By Arris Reddick Murphy, FedEx Corp

The U.S. Department of Labor’s (DOL's) much-discussed final rule on overtime pay announced in May focuses primarily on updating the salary and compensation levels needed for executive, administrative, and professional (EAP) workers to be classified as exempt. But it may have implications for some of these workers’ 401(k) retirement plans, as well.

The rule, which takes effect December 1, 2016, establishes a standard salary level for full-time salaried employees at $913 per week, sets an annual compensation requirement for highly compensated employees who are subject to a minimal duties test at $134,004, and implements a process for updating the salary levels every 3 years to maintain the rule’s new levels and to make sure they continue to provide an effective exemption test.

The rule is intended to provide overtime protection for workers, and it will boost pay for many. Based on salary data, about 4.2 million salaried workers will be affected by the new rule. The DOL estimates employers will make adjustments so that 4.1 million of them will become eligible for overtime, while the remaining 100,000 will likely receive a pay increase so their salaries are above the threshold.

Employers may need to make payroll changes for some employees to comply with the overtime regulation, and many will do so before the rule’s effective date. Beyond that, this article looks at the possible impact of necessary overtime employment changes as they relate to employees’ 401(k) plans.

Implications for 401(k) plans

As employers review their employee rosters to determine what modifications are needed to comply with the new overtime regulation, consideration should be given to the company’s 401(k) plan, and how the changes will affect the costs of the plan and its administration. For example, these changes may extend to employee eligibility for the plan, if different plans are offered for salaried and hourly employees. The change may also have an effect on elective deferral and matching contribution amounts, and loan repayments made to 401(k) plans.

Elective deferral amounts may be affected when the plan’s definition of compensation includes overtime pay. For example, a participant who was not previously eligible for overtime pay could now benefit from increased earning potential and elect to defer a greater percentage of her earnings to the 401(k) plan.

Of course, when the participant’s deferral amounts are increased, that has a direct correlation to the amount of matching contributions the employer makes on behalf of the employee. In this way, the change could potentially increase the sponsor’s cost for the plan.

Plan loans

For those participants who will experience a status change that makes them eligible for overtime, this change may affect other components of their employment. For example, an exempt participant may be reclassified as nonexempt under the new rule, and the status change might cause his pay frequency to change from biweekly to weekly. If this participant has an outstanding plan loan, his loan repayments will need to be adjusted to align with his new pay periods.

To avoid continuing to deduct the established biweekly loan repayment amount when adjusting the employee’s deductions for weekly pay, the plan administrator will have to re-amortize the loan to adjust the repayment amount. If procedures for this type of change have not been established for the plan, the loan policy should be amended to incorporate required modifications.

In addition, the change would need to be communicated to participants with plan loans before the changes take place, and it makes sense to include this disclosure with the notice-of-employment-status change.

The applicable notice would describe changes that are visible to the participant, such as the change in pay frequency and the updated amount to be deducted from his pay for the loan repayment. It is helpful if the new repayment deduction amount is listed, along with the date the change will take effect.

As is customary with any participant communications, the notice must be written in a manner that is understandable to participants, and should provide a toll-free number that the participant may call with additional questions.