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Proposed Higher Compensation Thresholds for Overtime Exemption Would Indirectly Affect Retirement Plans



Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 29 CFR Part 541, 84 Fed. Reg. 10900 (Mar. 22, 2019); Fact Sheet: Notice of Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees (March 2019); FAQs: “Notice of Proposed Rulemaking (NPRM): Overtime”

Proposed Regulations

Fact Sheet


The DOL has proposed regulations that would substantially increase the salary thresholds used to determine whether executive, administrative, and professional employees must be paid overtime. The Fair Labor Standards Act (FLSA) generally exempts from overtime any employees who (1) are paid a predetermined and fixed salary (the “salary basis test”), (2) primarily perform executive, administrative, or professional duties (the “standard duties test”), and (3) are paid at least a minimum weekly salary (the “salary level test”). The current minimum salary level for this exemption is $455 per week ($23,660 per year). The overtime exemption also applies to individuals who fail to meet the standard duties test, but who primarily perform office or non-manual work that customarily and regularly includes at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee (the “minimal HCE duties test”), and whose total annual compensation exceeds a minimum annual amount (the “HCE salary threshold”). The current HCE salary threshold is $100,000 per year. Both current salary amounts were set in 2004. They were increased in 2016, but a court declared that amendment to the regulation invalid, and an appeal of that decision was suspended by the Fifth Circuit pending the issuance of new regulations.

The proposed regulations would increase the minimum weekly salary under the salary level test to $679 per week ($35,308 per year) and increase the HCE salary threshold to $147,414 per year. (Different weekly minimums would apply in some U.S. territories and in the motion picture industry.) For purposes of the salary level test (but not the HCE salary threshold), up to 10% of the minimum weekly salary could be satisfied by annual or more frequent nondiscretionary bonuses, incentives, and commissions. A special rule would allow a catch-up payment if the total salary plus bonus, incentives, and commissions did not equal 52 times the weekly minimum by the last pay period of the calendar year (or another 52-week period designated in advance by the employer). The proposed regulations would have no effect on overtime protections for employees in certain occupations (e.g., police officers, firefighters, nurses, and laborers) and would make no changes to the job duties tests. They also would not change the alternative compensation minimums for academic administrative employees and computer employees. The regulations could become effective as early as January 1, 2020. Once finalized, the thresholds would not be subject to regular cost-of-living adjustments, but the DOL has committed to periodic review and updating of the amounts through the rulemaking process.

EBIA Comment: The proposed regulations do not include any provisions directly regulating retirement plans, but they will—if adopted—have indirect effects. The DOL has estimated that the increased dollar amounts would cause approximately 1.3 million employees to become eligible for overtime. In many cases, such eligibility would result in higher wages, which would translate into increased retirement plan contributions under plans that calculate plan contributions using a definition of compensation that includes overtime pay. The proposal might also create additional nonexempt highly compensated employees, because the FLSA’s HCE salary threshold would be higher than the highly compensated employee dollar threshold under Code § 414(q) ($125,000 for 2019). (This consequence of higher compensation is not unique to retirement plans; it could affect other plans subject to nondiscrimination testing that limit benefits for higher-paid employees.) For plans that exclude overtime pay when calculating contributions, nondiscrimination testing results could change, e.g., if the number of employees with overtime pay increases and that disproportionately lowers the average deferral or contribution percentages of non-highly compensated employees for testing purposes. Consequently, employers whose plans might be affected by the regulations may wish to project their impact in advance, so any increased costs and adverse effects on testing can be estimated, and preparations can be made to address them. For more information, see EBIA’s 401(k) Plans manual at Sections V (“Core Concepts: Definitions and Uses of Compensation”), XVIII.K (“Identifying Highly Compensated Employees (HCEs)”), and XX (“Nondiscrimination: Code § 401(a)(4) and Top-Heavy Rules”).

Contributing Editors: EBIA Staff.

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