CSH’s Livia Thomas contributed to this article.
Earlier this year, the DOL released rulings concerning overtime regulations for eligible employees. This rule now requires overtime pay rates to apply to employees whose wages are under $913/week or $47,476/year. This is an increase from the previous standards of $453/week or $23,660/year.
It’s important to consider reviewing your current benefit plan designs because there are a few ways this ruling can affect retirement plans and plan sponsors. For example, plan compensation is used to determine which wages are eligible and used for contribution calculations and compliance testing. Therefore, plan sponsors may want to consider excluding overtime pay for contribution calculation.
Increases in eligible wages, including overtime wages, could therefore increase two types of plan contributions:
- Employee elective deferrals could increase for those affected by the increase in eligible wages. Plans with affected Highly Compensated Employees could run into issues with the plan’s compliance testing due to their higher wages and deferrals.
- Plan sponsors could also see increases on the employer contributions side. Most types of matching provisions would likely have increased matching costs corresponding to the higher deferral amounts. Other discretionary contributions would increase due to the increase in plan compensation.
Some employers have already taken steps to rearrange the way their employees are classified. Doing so could change the eligibility of certain employees for retirement plan purposes, which could become more costly for the plan or affect nondiscrimination testing.
It’s important for employers to understand the potential impacts these new regulations could have on their employees when it comes to retirement plan operations. Since these regulations go into effect December 1, 2016, now would be a good time to review and discuss your current plan design with your retirement plan professional to identify any possible changes to make to the plan documents.