With the release of the Department of Labor’s (DOL’s) revised federal overtime regulations, plan sponsors should be aware of the potential impact to their retirement plans. This new rule will touch more than 4 million U.S. workers and affects plan definitions of compensation, employee classifications, employer costs, and eligibility requirements. We encourage plan sponsors to review their plan design, definitions, and elections in preparation of the rule’s December 1 effective date.
What Is It?
In April 2016, the DOL issued a final rule revising overtime regulations under the Fair Labor Standards Act (FLSA). The new rule increases the standard salary level for overtime eligible employees 101 percent from $455/week ($27,660/year) to $913/week ($47,476/year).
The new rule impacts highly compensated employees (HCEs) as well. The salary level for HCE’s subject to the minimal duties test will increase 34 percent to $134,004 per year (previously $100,000). The levels will be updated on a three-year cycle starting January 1, 2020. Note that FLSA uses a different definition for highly compensated employee than ERISA Section 414(q)(1)(b).
Several overtime exemptions exist based on job type under FLSA for white collar workers. These include executives, administrative, and professional duties.
What This Means to Retirement Plans
There could be several direct impacts to retirement plan sponsors under the new rule. Notable impacts as a result of the rule include:
- Compensation. The definition of plan compensation determines wages that are eligible for contributions. Employers that expect a significant increase in overtime wages may amend their plan documents to exclude overtime from the definition of compensation. Employers may exclude overtime pay for matching and non-elective contributions to minimize the potential cost increase. Regardless, they must satisfy nondiscrimination testing requirements under ERISA Section 414(s).
- Contributions. With the increase in overtime eligible salary levels, plans that do not exclude overtime from the definition of compensation may see increased employee elective deferrals. Plans with higher levels of overtime eligible HCEs could face issues with nondiscrimination testing. Plans that offer matching contributions may see an increase in employer contributions.
- Eligibility. As a response to the new rule, some employers are restructuring employee classifications. Depending on the plan eligibility requirements this could restrict employee participation. It may be appropriate to review eligibility requirements to determine any impact.
With the new rule effective December 1, employers should work to understand the effect of these rules on their workforce. Reviewing the plan document to determine any necessary changes to eligibility, contributions, and compensation can identify and reduce potential challenges in the implementation of the rule.