a documented plan.

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The Financial Case for Bona Fide Plans

Choosing to meet your fringe obligation through bona fide plans rather than cash can result in meaningful cost savings. Consider this comparison for a worker with a $18.50/hour fringe obligation working 2,080 hours per year:

• All fringe in cash: $18.50/hr x 2,080 hrs = $38,480, plus approximately $2,944 in employer FICA taxes (7.65%) = $41,424 total employer cost.
• Bona fide plan contributions: $18.50/hr x 2,080 hrs = $38,480 with no additional payroll tax = $38,480 total employer cost.

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Reporting Fringe Benefits on the WH-347

Accurate fringe benefit reporting on the WH-347 requires attention to detail. In Column 5 (Rate of Pay), list the basic hourly rate and fringe rate separately. On the Statement of Compliance, clearly indicate which payment method you are using (Box 4a, 4b, or 4c).

If using plans, be prepared to provide documentation of those plans if requested.

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Key Takeaways

• Mandatory, not optional: Fringe benefits are a mandatory part of the prevailing wage.
• Three payment options: You can pay fringe as cash, contribute to bona fide plans, or use a combination.
• Tax advantages: Bona fide plan contributions save money because they are not subject to payroll taxes.
• Annualization required: Non-hourly benefits must be converted into hourly fringe credits.
• Know the exclusions: Legally required employer costs (FICA, workers' comp, unemployment) never count as fringe credits.