3 Ways Overtime Compensation Can Affect Employee Benefits

The Department of Labor’s final rule on exempt versus non-exempt employees, implemented in 2020, increased the income threshold for classifying employees as exempt from FLSA overtime pay mandates. Some 18 months later, there are companies still trying to adjust to the new rule. Some have discovered that the change even affected their employee benefits packages.

In a blog post discussing the rule, Dallas-based BenefitMall mentioned the three big changes it pushed through:

  1. The higher salary threshold
  2. A higher threshold for highly compensated employees
  3. How non-discretionary and incentive pay are treated.

The one thing they left out is the effect of the rule on employee benefits. This could have been by design. In the months leading up to the rule’s implementation, experts were still wrapping their brains around its finer points. Looking back on it now, it is clear that overtime compensation can affect employee benefits in three ways. All three are things insurance brokers should take note of as they work with clients to develop new packages.

1. Benefit Plan Participation

Benefits packages are not necessarily the same for all of the employees of a given company. In fact, it is not unusual for companies to offer separate packages for exempt and non-exempt employees. A previously exempt employee reclassified as non-exempt may no longer be eligible for benefits reserved only for his exempt peers.

The net effect of this issue could be financially significant. Simply put, the amount of money gained in overtime pay may not equal the value of the lost benefits. Furthermore, any new benefits the employee is eligible for may not offer as much value either.

Insurance brokers can tap into this reality as a means of offering clients uniform benefits that apply equally to all employees, whether exempt or not. The other option is to continue separate benefit plans but look for new options that better align with the makeup of the client’s current workforce.

2. Retirement Plan Contributions

Employers making contributions to employee retirement accounts may do so based on a percentage of each employee’s income. The overtime rule affects these contributions if part of the company’s income calculation includes overtime pay. Every overtime hour worked means more money paid into retirement contributions. The short-term effect may be more money for employee plans, but that could force companies to overhaul their 401(k) packages in the long term.

Insurance brokers may not have much leeway in this regard. Retirement plans are not as easily customized to account for higher wages. Nonetheless, it is something brokers will have to look at as they work to bring new clients on board.

3. Benefit Package Expansion

The most direct impact of the overtime rule is likely to be felt at renewal time. Companies that rely on a significant amount of overtime may not be able to afford the same benefits packages in future years. Between higher salaries and more expensive benefits, current plans may prove out of reach for the following year.

Again, this is an opportunity for insurance brokers to find better and more affordable options. Those that manage to keep benefits competitive without costing clients more money instantly become heroes. They are the ones most likely to expand their book of business.

It has been more than a year since the implementation of the final overtime rule. Its impact on employee benefits is hard to gauge due to 2020’s coronavirus issues. We will have a better idea of the impact at the end of 2021. In either case, the rule quite likely impacted employee benefits to some degree.

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