RBS News

Requesting Approval of Unfunded Benefit Plans Under Davis-Bacon and Related Acts

On August 8, 2023, the Department of Labor issued a Final Rule that makes significant changes to contractor and subcontractor obligations on federal and federally-assisted construction projects.  Contractors who perform work under projects covered by Davis-Bacon and Related Acts (“DBRA”) should become familiar with their new obligations, particularly the obligation to obtain Department of Labor (“DOL”) approval of unfunded/self-funded benefit plans. 

Unfunded plans are defined as any plan funded from the general assets of the contractor or subcontractor.  In the construction industry, paid time off (PTO), vacation and holiday plans are often classified as “unfunded plans.”   Contractors may be able to use unfunded benefit plans to meet their prevailing wage obligations under DBRA, however the Final Rule clarified that contractors must seek and obtain written prior approval from the DOL before claiming any fringe benefit credit.  Failure to get an approval letter from the DOL for these unfunded plans can lead to a denial of fringe benefit credit by the DOL.

Plan Requirements:

The unfunded plan must comply with four (4) key requirements generally to be approved:

1. The plan can be reasonably anticipated to provide benefits.

An unfunded/self-funded plan, whereby a contractor makes out-of-pocket payments to provide benefits, must be bona fide, or genuine, and it must be “reasonably anticipated” that it will withstand a test of actuarial soundness. Unfunded plans cannot take Davis- Bacon credit for the employer’s administrative costs or employee contributions. Employer contributions to the plan must be made no less often than quarterly.

• The plan must represent a commitment that can be legally enforced.

A bona fide unfunded/self-funded plan or program must also be administered in compliance with, and be enforceable under, the Employee Retirement Income Security Act of 1974 (ERISA).

• The plan must be carried out under a financially responsible plan or program.

These payments are not negotiable and may not revert in any manner to the employer.  Funds should be kept in an account that is separate from the company’s general funds and tracked using software and/or ledgers. PTO/vacation cannot be “use it or lose it” and must be paid out to the employee upon termination.

• The plan or program must be communicated in writing to employees.

This communication may be in the form of a summary plan description provided to employees. It may also be communicated in an employee handbook that is distributed to all employees upon hire.

Annualization Requirement

It's important to note that the DOL requires the annualization of fringe benefits. This means the cost of benefits must be averaged over all hours worked by an employee during the year, including both DBA-covered and non-DBA work. This ensures that the fringe benefit credit accurately reflects the benefit provided relative to total hours worked.

Submission of Request for Approval to DOL:

In order to request DOL approval, send a cover letter, comprehensive description of unfunded plan, documentation evidencing the plan’s enforceability and financial responsibility and copies of written communications provided to employees regarding the plan to:

unfunded@dol.gov

or via regular US Mail to:

United States Department of Labor
Wage and Hour Division
Director, Division of Government Contracts Enforcement
200 Constitution Ave., NW, Room S-3502
Washington, DC 20210

Implementing an unfunded plan without prior DOL approval could result in non-compliance with DBRA requirements, leading to potential penalties and the obligation to pay back wages.  Therefore, it is critical to seek written approval before claiming unfunded plan credit against fringe benefit obligations on a Davis-Bacon project.

While unfunded plans can offer flexibility, they come with specific compliance obligations under the DBA. We recommend a thorough review of your unfunded plans and preparation of a comprehensive submission to the DOL for approval. Our firm is available to assist with this process to ensure compliance and mitigate any potential risks.  Please contact Attorney Nick A. Nykulak at nickn@rbslaw.com or Kimberly S. Basta at kbasta@rbslaw.com if you have further questions or wish to discuss.