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’s because of the U.S. Department of Labor’s revised rule increasing the income threshold for overtime pay eligibility that was published in September and that goes into effect January 1, 2020.
What’s the exempt threshold rule?
A quick refresher: The $455 weekly pay threshold for exempt status will rise to $684 on January 1, 2020. This change is projected to make a million more workers eligible for overtime pay.
The change left the “duties test” intact. For workers to be classified as exempt (and, thus, ineligible for overtime pay), their jobs’ “primary duty” must still satisfy the executive, administrative or professional exemptions. So, a worker earning more than the new $684 weekly ($35,568 annualized) pay threshold would still be eligible for overtime pay for hours worked exceeding 40 in a week — if the job doesn’t fall into those exemption categories.
What will it cost?
What will this change cost you? First, let’s say you include overtime pay in compensation eligible for an employer 401(k) contribution, and that every 401(k) plan participant gets a 3%-of-pay nonelective employer contribution to their plan account. (That’s the minimum percentage for safe harbor status and, therefore, a common practice.)
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 nonelective plan contributions. To put things in perspective, that’s only 3% of the extra wages you’d be paying these workers if they previously were ineligible for overtime pay.
The full picture
Even with an anticipated jump in payroll costs, it’s important to get the full picture. You could amend your plan to make overtime pay no longer eligible for the 3% nonelective contribution. Or you might concentrate on keeping the workweeks of those employees newly eligible for overtime pay to 40 hours. Either approach will likely yield bigger savings while also minimizing incremental 401(k) costs. But discuss all options with your benefits advisor.