Funded or “Bona-Fide” Fringe Benefit Plans
With funded or “bona-fide” plans the sponsor/employer makes consistent, irrevocable payments into a third party trust. Funds cover premium expenses with third party insurance and benefit providers. “Funded” Fringe Benefit Plans do NOT need DOL approval. The DOL’s standard for what constitutes a “Funded” Fringe Benefit Plan is as follows:
• Paid to a bona-fide third party trustee or insurer
• Regularly paid (at least once per quarter)
• Individually paid (credit is made for individual workers which are eligible)
• Irrevocably paid*
*the contractor will not be able to recapture any of the contributions paid in nor in any way divert the funds to its own use or benefit.
Un-Funded or Self-Insured Fringe Benefit Plans
With un-funded or self-funded plans the sponsor/employer makes periodic payments into a designated fund. Claim payments are drawn from the employer’s general assets and have the potential to vary greatly month-to-month. Often Employers secure a stop-loss insurance policy where a premium is paid to a third party to protect the company from catastrophic claims. The most common form of un-funded plan is vacation, holiday, sick. Unfunded fringe benefit plans DO need DOL approval. Here’s what criteria the DOL is looking for in order to approve an unfunded fringe benefit plan.
• Contributions reasonably anticipate the cost of a bona-fide fringe benefit & associated claims.
• The plan is legally enforceable (according to ERISA)
• The plan is carried out according to a fiscally responsible plan
• The plan has been clearly communicated to participating workers
• The plan has been approved by the DOL’s WHD.
Un-funded or self-funded fringe benefit plans provide cost savings and greater flexibility, but also incur greater risk and more up-front work to achieve DOL approval. Funded or bona-fide fringe benefit plans are easier to implement without DOL approval, provide less risk to the employer, but also can incur greater administrative costs. One of the greatest advantages of funded or bona-fide plans is that they enjoy ERISA override above state and local laws. If a contractor works in multiple states or locations they may create a funded benefit plan that applies uniformly at all locations regardless of state or local prevailing wage requirements.