Fair Labor Standards Act Update: New Employee Exempt Status Threshold Rules Affect Retirement Plans

These drastic changes to the Fair Labor Standards Act (“FLSA”) will affect what forms of compensation employers use to calculate employer contributions to their qualified retirement plan and determine highly compensated employee (“HCE”) status.

Exemption Changes

Since 2004, the overtime pay requirements have not changed (time-and-a-half per week exceeding 40 hours worked). The rules automatically presume employees earning above $455 for a 40-hour week ($23,660 annualized) are exempt from overtime pay requirements, however, now that threshold is increasing to $913 per week (annualized at $47,476).

In addition, the HCE definition, for purposes of automatic exempt status, is rising from $100,000 in annual income to $134,004. Beginning in 2020, these amounts will be automatically adjusted for inflation at three-year intervals.

Bonus Standards

No more than 10% of income for exempt status determination can come from commissions and nondiscretionary bonuses (this is automatically paid if it meets certain job-related quotas), and must be paid at least on a quarterly basis. However, you do need to be careful. If you are currently paying nondiscretionary bonuses to employees on a less than quarterly basis and decide to switch to a quarterly basis, then you might shift employees into exempt status, thus not entitling them to overtime pay.

Keep in mind, the impact of responding to the minimum wage threshold. If you currently make annual contributions to employees’ retirement accounts based on a percentage of their pay (either in addition to, or in lieu of matching contributions), you could see your costs going up.

For example, assume you make a 3% nonelective annual contribution and have several employees whose current salaries are $30,000. They’d no longer qualify as exempt. Let’s say that, with overtime included, they now earn an average of $40,000, and you will be paying an additional $300 in nonelective annual contributions per employee, not to mention an additional $10,000 in wages per employee.

Alternative Responses

So what should you do? You can:

  • Try to limit those employees’ hours to 40 per week and pay overtime as needed, or
  • Raise those employees’ salaries to or above the new $47,467 threshold, avoiding the necessity of paying overtime.

If you’re not including overtime pay in the 3% nonelective contribution, the size of your contribution wouldn’t change in the first scenario, but would increase in the second. And, if you include overtime pay in the 3% contribution calculation and decide simply to start paying overtime instead of raising wages, as noted, your 3% contributions will go up.

Also, consider whether the net increase would be greater than what you could face if you increase base pay, even if it isn’t large. Finally, if you opt not to raise salaries, and you don’t include overtime pay in the 3% contribution calculation, and nonexempt employees are receiving a lower proportion of total nonelective contributions throughout the year, the share going to exempt HCEs will rise, possibly triggering discrimination testing failures.

Now’s the Time

Make sure your plan won’t be affected by the new FLSA rules by checking with your benefit specialist. Remember, that decisions about benefit formula design and forms of compensation should look beyond the dollars. Be sure to weigh employee perception and motivational factors.

© 2016

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