Why SIMPLE Plans Don’t Work For Prevailing Wage Contractors
Deadlines are a way of life for contractors — and an important deadline is fast approaching! Does your company have a SIMPLE plan? Did you know that they cannot be used effectively if you work 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.
After November 1st, you are stuck with your SIMPLE plan through 2017. 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 time is of the essence!
Here’s the Deal: Prevailing wage contributions made to a retirement plan 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.
There are four reasons that SIMPLE plans are not appropriate for prevailing wage contractors:
- 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.
- 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. Some contractors who have existing retirement plans set up a second retirement plan specifically for prevailing wage contributions. With a SIMPLE retirement plan, this is not allowed.
- Contributions are limited with a SIMPLE plan. Standard 401(k) plans allow annual deferrals up to $18,000 with an additional $6,000 allowed for employees age 50 and over. With a SIMPLE plan, the annual deferral limit is $12,500 with an additional $3,000 allowed for employees age 50 and over.
- SIMPLE plans cannot help you maximize your tax savings. Because this type of plan requires that contributions for all employees 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 which result from 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?
So you’ve made the decision to get out of your SIMPLE plan and look for something that will be more beneficial given the amount of prevailing wage work you’re doing. 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.
About the author:
K.C. Cannon, Jr. is Vice President of sales at Fringe Benefit Group, which has been helping the construction industry design and administer fringe benefit programs since 1983. For more information on its prevailing wage benefit plan, The Contractors Plan, please contact K.C. at firstname.lastname@example.org or 866-670-7442.