As a consequence of our experience and geeky curiosity about the business, we’re often victims of self-inflicted wounds as we torment each other with question after question as we peel the onion on a specific topic. Somewhat fatiguing, but we don’t want our clients surprised by unintended consequences of well-intentioned policies or incomplete solutions. I’m grateful to work with engaged and thoughtful colleagues who continually strive to make sure we’re thinking of everything. Jennifer Chung, Esq., Vice President, Senior Compliance Officer was a key contributor here on a few topics I’ve been thinking about this summer.
- Expanded fertility benefits – Historically limited to infertility benefits, this has been redefined by some companies to support LGBT employees, amongst others. Like the new impact on clients who offer cash in lieu of benefits to non-exempt employees, no good deed goes unpunished. There’s even healthy debate on what this should be called and to whom it should be offered – Fertility, Family Creation, Family Expansion…there are multiple versions that can be off-putting to certain individuals once you start trying to define “family”.
- Reclassified employees – The impact goes beyond an increase to overtime pay. You may have components of your Benefits programs that require a second look if you’re moving employees to non-exempt status.
Expanded Fertility Benefits
I’m surprised by the narrow lens through which some emerging solutions are examined. A recent example is the publicity around companies rolling out these benefits – (New hope for a family). We have been exploring this for months with clients committed to meeting the needs of a diverse workforce. We have concerns, however, about the mechanics and ramifications of offering such a benefit on a tax-free basis. It was surprising that the taxation issue wasn’t even acknowledged in multiple news publications. I’d welcome dialogue with industry peers who are also navigating this new space to help clients modernize their policies. Have you identified an iron clad defensible strategy here?
Our Senior Compliance Officer, Jennifer Chung, Esq. provides this guidance:
- The way the Code is enforced by the Tax Court, in order to avoid taxability of the benefit, it must be considered “medical care” under §213(d).
- In order to be medical care, there almost always has to be a diagnosis of infertility (i.e. a doctor’s assessment of infertility or reduced fertility).
- If the same-sex couple (or single employee) are perfectly fertile but are missing the requisite opposite-sex component (sperm/egg) that would not count as “infertility” in accordance with the Tax Court.
- A potential solution is to make the benefit taxable to avoid §§125 and 105(h). (Or only provide reimbursement when there’s an infertility diagnosis.)
Another hurdle has to do with the alphabet soup of benefits laws. Even if the benefit is taxable, when something is a medical reimbursement (which indicates that it’s a type of group health plan), it introduces ERISA, HIPAA, COBRA, and ACA.
- How do you do the government reporting?
- How do you continue coverage for a terminated employee?
- Is it integrated for ACA purposes?
- How is the PHI handled?
Perhaps creating a taxable cash payment as a payroll practice with an upfront cash amount might have the least amount of hurdles, but don’t forget it should be included in FLSA overtime calculations per our recent client alert.
It would be complicated (but not impossible) to implement the benefit as the law stands today. As more companies adopt these programs, the regulatory agencies will need to take a fresh look to either remove the obstacles or adjust their stance. Our clients who are motivated to move forward with a fertility (or family creation) benefit should do so with an understanding of all the possible hurdles and hire ERISA counsel to carefully create the benefits program.
I am currently working with a large employer who is reclassifying a large percentage of their workforce as a result of the new regulations. A summary of key insights:
To refresh your memory, the Department of Labor published its final overtime rule in May which goes into effect December 1st, 2016.
- The annual salary threshold will increase for exempt employees from $23,660 to $47,476.
- The annual salary threshold for highly compensated employees will increase from $100,000 to $134,004. These employees may generally be considered exempt without regard to the standard duties test. These amounts are automatically updated every 3 years to maintain the same (40th and 90th) percentiles, with the first automatic update scheduled for 1/1/2020.
- Nondiscretionary bonuses, incentive payments and commissions, paid at least quarterly, can account for up to 10% of the standard salary threshold. Previously, there was no provision to count these payments toward the salary threshold.
There is no change in the duties test used to determine whether employees earning more than the salary threshold must be classified as non-exempt. This includes the exemptions for executive, administrative and professional positions.
In working with this client, I have learned there is a lot for employers to consider in how this will impact reclassified employees and their organization. This goes beyond increased overtime costs. Employers also need to think about how they will communicate with their affected employees. Some will feel hurt and demoted, and all reclassified employees will have to abide by new rules about time tracking.
- Reclassified employees will need to track all time worked. This may be the first time in their careers they have had to do this. Even if a reclassified employee remains salaried, hours worked will need to be tracked.
- Will overtime be allowed? If so, how much will be authorized and will prior approval be required?
- What is the business impact if reclassified employees are not allowed to work overtime? Can they get their jobs done in a 40-hour week?
- Will reclassified employees be allowed to travel? If so, how will they be paid for travel time?
- Often there are differences in vacation, sick and other paid-time off benefits for exempt vs. non-exempt employees. Some employers may want to consider basing PTO on job level and length of service instead of exempt vs. non-exempt.
- Some companies provide greater life and disability benefits to their exempt workforce, or they may only offer some benefits such as long-term disability to exempt employees. Employers that want to maintain the same level of benefits for reclassified employees should work with their consultant and insurance carriers to come up with new defined classifications such as job level or grade instead of exempt vs. non-exempt. Another option that can be explored is grandfathering reclassified employees in a closed class.
- 401(k) and other similar retirement plans could be impacted depending on whether overtime pay and/or bonuses are included in employer contributions.
Impacted employers should be reviewing the final rule in detail and consulting with professional advisors and legal counsel to explore possible strategies and to ensure compliance by the December 1st deadline.
This is a dynamic time in our industry and we like the “juicy work” that comes along with creatively navigating options with clients.