Withholding Prevailing Wage Supplements in a Cafeteria Plan? Better Do It Right!

The old adage about things that sound too good to be true applies doubly when it comes to prevailing wage benefit plans. It seems like the rate is always higher, the hours are always longer, the punch list keeps growing, and the float on payments is forever.

That has always been our experience too, until the other day when a potential client wrote us this email:

“When I asked about the annual testing he said, ‘Our design has been deemed by the New York State Department of Labor to meet the exception to the annualization requirement. Our design is deemed by them to be equivalent of paying the people in cash, although obviously we are not doing that.’ I don’t necessarily like sending direct information from one vendor to another, but I am concerned. What kind of Plan would this be then?”

This would be a Cafeteria Plan. A Plan the NYSDOL openly promotes on their website as compliant with NYSDOL annualization regulations. From NYSDOL Article 8 FAQ’s online :

“A: Yes. A true Cafeteria Plan, where the total dollar value of the supplement amount is provided to the employee and the employee is provided the option or vehicle to purchase their own benefits, is considered the same as cash.”

This raises some red flags for us. The first is, in our experience, the NYSDOL Bureau of Public Works doesn’t deem anything. They only investigate your prevailing wage benefit plan, assess the willfulness of any violations they find, and then act on their findings. There is no pre-approval process.

Secondly, not all Cafeteria Plans are created equal. The word “true” in the NYSDOL answer presents a problem for this potential client. That’s because a Cafeteria Plan is a separate written plan, maintained by an employer for employees, that meets the specific requirements and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a Cafeteria Plan must be permitted to choose among at least one tax qualified benefit and one taxable benefit (such as cash).

Don’t take our word for it, check for yourself. See what Cornell’s index of IRS Code says in section 125.d.1.B.  Do you run a Cafeteria Plan? Are your participants offered a cash option? Did you ever offer them cash in their check? Does your Cafeteria Plan empty into a retirement Plan? If so, that’s not cash and something’s not right. Contact us today for a free consultation on your prevailing wage benefit plan.