New Exempt Status Salary Threshold Could Impact 401(k) Plan Costs
James Quaid, Larry A. Ruff
If your 401(k) plan employer contribution formula for hourly employees includes overtime pay, your plan costs may increase next year — along with your overtime pay outlays. That is because the U.S. Department of Labor (DOL) issued a final ruling that increases the salary threshold for overtime pay eligibility.
What is the rule?
On September 24, the DOL released a final rule that will increase the salary threshold for professional employees to receive overtime pay. Under the rule, the salary threshold for overtime pay will be increased from $455 per week ($23,660 annually) to $684 per week ($35,568 annually) beginning on January 1, 2020. The DOL estimates that 1.2 million additional workers will be entitled to overtime pay as a result of the increase to the salary threshold.
Under the Fair Labor Standards Act, most workers are entitled to minimum wage and overtime pay for working more than 40 hours a week. Under what is known as the “white collar” exemption, employers are not required to provide overtime for employees who earn above the current $455 threshold and meet the job duties criteria for executive, administrative and professional employment. The final DOL rule boosts that threshold to $684.
In addition to increasing the salary threshold for employees who qualify for overtime pay, the final rule permits bonuses, commissions and incentive pay to be used to satisfy up to 10 percent of the salary level at which employees qualify for overtime pay. This rule does not change any of the job duties criteria, nor does it include any automatic increases to the salary threshold.
What will it cost?
First, let us say you include overtime pay in compensation eligible for an employer 401(k) contribution, and that all 401(k) plan participants receive a 3%-of-pay non-elective employer contribution to their plan accounts.
Suppose you have 500 employees and 200 of them will be newly eligible for overtime pay. And, assume that their average pay is $655 per week and that the average worker newly eligible for overtime puts in four hours of overtime per week.
Those additional 800 hours of weekly overtime, based on 1½-times-base pay, adds up to nearly a $30,000 annual increase in non-elective plan contributions.
The full picture
In the meantime, the most important action for employers will be to analyze the status of employees who earn below the new salary threshold, but were previously exempt. This is also a good opportunity for employers to re-examine whether jobs now classified as exempt continue to be exempt under the job duties criteria.
With a potential jump in payroll costs, employers might consider whether to re-classify those employees as non-exempt hourly workers or possibly give them raises to bring them up to the new threshold. These decisions require an analysis of the payroll and 401(k) plan costs versus compensation increases. Also, when making such changes, you need to carefully consider whether the classifications may be viewed as discriminatory.
Other considerations may be to change the work weeks of affected employees to minimize overtime pay to 40 hours or less. You could amend your plan prospectively to exclude overtime pay from compensation used in the calculation of employer contributions. If you are considering such an amendment, keep in mind that this type of change may make it harder to pass non-discrimination testing for plans that do not provide safe harbor contributions. It may also be an employee relations issue as it reduces worker retirement benefits. Either approach will help minimize the impact of payroll costs while also minimizing incremental 401(k) plan costs. We recommend you discuss all options with your accounting firm and benefits advisor.
For more information, contact Jim Quaid at firstname.lastname@example.org or Larry Ruff at email@example.com or 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.