Employer-sponsored benefits will be under the microscope as companies consider the consequences of having to pay more employees time-and-a-half for time worked in excess of 40 hours a week.
Under the new rule released by the Department of Labor on May 18, employees earning up to $47,476 a year—or $913 a week—will be eligible for overtime pay starting on Dec. 1. That’s a doubling of the salary threshold for overtime eligibility from the previous $23,660 a year. The salary level will be updated every three years.
DOL estimated that this will result in about 4.2 million more employees qualifying for overtime pay under the new rule.
Employers can satisfy up to 10 percent of the salary level with bonuses, incentive payments or commissions, provided they're offered on at least a quarterly basis.
“The overtime rule in some way or another is going to impact the workforce across the United States and every company needs to review its eligibility rules for all the benefits it provides,” Will Hansen, the ERISA Industry Committee's senior vice president of retirement policy, told Bloomberg BNA.
Implications for 401(k) Plans
Hansen addressed the rule’s implications for sponsors of Section 401(k) plans. He noted, for example, that a 401(k) plan may define “compensation” to include or exclude overtime pay. Sponsors of 401(k) plans may also have different eligibility and contribution rates depending on whether an employee is paid by the hour or is on salary.
Hansen said plan sponsors should “dive into the details” to see how the overtime rule might affect nondiscrimination testing, which requires that the plan not discriminate in favor of highly compensated employees as to contributions or benefits.
For example, if a company increases its hourly workforce and decreases its salaried workforce, but only salaried workers are eligible for the plan, low-paid employees are being dropped from the plan, which could make passing nondiscrimination testing more difficult, he said.
Beyond 401(k) plans, the overtime rule has the potential to impact many other benefits.
“If the company differentiates benefits based on the number of hours, part-time versus full-time, hourly or salaried, this could impact in a positive or negative way all benefits” ranging from health care eligibility to tuition reimbursement and transportation subsidies, Hansen said.
Hours and Compensation Audit
The overtime rule is an opportunity for employers to do an inventory of their current benefits and associated costs.
“We are advising our clients to first understand what the right classification is for their employees and do a fresh wage and hour and compensation audit,” just as they did when the Affordable Care Act was passed, Mark Sinatra, CEO of Staff One HR in Dallas, told Bloomberg BNA.
The audit should comprise the following steps, Sinatra said:
A deep dive review into the hours worked and the proper classification of employees;
Assessing the steps employers need to take in response to those findings, including the cost of implementation; and
Making sure that any changes are documented in the company handbook, job descriptions, salary classifications, and are communicated to the employees.
Companies also need to determine whether changes in benefits will allow them to remain competitive in the marketplace, he said.
Complying with the overtime rule may also put a strain on employers’ benefits budgets, Sinatra said. For 401(k) plans, a key question will be, “what is the benefits vesting period and the company match?”
“Certainly the trend in the last few years is employers providing more employer-sponsored benefits, such as gym programs and wellness. There’s not an unlimited budget. Will the pie expand, and if so, by how much?”
Some employers may also convert ancillary benefits they typically pay for, such as dental, vision, life and disability insurance, into benefits that employees voluntarily pay for if salaries increase due to the overtime rule, he said.
See related story, Overtime Rule Sparks Debate over Next Steps.
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