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New Overtime Rules Affect Retirement Plans

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. Source: 

Key Article Points: Overtime

-“DOL claims that 4.2 million white collar workers will become newly entitled to overtime protection due to the increase in salary level.”

-“Overtime rules will not only increase employers’ compensation costs. It will increase costs for retirement plan benefits, and may have other effects.”

-Joe DeSilva, senior vice president/ general manager of ADP Retirement Services says the additional costs for plan sponsors depends on what the plan document defines as compensation: “Plan sponsors have the opportunity to select whether to include overtime compensation… in our book of business, the vast majority do. I think the additional cost will be somewhat sizeable.”

-“With the increase in overtime levels for highly compensated employees, there could be an issue with nondiscrimination testing. More deferrals from the non-highly compensated could help plan sponsors pass the testing, but more deferrals from highly compensated employees could cause them to fail the testing,” DeSilva points out.

-Steven J. Friedman, shareholder at Littler Mendelson in New York City says “he wouldn’t be surprised to see employers creating more part-time positions so they can avoid characterizing individuals as full-timers who would be subject to new rules. He warns that this could violate Employee Retirement Security Act (ERISA) Section 510 against interference of benefits. This could subject employers to lawsuits, just as it did when employers decided to reduce employee hours to avoid being subject to the employer mandate of the Affordable Care Act (ACA).”

-“DeSilva noted that plan sponsors may rethink the definition of compensation in their plan documents to not include overtime pay. It could potentially lead to plan amendments.”

-“The DOL notes that as a general matter, non-profit organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities that result in sales made or business done that meet the $500,000 threshold.”

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