Davis-Bacon fringe benefits: Pay it as cash or put it toward health coverage?

On a prevailing-wage job, the fringe isn’t optional. Davis-Bacon fringe benefits are part of the wage you already owe every laborer and mechanic on the site, listed on the wage determination right next to the basic hourly rate. The only real decision is how you pay it.

You can hand it over as cash on the paycheck, or you can put it toward bona fide benefits like health coverage. Both satisfy the same obligation, but they don’t cost the same. Cash fringe is taxed as wages which means employer FICA and, in most states, workers’ comp premiums ride on every dollar. Fringe that goes into a qualifying health plan instead generally carries none of that.

This guide walks through how each option works, the annualization rule that changes the math, an example for an hourly based worker, and how to decide which approach fits your crew.

What are Davis-Bacon fringe benefits?

Davis-Bacon fringe benefits are the portion of the prevailing wage that a contractor must provide on top of the basic hourly rate on federally funded or federally assisted construction projects. Under the Davis-Bacon and Related Acts (DBRA), the prevailing wage for each job classification equals the basic hourly rate plus a fringe benefit amount. Both must be paid for every hour worked on the job site.

You’ll find both numbers on the wage determination attached to your contract. General wage determinations are published on SAM.gov by county, construction type, and job classification.

The fringe amount is usually an hourly dollar figure. In the Department of Labor’s own example, a classification with a $27.00 basic hourly rate and a $14.00 fringe carries a total prevailing wage obligation of $41.00 an hour.

Three ways to pay the fringe on a prevailing-wage job

The Department of Labor (DOL) lets contractors meet the fringe obligation with cash, with contributions to bona fide fringe benefit plans, or with any combination of the two. According to DOL Fact Sheet #66E, cash wages paid above the basic hourly rate can also offset the fringe portion. That flexibility is specific to Davis-Bacon and doesn’t apply under the Service Contract Act.

One thing the choice doesn’t change is overtime. Cash paid in lieu of fringe is excluded from the time-and-a-half premium required under the Fair Labor Standards Act and the Contract Work Hours and Safety Standards Act. You still owe the fringe for every hour worked, including overtime hours, but the extra half-time is calculated on the basic hourly rate either way.

That exclusion only holds when the cash is truly paid in lieu of fringe. If a worker earns the same higher rate on private jobs where no fringe requirement applies, DOL treats the extra pay as part of the regular rate, and it counts toward overtime.

Why paying fringe in cash costs more than it looks

Cash is the simplest way to pay the fringe, which is why many open-shop contractors default to it. The cost is that every cash fringe dollar becomes taxable wages, and your full labor burden rides on top of it.

On each dollar of cash fringe, an employer typically pays:

• Employer FICA: 6.2% for Social Security, up to the annual wage base, plus 1.45% for Medicare, or 7.65% combined, according to the IRS.
• Workers’ compensation: In most states, premiums are calculated as a rate per $100 of payroll, and cash wages count as payroll. Rates vary widely by state and class code, so check yours before you assume this line is small.
• Unemployment taxes: FUTA and state unemployment taxes apply until a worker reaches each taxable wage base, which many full-time crew members hit early in the year.

Your crew pays a share, too. Cash fringe is subject to income tax withholding and the employee’s own 7.65% FICA, so a $14.00 hourly fringe is worth noticeably less than $14.00 by the time it reaches a worker’s bank account.

If you carry pay-as-you-go workers’ comp through Fingercheck, premiums are based on actual payroll each pay period instead of an annual estimate. That means the cost of cash fringe shows up in real time, not months later at your premium audit.

What changes when the fringe goes toward health coverage

When you route the fringe into a bona fide health plan, the contribution generally stops counting as wages. According to IRS Publication 15-B, accident and health benefits you provide to an employee are generally exempt from federal income tax withholding, Social Security, Medicare, and FUTA tax. That includes employer contributions toward the cost of health insurance.

Workers’ comp often follows a similar pattern, though it’s set by insurance rating rules rather than tax law. The rating rules most states use, including NCCI’s Basic Manual and California’s WCIRB rules, generally exclude employer contributions to group insurance plans from the payroll used to calculate premiums. Confirm with your carrier, since state rules and policies differ.

That’s the trade, a dollar of fringe paid as cash carries your full labor burden. The same dollar paid toward health coverage generally carries none of it, and your worker gets coverage instead of a smaller after-tax check.

To take Davis-Bacon credit for the contribution, though, the plan has to be bona fide. DOL’s requirements include:

• A third party holds the money: Contributions must be made irrevocably to a trustee, insurer, or other third party that isn’t affiliated with you, and they must be made at least quarterly.
• The plan is legally enforceable: It must meet applicable requirements under ERISA, IRS rules, and state insurance law.
• The worker is eligible: You can take credit for workers in a waiting period who will likely become participants, but not for workers the plan excludes, such as part-timers barred by its eligibility rules.
• Only benefit costs count: Your own costs of administering the benefit, such as tracking invoices or updating enrollment records, aren’t creditable, even if a vendor handles that work for you. Costs an insurer or plan administrator incurs to deliver the benefits can count.

Unfunded plans, which pay benefits out of a contractor’s general assets instead of through a third party, need written approval from DOL before you can claim credit for them.

The annualization rule: Why health coverage isn’t a dollar-for-dollar swap

Here’s the catch most fringe-benefit pitches leave out. DOL requires contractors to annualize health plan contributions, which means you can only credit the plan’s cost spread across every hour the worker puts in, on private jobs and prevailing-wage jobs alike. Annualization was long-standing DOL policy, and the 2023 Davis-Bacon rule codified it at 29 CFR 5.25(c).

The formula is straightforward: Annual plan contribution ÷ total hours worked on Davis-Bacon and private jobs = creditable fringe per hour

Say you pay $600 a month toward a worker’s health coverage, or $7,200 a year, and that worker logs 2,000 hours across all jobs. Your creditable fringe is $3.60 per hour, no matter how many of those hours fall on Davis-Bacon work. If the wage determination requires $14.00, the remaining $10.40 still has to reach the worker as cash or as other bona fide benefits.

DOL’s reasoning is that health coverage protects the worker year-round, so prevailing-wage work shouldn’t be the sole or disproportionate source of funding for it. Failing to annualize, or leaving private hours out of the calculation, is one of the common violations DOL calls out by name.

There are a few exceptions. Defined contribution retirement plans with immediate participation and vesting within the first 500 hours worked, can be exempt from annualization without a request to DOL. Other exceptions are limited to benefits that aren’t continuous in nature and don’t cover both private and Davis-Bacon work, which rules out a typical year-round health plan.

Annualization only works if your hours are accurate across every job, not just the certified ones. Fingercheck captures GPS-verified hours and allocates them to the right job code, so the same timecards that build your certified payroll also give you the total hours behind your annualization math.

Running the math: cash vs. health coverage for one Carpenter

Here’s how the choice plays out for a single worker. The assumptions:

• Wage determination: $32.00 basic hourly rate plus $14.00 fringe.
• Hours: 2,000 total for the year, 1,200 of them on Davis-Bacon jobs.
• Health plan: $600 a month, or $7,200 a year, which annualizes to $3.60 per hour.
• Employer burden on cash wages: 15.65%, made up of 7.65% employer FICA and an illustrative workers’ comp rate of $8.00 per $100 of payroll. The worker’s base wages are assumed to have already met the FUTA and state unemployment wage bases.

When offering coverage and still paying the full fringe in cash, crediting the plan saves this contractor about $5,000 a year for one worker.

Compared with paying all cash and offering no coverage, crediting costs about $2,200 more per worker per year. In exchange, the worker gets $7,200 worth of year-round health coverage that isn’t taxed as income. Put another way, the fringe obligation covers roughly 70% of the plan’s cost.

The math shifts with each worker’s mix of hours. For a worker who spends the whole year on Davis-Bacon jobs, crediting the plan actually costs less than paying all cash, because you skip the labor burden on every credited dollar. For a worker who only spends a few weeks a year on prevailing-wage work, the credit is small, so the coverage has to justify itself on hiring and retention.

These figures are illustrative. Workers’ comp rates vary widely by state and class code, and your results will depend on your plan cost and your crew’s actual hours.

Cash or coverage? How to decide for your crew

Crediting health coverage usually wins when your crew spends most of its hours on prevailing-wage work and you want benefits to help you hire and keep skilled workers. Cash usually wins when prevailing-wage work is occasional or your crew turns over quickly.

Before you decide, ask these questions:

• What share of each worker’s hours is Davis-Bacon work? The higher the share, the more of the plan’s cost the fringe can cover.
• Would you offer coverage anyway? If benefits are already part of your hiring plan, crediting them against the fringe is the cheapest way to fund them.
• How long do workers stay? Credit is allowed during a plan’s waiting period for workers who will likely become participants, but frequent turnover makes enrollment harder to manage.
• What does your crew want? Some workers, such as those already covered through a spouse, may prefer cash. Talk with your team before you redesign how you pay them.
• Are you working state prevailing-wage jobs, too? Many states run their own programs with their own fringe crediting rules, so don’t assume the federal approach carries over.
• Can your payroll system show it correctly? Your certified payroll has to show whether each worker’s fringe was paid into plans or in cash, and the two have to add up to the full rate.

Put the fringe toward benefits in the same system that runs certified payroll

Most contractors handle the fringe decision in three places: a time-tracking app for hours, a payroll provider for checks, and a separate broker for coverage. Every handoff is a chance for the annualization math, the cash top-up, and the certified payroll report to drift apart.

Fingercheck keeps everything together. Your crew’s GPS-verified hours flow straight into payroll, job costing, and certified payroll reports, and you can set prevailing wages at both the worker and job-site level. Certified payroll reporting is built into Fingercheck payroll at no extra cost.

Through our partnership with Meridio, the platform that runs your certified payroll can now put the fringe toward health benefits in the same system. Meridio’s Core Plans offer nationwide, ACA-compliant coverage with preventive care and medical options, starting at $190 a month, with no minimum group size, no underwriting, and year-round enrollment. They’re designed for full-time, part-time, and seasonal workers, which matters on prevailing-wage jobs, since you can’t take fringe credit for workers your plan excludes.

Davis-Bacon fringe benefits are money you already owe. The real question is whether that money leaves as taxed cash or goes to work as coverage your crew can use. To see how the numbers look for your own crew, talk to a Fingercheck payroll expert.

This is general information, not tax, legal, or insurance advice. Talk to a licensed benefits professional or tax advisor about how Davis-Bacon fringe rules apply to your business.

Victoria Davis As the Senior Demand Generation Manager at Fingercheck, I spend my days figuring out what business owners are searching for and making sure we're the payroll answer they find. I'm a seasoned B2B SaaS marketer who believes creativity belongs in every industry. Off the clock, you'll find me cooking and baking, hanging out with my four dogs, or at the local farmers market.

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