(b)lines Ask the Experts – Effect of Overtime Rules on Plan Administration

“I recently read that the DOL is proposing a new overtime rule. As proposed, will that new rule have an impact on the 403(b) retirement plan that we sponsor?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

The Department of Labor (DOL) has actually proposed two rules which affect overtime. The first proposal would increase the salary thresholds for determining eligibility for overtime, while the second proposal would clarify the payments which are included in the “regular rate” used to calculate an employee’s overtime rate of pay. 

Under current law, to be exempt from the overtime requirements, an employee generally must (1) be a salaried employee, (2) with a weekly salary of $455 or more, (3) who primarily performs executive, administrative, or professional duties. The first proposal would increase the weekly salary threshold to $679 per week. (There is also a separate highly compensated employee (HCE) test, the threshold for which would increase under the proposal.) If implemented, this proposal would undoubtedly increase the number of employees who are required to receive overtime pay for hours worked in excess of 40 in a week. Therefore, if the plan’s definition of compensation includes overtime, these employees would have increased compensation on which contributions to a 403(b) plan are based.

The second proposal clarifies items that may be excluded from an employee’s regular rate of pay, such as payments for unused paid leave and certain reimbursed expenses and discretionary bonuses. As this proposal is generally intended to merely clarify the payments that are included in the regular rate, there should be minimal (if any) impact on compensation under 403(b) plans.

Many plans include overtime in the plan’s definition of compensation. Further, overtime must be included in calculating compensation for certain Code purposes, such as the compensation limit under Section 415. Therefore, while these two proposals do not directly effect a change to the definition of compensation for purposes of 403(b) plans, there could be impacts on the amount of “includible compensation” on which contributions will be calculated for some employees. Finally, for plans that EXCLUDE overtime from their definition of compensation and are subject to nondiscrimination testing, such testing may be impacted by the proposed rules.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.