On December 1, 2016, the Department of Labor’s overtime rules are going to take effect and will certainly change the eligibility dimensions for employees in the domain of overtime pay and benefits. In a straightforward way, the new overtime rules will increase the eligibility criteria for overtime pay for executive, administrative, and professional workers if they serve more than 40 hours/week. The salary bar for exempt will increase from $455 to $913 per week and the aggregate annual compensation to get exempted will raise from $100,000 to $134,004 per year.

In defense, employers are trying their best to make the upcoming situation favorable for them. Some are raising their employees’ salaries who are near the upper non-exempt limit in order to classify them as “exempt” while some are planning to cap working hours at 40 hours per week so as to avoid paying overtime and some are meeting their work needs with part-time workers. But, no matter what will be the plan, employers will have to consider employee benefits plans and analyze the potential  was a part of new overtime rules preparation, while keeping the compliance intact.

Trimming Employee Benefits is an Easy Option!

Reducing or trimming down employee benefits can be considered to save money to pay for overtime compensation. Employers can choose to reduce their premium contributions towards health and welfare plans or reduce cost by changing plan designs (high deductibles and copayments) or removing certain costly benefits.  Other options can be reducing paid time off or other optional employee perks such as fitness offerings, transportation facilities, paid parties etc.  Also, you can opt for reduced or removed 401(K) matching or employer contributions to control costs.

However, above stated options are possible and seem a direct triumph, but employers should always do their part of homework and proceed with caution to avoid any breach or non-compliance issues. Here are some potential consequences they should be prepared for:

Reducing Medical Benefits Can Be A Costly Game!

As per Affordable Care Act  (ACA) provisions, employers having 50+ employees have to either offer “affordable” or “minimum value”  major medical coverage to their full-time employees, or face some heavy tax penalties, which can be heavier than the reduced benefits offerings. Therefore, it is very important to analyze all the possible scenarios before reducing or removing their premium share since it can affect “affordability” or “minimum value” clause. Also, categorizing employee in the exempt or non-exempt bracket will not work that effectively if an employer is already offering the bare minimum major medical coverage required to avoid penalties; since it will leave no room to make any changes.

Questionable Eligibility For Benefits Under Existing Plans!

Employers must take a careful consideration while classifying “exempts” from “non-exempts” or vice-versa. This will create a sense of discrimination since few employees will either gain or lose benefits and more & more compensation changes might change the original benefits as well. For example- on 401 (K) plans, some plans count overtime as “compensation”, which will hike your matching contribution or if the case is other way around, the share of elective deferrals and matching contributions may shift in hands of exempt employees, creating more chaotic situation for employers. Moreover, if they plan to hike the compensation in order to avoid paying overtime, premium contribution will also have to undergo changes unless benefit plan designs are changed. 

Violation of Section 510 Of ERISA!

Reducing hours to prevent offering benefit coverage may lead to ERISA 510 violation and hence can put employers in big trouble. Even if the purpose is to comply with new overtime rules, it’s still a question whether courts will consider it or not. Therefore, it’s better to play safe and stay compliant with the laws and rules.

Show Changes Well In Advance!

Any changes you make in your benefits offering should be well maintained and informed as per ERISA and other requirements. The ERISA Summary Plan Description (SPD) or wrap document has to be well updated and re-distributed within the time frame of 210 days following the close of the plan year in which changes were incorporated, or within 60 days after the date of change adoption. A revised Benefits and Coverage Summary must be presented within 60 days in advance of the effective date if there is any modification in the major medical plan made outside of open enrollment.

Putting All Together:

The DOL’s new overtime rule will certainly impact the employee benefit plan offerings by forcing employers to make major changes in their compensation practices. But, it is highly advisable for you to review all the angles before making any changes in compensation or employee reclassification since it may lead to some serious law violations. Employers must provide all the opportunities to employees to ask questions and clear their doubts before making the modifications. Above are few possible consequences that should be kept in mind before making your move towards the change.