The Department of Labor (DOL) dealt the human resource world another wild card in May when it released its final overtime rules. As most of you are already aware, the new rule nearly doubles the threshold for exempt employees from $455 per week or $23,660 a year to $913 a week or $47,476 annually. This means that employees paid less than the $47,476 salary level will be entitled to overtime pay on any hours worked over and above 40 hours per week. According to the DOL’s estimate, the new overtime rules will potentially change nearly 4.2 million employees’ exempt-worker status because they will now fall under the new exempt salary threshold.
While this law poses some very obvious challenges to companies in areas of compensation and hiring practices, it has a less recognizable, but just as impactful meaning to qualified retirement plans. This impact comes in the way the 401(k)’s plan document defines compensation. In many of the plans we have seen, overtime compensation is often included in the plan’s definition of compensation. This means that everything from deferral percentages to company match will be impacted for employees who become non-exempt on December 1 and begin to receive overtime. Additionally, for plans that exclude overtime from the definition of compensation, that practice of exclusion could be considered discriminatory if it causes the plan’s definition of compensation to favor the highly compensated employee (HCE) group. Speaking of HCEs, the new rule also built in a 34% increase to the total annual compensation requirement needed to be an exempt HCE, upping the level to $134,004. It remains to be seen what, if any, impact that change will have on the qualified plan world’s HCE definition.
What can you do to get ahead of the December 1st deadline? Read your plan’s document to make sure that you have a good understanding of your definition of compensation. Reach out to your payroll provider to make sure they are ready to accommodate the changes. Review your employee demographics to determine the potential impact to your company’s bottom line. Possibly and most importantly, partner with professionals in the benefit world to help you analyze this change and the other changes that are sure to come your way.
Jamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162