diff --git a/tests/overlay/054 b/tests/overlay/054
new file mode 100755
index 0000000..c788460
--- /dev/null
+++ b/tests/overlay/054
@@ -0,0 +1,162 @@
+#! /bin/bash
+# FS QA Test No. 054
+#
+# Test encode/decode overlay file handle of dir with non-indexed ancestor
+#
+# Overlayfs with nfs_export enabled, indexes all directories on copy up.
+# Directory index is requires for decoding lower directory file handles
+# in case ancestors have been renamed.
+#
+# When enabling nfs_export on an overlay that already has non-indexed
+# merge dirs, the possibility of non-indexed ancestor rename requires
+# special handling when encoding lower directory file handles.
+#
+# - Check encode/decode/read file handles of non-indexed merge dir
+# - Check encode/decode/read file handles of dir with non-indexed parent
+# - Check encode/decode/read file handles of dir with non-indexed grandparent
+# - Check decode/read of file handles after rename of non-indexed merge dir
+# - Check decode/read of file handles after rename of non-indexed parent
+# - Check decode/read of file handles after rename of non-indexed grandparent
+#
+# This test requires and enables overlayfs NFS export support and merge
+# dir rename support (redirect_dir).
+# NFS export support depends on and requires overlayfs index feature.
+#
+#-----------------------------------------------------------------------
+# Copyright (C) 2018 CTERA Networks. All Rights Reserved.
+# Author: Amir Goldstein <amir73il@gmail.com>
+#
+# This program is free software; you can redistribute it and/or
+# modify it under the terms of the GNU General Public License as
+# published by the Free Software Foundation.
+#
+# This program is distributed in the hope that it would be useful,
+# but WITHOUT ANY WARRANTY; without even the implied warranty of
+# MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE.  See the
+# GNU General Public License for more details.
+#
+# You should have received a copy of the GNU General Public License
+# along with this program; if not, write the Free Software Foundation,
+# Inc.,  51 Franklin St, Fifth Floor, Boston, MA  02110-1301  USA
+#-----------------------------------------------------------------------
+#
+
+seq=`basename $0`
+seqres=$RESULT_DIR/$seq
+echo "QA output created by $seq"
+
+here=`pwd`
+tmp=/tmp/$$
+status=1	# failure is the default!
+trap "_cleanup; exit \$status" 0 1 2 3 15
+
+_cleanup()
+{
+	cd /
+	rm -f $tmp.*
+}
+
+# get standard environment, filters and checks
+. ./common/rc
+. ./common/filter
+
+# real QA test starts here
+
+_supported_fs overlay
+_supported_os Linux
+_require_scratch
+_require_test_program "open_by_handle"
+# We need to require all features together, because nfs_export cannot
+# be enabled when index is disabled
+_require_scratch_overlay_features index nfs_export redirect_dir
+
+# All overlay dirs are on scratch partition
+lower=$OVL_BASE_SCRATCH_MNT/$OVL_LOWER
+middle=$OVL_BASE_SCRATCH_MNT/$OVL_LOWER.2
+upper=$OVL_BASE_SCRATCH_MNT/$OVL_UPPER
+work=$OVL_BASE_SCRATCH_MNT/$OVL_WORK
+
+NUMFILES=1
+
+# Create test dir and empty test files
+create_test_files()
+{
+	local dir=$1
+	local opt=$2
+
+	mkdir -p $dir
+	$here/src/open_by_handle -cp $opt $dir $NUMFILES
+}
+
+# Test encode/decode file handles on overlay mount
+test_file_handles()
+{
+	local dir=$1
+	shift
+
+	echo test_file_handles $dir $* | _filter_scratch | \
+				sed -e "s,$tmp\.,,g"
+	$here/src/open_by_handle $* $dir $NUMFILES
+}
+
+# Re-create lower/middle/upper/work dirs
+create_dirs()
+{
+	_scratch_mkfs
+	mkdir -p $middle
+}
+
+# Mount an overlay on $SCRATCH_MNT with all layers on scratch partition
+mount_dirs()
+{
+	_scratch_mount -o "index=on,nfs_export=on,redirect_dir=on"
+}
+
+# Unmount the overlay without unmounting base fs
+unmount_dirs()
+{
+	$UMOUNT_PROG $SCRATCH_MNT
+}
+
+# Check encode/decode/read file handles of dir with non-indexed ancestor
+create_dirs
+create_test_files $lower/merged -w
+create_test_files $lower/merged/dir -w
+create_test_files $lower/merged/dir/subdir -w
+create_test_files $lower/merged/parent/child -w
+# Create non-indexed merge dir
+mkdir $upper/merged
+mount_dirs
+# Check encode/decode/read file handles of non-indexed merge dir
+# This is expected to encode an upper file handle
+test_file_handles $SCRATCH_MNT/merged -p -o $tmp.merged_file_handles
+# Check encode/decode/read file handles of dir with non-indexed parent
+# This is expected to copy up merged/dir and encode an upper file handle
+test_file_handles $SCRATCH_MNT/merged/dir -p -o $tmp.dir_file_handles
+test -d $upper/merged/dir || echo "merged/dir not copied up"
+# Check encode/decode/read file handles of dir with non-indexed grandparent
+# This is expected to encode a lower file handle
+test_file_handles $SCRATCH_MNT/merged/dir/subdir -p -o $tmp.subdir_file_handles
+test -d $upper/merged/dir/subdir && echo "merged/dir/subdir unexpected copy up"
+# This is expected to copy up parent and encode a lower file handle
+test_file_handles $SCRATCH_MNT/merged/parent/child -p -o $tmp.child_file_handles
+test -d $upper/merged/parent || echo "merged/parent not copied up"
+test -d $upper/merged/parent/child && echo "merged/parent/child unexpected copy up"
+
+# Rename non-indexed merge dir
+mv $SCRATCH_MNT/merged $SCRATCH_MNT/merged.new/
+# Check open, read and readdir from stored file handles
+# (testdir argument is the mount point and NOT the dir
+#  we are trying to open by stored file handle)
+test_file_handles $SCRATCH_MNT -rp -i $tmp.merged_file_handles
+test_file_handles $SCRATCH_MNT -rp -i $tmp.dir_file_handles
+test_file_handles $SCRATCH_MNT -rp -i $tmp.subdir_file_handles
+test_file_handles $SCRATCH_MNT -rp -i $tmp.child_file_handles
+# Retry decoding lower subdir file handles when indexed ancestor is in dcache
+# (providing the ancestor dir argument pins the ancestor to dcache)
+test_file_handles $SCRATCH_MNT/merged.new/dir -rp -i $tmp.subdir_file_handles
+test_file_handles $SCRATCH_MNT/merged.new/parent -rp -i $tmp.child_file_handles
+unmount_dirs
+
+status=0
+exit
diff --git a/tests/overlay/054.out b/tests/overlay/054.out
new file mode 100644
index 0000000..dd8fddf
--- /dev/null
+++ b/tests/overlay/054.out
@@ -0,0 +1,11 @@
+QA output created by 054
+test_file_handles SCRATCH_MNT/merged -p -o merged_file_handles
+test_file_handles SCRATCH_MNT/merged/dir -p -o dir_file_handles
+test_file_handles SCRATCH_MNT/merged/dir/subdir -p -o subdir_file_handles
+test_file_handles SCRATCH_MNT/merged/parent/child -p -o child_file_handles
+test_file_handles SCRATCH_MNT -rp -i merged_file_handles
+test_file_handles SCRATCH_MNT -rp -i dir_file_handles
+test_file_handles SCRATCH_MNT -rp -i subdir_file_handles
+test_file_handles SCRATCH_MNT -rp -i child_file_handles
+test_file_handles SCRATCH_MNT/merged.new/dir -rp -i subdir_file_handles
+test_file_handles SCRATCH_MNT/merged.new/parent -rp -i child_file_handles
diff --git a/tests/overlay/group b/tests/overlay/group
index ec0b711..4326a27 100644
--- a/tests/overlay/group
+++ b/tests/overlay/group
@@ -54,3 +54,4 @@
 051 auto quick copyup hardlink exportfs nonsamefs
 052 auto quick copyup redirect exportfs
 053 auto quick copyup redirect exportfs nonsamefs
+054 auto quick copyup redirect exportfs
