December 1, 2016, may or may not bring snow to many parts of the country. However, it will bring the Fair Labor Standards Act (FLSA) final overtime rule. The dramatic changes included in the FLSA final overtime rule could have significant implications for retirement plans. Specifically, the changes affect what forms of compensation employers use to calculate their contributions to qualified retirement plans and determine highly compensated employee (HCE) status.
A New Exemption Season
The current rules automatically exempt employees who earn more than $455 for a 40-hour week ($23,660 annualized) from overtime pay requirements (i.e., time-and-a-half for exceeding 40 weekly hours). Under the new FLSA final overtime rule, the exemption will apply to those who earn more than $913 per week (annualized at $47,476). In addition, an HCE’s minimum income (for automatic exempt status purposes) will increase from $100,000 to $134,004. Beginning in 2020, these amounts will be automatically adjusted for inflation every three years.
A Snowball Effect on Bonus Standards
No more than 10% of income for exempt status determination can come from commissions and nondiscretionary bonuses (i.e., those automatically paid if employees meet certain job-related quotas). However, team members must receive these additional amounts at least once a quarter. Thus, employers that pay nondiscretionary bonuses to employees whose income is close to but under the income thresholds less frequently than quarterly may see such employees move into exempt status, leaving them unentitled to overtime pay.
Employers that make annual contributions to employees’ retirement accounts based on a percentage of their pay (either in addition to or in lieu of matching contributions) could see their costs go up. The magnitude of the increase will depend on how they respond to the higher minimum wage threshold.
For example, assume that an employer makes a 3% nonelective annual contribution and has several employees whose current salaries are $30,000. They’d no longer qualify as exempt. With overtime included, however, they now earn an average of $40,000. Given the additional $10,000 in wages per person, the employer will pay $300 more in non-elective annual contributions per employee.
Bundle Up to Prepare for the FLSA Final Overtime Rule Changes
So what should you do to prepare for the new rule? You can:
- strive to cap those employees’ hours at 40 per week and pay overtime as needed, or
- raise their salaries to or above the new $47,467 threshold to avoid paying overtime.
For employers who do not account for overtime pay in the 3% nonelective contribution, the size of their contribution would not change in the first scenario, but would rise in the second. Conversely, employers’ contributions will go up if they include overtime pay in the 3% contribution calculation and decide simply to start paying overtime instead of raising wages.
Companies should consider whether the net increase would be greater than what they could face if they increase base pay, even if the addition is small. Finally, for employers that neither raise salaries nor include overtime pay in the 3% contribution calculation – and whose nonexempt employees receive a lower proportion of total nonelective contributions throughout the year – the share going to exempt HCEs will rise, possibly triggering discrimination testing failures.
Don’t Let the FLSA Final Overtime Rule Put Your Benefit Plan on Thin Ice
Although the new FLSA rules stand to primarily affect employers’ costs, remember that expenses are not the only factors when deciding what types of compensation to provide your workforce. Employee perception and motivation are just as important. Contact CRI to ensure that your plan is designed to keep your budget and your staff happy – just as you would be with a cup of hot chocolate on a cold winter day.