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How New Overtime Rules May Affect Benefit Plans

Employee Benefits

With the recent 2016 release of the Department of Labor's revised federal overtime regulations, HR teams need to be aware that in addition to the impact on certain employees’ eligibility for overtime pay, the new rules may also affect eligibility for and contributions to benefit plans. Retirement plan administrators are encouraged to review their plan design, definitions, and elections to prepare for the December 1, 2016 effective date. Advanced planning plays a role in preventing fiscal surprises for employers, as well as helping to ensure that employees continue to maximize their retirement benefits.

Retirement benefits may be tied to factors such as compensation levels and employee classifications. The plan's definition of compensation, classifications of employees, and hour-based eligibility requirements may be impacted by these new rules, which are expected to impact over 4 million workers nationwide. Once the Final Rule becomes effective, employees may find the availability and expected level of retirement benefits to be less favorable than before.

In order to defer potential increases to matching contributions, employers may restrict plan eligibility, exclude overtime compensation from 401(k) definitions, re-classify highly compensated employees using non-discriminating profit-sharing options, or reduce the matching contribution formula across the plan. Here is a closer look at what business leaders need to know:


The final rule will go into effect December 1, 2016. Employers should start to prepare now. Human resources and retirement plan administrators should already be reassessing their benefits plan design, definitions, and employee classifications.

Restrict Plan Eligibility 

Organizations may have several types of employee classifications among the workforce for determining benefit level and eligibility, so it is important all individuals within a class are treated equally.

While some companies may offer certain benefits depending on the group of employees, others are a multiple of salary, and thus employers may get stuck paying for an increase in premiums on these plans. In order to offset these additional costs, some companies may consider shifting employees around, as well as restricting plan benefits.

Excluding Overtime Compensation 

As a result of the final rule, many employers will begin paying overtime for hours worked over 40 in a workweek to newly non-exempt employees. . Because the additional compensation will likely increase 401(k) contributions, employers may want to consider a cost control measure to exclude overtime pay as a basis for retirement plan matching contributions. Employers can potentially amend their plan to an exclusion of overtime pay, by changing the 401(k) definition. Excluding overtime can be a risky move; however, as the compensation taken into account under the plan must satisfy nondiscrimination testing requirements. Companies considering different scenarios under the new regulations should consult with an expert HR advisor or attorney before proceeding.

Reclassifying Employees

Employers may also be reviewing their benefits plan to assess whether they condition eligibility based on employee classification (such as exempt vs. nonexempt). Modification of these terms may need to be considered before continuing to provide the existing benefit levels to employees. Reclassification of employees in response to the overtime rules may have serious implications on a benefits plan, especially for highly compensated employees using non-discriminating profit sharing.

Matching Contributions

Matching contributions can vary widely from plan to plan, so employers may need to evaluate individual classifications to determine which contribution formulas should be changed. A common method is to match 50% of employee contributions, and up to 6% of salary. Now may be the time for HR to consider adjusting the matching percentage across the plan.

Conducting analysis and scenario planning in advance may allow time time plan, adjust benefits programs, and seek counsel.

Scenario Planning and Employee Communications

Perhaps the most important takeaway for employers is that the new overtime regulations may impact the company's benefit plans in multiple ways. Conducting analysis and scenario planning in advance (before the rule  goes into effect on  December 1, 2016) may allow companies the necessary time to plan, adjust benefits programs, and seek expert counsel. Once decisions have been made, it's important that employee communications are carefully managed – including explaining the legal changes, what steps the company has had to take in response with benefits packages, and what employees can expect to see as a result.

An organization can face legal and financial consequences for non-compliance with the new overtime regulations. With a proactive approach, a company can develop standards today that can make the regulations easier to accommodate when they become effective.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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