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What is the NBA over 38 rule?

Contracts are full of fine details and minor clauses that most people wouldn’t care to read, but inside that could be a major consequence for parties involved, as the NBA has seen over the years.

What is the NBA over 38 rule? The Over 38 rule is a complex rule regarding contracts for NBA players who are or will be at least 38 years old during a contract. While the rule is quite detailed and varies based on the situation, in essence, it reduces the incentives for teams to offer players contracts that are 4 years or longer. The Over 38 rule involves deferred compensation and “zero years” that basically frontends the salary for players who fall under the Over 38 rule.

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How does the Over 38 rule work?

The Over 38 rule is a complicated and detailed rule in the NBA’s CBA. It was introduced to address a loophole that players were, in the view of the NBA, were abusing and taking advantage of. How the rule addresses the loophole will be explained once the rule has been broken down to give better understanding.

The Over 38 rule refers to players who are at least 38 years old or will be at least 38 years old in the duration of a contract. By the rulebook, October 1st is the cut-off date for determining a player’s age for that season. The rule assumes that players who sign 4-year or 5-year contracts will retire at some point before that contract runs out. Therefore, depending on the type of contract, the 4th and/or 5th years are referred to as “zero years” (zero in this case meaning no salary earned).

In these “zero years”, salary is shifted towards the early seasons of the contract as deferred compensation. The key point is that deferred compensation is counted towards the cap in the year it was earned, not the year it was paid. So in a 4-year contract, if the 4th season is a zero year, the salary for the 4th season is spread out over the first 3 years of the contract. It is important to note that this is how the salary is counted for the cap; salary is still paid to Over 38 players in their zero years (for salary cap purposes, it is earned in the first 3 seasons).

However, it is not so simple to just spread the salary over to the early part of the contract, because there are salary cap implications to consider. For example, take the non-taxpayer mid-level exception figure for the 2022/23 NBA season, which is at $10,490,000 a year, up to 4 years with a 5% annual raise. So, a 4-year contract using the mid-level exception looks would total around $45.2 million, accounting for 5% raises each year.

But for a player who falls under the Over 38 rule, their contract will have the 4th year as a zero year. Normally, the player will earn around $12,143,486.25 in his 4th season, but because this money is counted as deferred for salary cap purposes, that money is spread over the first 3 seasons. In the first year, the deferred compensation would be about $3.85 million. Add that to the player’s salary in the 1st season makes it approximately $14.34 million, which exceeds the non-taxpayer mid-level exception set at $10.49 million.

Because the example above would exceed the salary cap limitation for that contract, the salary structure of the contract has to be adjusted. This is done by adjusting the cap hit for each year to include the deferred compensation without exceeding the salary cap limit. So, instead of adding roughly $4 million on top of the $10.49 million, the deferred compensation must become included within the $10.49 million; this is done by reducing the base salary.

How does that actually look? Well, it is important to remember that zero years and deferred compensation are for salary cap purposes. Players still get their salaries in “zero years” but now it looks a little different. Take the reverse of how the deferred compensation calculation happens: the player’s earned salary for the first season would be $10.49 million, minus the deferred compensation. This means that the player’s salary for the first season is now around $6.64 million.

This example is of a contract with 1 zero year. What were to happen if there were 2 zero years in the contract? In a 5-year contract with 2 zero years, the salary for the last 2 seasons would be spread out over the first 3 seasons, further reducing the base salaries of players.

Why is reducing the base salary an issue for players? The problem is not necessarily the reduction of the base salary, but the unchanging total salary earned in the contract. When the money gets shifted around, what happens is that a 3-year contract and a 5-year contract with 2 zero years pay the same amount of money.

This is the real consequence of the Over 38 rule. Previously, for example, older players could sign a 5-year contract, retire after the 3 seasons, and collect paychecks for 2 years, essentially getting 5 years’ worth of pay for 3 years worth of service. But now, the opposite would happen if they signed a longer contract: they would play for up to 5 years, in theory, and be paid for only 3 years’ worth of service. Therefore, players and their agents have no interest in doing that anymore, and the loophole has been solved with the Over 38 rule. The NBA and the NBA Players Association are always butting heads whenever a collective bargaining agreement (CBA) come around over rules and contract clauses that may give one party an unfair advantage over the other. The Over 38 rule is one such clause that the NBA felt the players were taking advantage of; while the NBAPA conceded, they have successfully managed to raise the age limit from 36 to now 38 for this rule to be applicable.