SIMPLE Plans Don’t Work For Prevailing Wage Contractors

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Did you know that SIMPLE plans cannot be used effectively when work is performed on prevailing wage jobs? Employers with SIMPLE IRA or SIMPLE 401(k) plans are unable to take full advantage of the savings that can be realized from prevailing wage retirement contributions.

Unless changes are made by November 1st, employers will be stuck with their SIMPLE plan through the next year. Written notice of intent to discontinue a SIMPLE plan must be provided to employees at least 60 days prior to the beginning of the calendar year so keep that in mind when considering making a switch.

Here’s the Deal: Prevailing wage contributions made to a qualified retirement plan, e.g. Profit Sharing, 401(k), reduce payroll overhead and can be leveraged in other ways to save company owners money and allow them to contribute more to their own retirement accounts.  Some contractors set up SIMPLE plans because there is no requirement for annual reporting and nondiscrimination testing but they quickly discover that a SIMPLE IRA plan is not a good fit for prevailing wage jobs. While they are relatively easy to set up, their lack of flexibility can cost you winning bids.

Top 4 reasons that SIMPLE plans don’t work for prevailing wage contractors:

1. Contribution amounts must be identical. Contribution amounts cannot vary by project, job site, or job category. The contribution rate must be the same for all employees.
2. Employers are prohibited from using any other type of qualified retirement plan with a SIMPLE plan. Employers who use a SIMPLE plan can only use the SIMPLE plan. Contractors who have existing retirement plans may want to set up a second retirement plan specifically for prevailing wage contributions. With a SIMPLE retirement plan, this is not allowed.
3. Contributions are limited with a SIMPLE plan. For 2023 standard 401(k) plans allow annual deferrals up to $22,500 with an additional $7,500 allowed for employees aged 50 and over. With a SIMPLE plan in 2023, the annual deferral limit is $15,500 with an additional “catch-up’ of $3,500 allowed for employees aged 50 and over.
4. SIMPLE plans cannot help you maximize your tax savings. Since this type of plan requires contributions for all employees to be the same, employers are often prevented from contributing the entire fringe portion of the prevailing wage for job classifications with higher wage determinations. This means companies cannot take full advantage of the potential savings on payroll burden that they would receive when allocating the entire fringe benefit amount to bona fide benefit plans.

Transitioning from a SIMPLE Plan to a 401(k) Plan

As noted, the deadline for employers to provide notification to employees that they intend to discontinue their SIMPLE plans is November 1st.   Employers should also contact their current SIMPLE plan administrator to notify them that contributions will not be made to the plan next year.

What Type of Retirement Plan is Best?

For assistance in determining what type of plan will provide maximum benefits for you and your company, consult a qualified retirement plan provider with experience helping prevailing wage contractors. Here at The Contractors Plan, we are the leading experts in prevailing wage benefits.

For more information on prevailing wage benefit plans, please contact us at info@thecontractorsplan.com or 866-670-7442.