How New Overtime Rules Will Affect Retirement Plans

The rules may add retirement plan related costs to employers, and could help or hurt nondiscrimination testing.

By Rebecca Moore | October 14, 2016
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This past spring, the Department of Labor (DOL) issued a final rule updating overtime regulations under the Fair Labor Standards Act (FLSA).

According to a DOL FAQ document, when the final rule takes effect on December 1, 2016, the "standard" salary level for employees eligible to receive overtime pay will increase to $913 per week (equivalent to $47,476 annually for a full-year worker), up from $455 per week ($23,660 annually). The total annual compensation requirement for highly compensated employees to be eligible for overtime pay will increase to $134,004 per year, up from $100,000 per year. These levels will update automatically every three years, beginning on January 1, 2020, to maintain the earnings percentiles set in the final rule.

A post from ADP notes that any exempt employee who earns greater than the threshold amount under the new rule may remain exempt from overtime pay if that person primarily performs executive, administrative or professional duties as described in the regulations.

The DOL says, as a result of the new rule, absent employer action, an estimated 4.2 million white collar workers will become newly entitled to overtime protection because of the increase in the salary level. As a result, many of these workers will be able to work fewer hours, will receive additional compensation when they work overtime, or will receive a salary increase to remain exempt. In addition, the final rule clarifies the overtime requirements for 8.9 million currently overtime-eligible salaried employees, 5.7 million salaried white collar employees and 3.2 million salaried blue collar employees because their pay will fall below the new threshold and no assessment of their duties, which can result in misclassification, will be necessary. An estimated 732,000 white collar, salaried workers making between $455 and $913 per week do not meet the duties test and are already overtime eligible, but their employers do not recognize them as such.

The DOL estimates that average annualized direct employer costs will total approximately $295 million per year over the first ten years, including regulatory familiarization costs, adjustment costs, and managerial costs. But, the overtime rules will not only increase employers’ compensation costs. It will increase costs for retirement plan benefits, and may have other effects.

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