President Seeks to Change Rules For Paying Overtime

It greeted me in my inbox this morning: "Obama Will Seek Broad Expansion of Overtime Pay." In a nutshell, the President says that corporations are making too much money, often at the expense of salaried workers who should be classified as non-exempt under the Fair Labor Standards Act (FLSA).

What do you think?

For background, as I am certain that most readers know, non-exempt workers generally must receive overtime pay (usually time and a half) for hours worked in a week beyond 40. The law gives the President/Administration fairly broad powers in classifying as non-exempt versus exempt. Currently, the regulations provide that workers typically earning $455 per week or more generally may be classified as exempt. The threshold was increased to that level by President Bush (43) in 2004 and has not been increased since.

Also classified currently as exempt under the label of professional or executive workers are groups including fast-food managers, computer technicians, loan officers, and other similar jobs that the President views should be paid overtime when they work beyond 40 hours in a week. The US Chamber of Commerce, of course, disagrees.

While I am usually pretty fiscally conservative, if I think about this, $455 per week isn't much. It's barely above the proposal from the Administration for an increase in the minimum wage ($404 for a 40-hour work week). On the other side of my brain, I consider that since I entered the professional workplace during the Reagan Administration, it has seemed fairly normal that people who want to get ahead in business will work at least 50 hours per week or more and in many cases, far more than that. It just became a way of life.

I recall that fairly late in the Clinton Administration when his Labor Department revised guidance on this issue that the firm that I was working for at the time reclassified who was exempt. That firm then turned around and said that non-exempt employees could only work overtime with approval from pretty high up managers. So, who won? Nobody, really. The company passed that work on to exempt employees and the newly non-exempt group who had seen pay raises cut in response to this regulation were stuck at 40 hours per week.

Lose lose.

Part of me wants to say that giving aspiring professional non-exempt workers the right to forgo overtime when they work more than 40 hours per week would enable those that want to get ahead to do so, but that would just take us back to the mentality in which I grew up in the workplace where we all worked insane hours to be the one person who stood out (of course we didn't because we were all that way) from the crowd and got ahead.

Ultimately, it feels like it is just part of macroeconomics. You can't just look at one individual and one company in a vacuum and see how they will react. There is a larger dynamic. If companies have to pay an individual overtime, they will seek to find ways around the rules to ensure that they can find exempt workers to do that job and still not have to pay. The newly non-exempt worker will lose and ultimately the company will lose as well. On the other hand, the Bush Administration limits probably exempt far too many workers from the rules. Nobody wins there either.

It's part of a broader give and take. In an ideal world, companies would allow workers to do their jobs and would pay overtime to those who should be non-exempt under the spirit of the FLSA. Also, in an ideal world, workers would not be working overtime unless it was truly necessary.

I wonder when we will be in an ideal world? Anyone? Buehler?

Can Anybody Win the ACO Game?

Suppose you invented a game that ultimately, nobody could win. Do you think it would be popular? I don't. Game players get frustrated at losing. Either they give up or they try to get better, but eventually, if their improvement doesn't lead to some more wins, they stop playing the game.

I know that accountable care organizations (ACOs) are not a game. For the uninitiated, they are healthcare organizations that choose to operate under a model in which they are rewarded for meeting metrics related to quality of care and total cost of care (TCC). Under the Affordable Care Act (ACA), those reimbursements are tied significantly to an ACO's trend in TCC being meaningfully less than the norm.

That sounds like a really good idea, in theory. The system is providing an incentive (no, I will not say it is incentivizing) to ACOs to reduce medical inflation. For an ACO to do that, however, costs money. The ACO will likely have to add to its infrastructure both from the standpoints of technology and people. Each has a cost.

Simply put then, the game is won when reimbursements (incentive payments) exceed the essentially required investment in the business. The game is lost when the converse is true.

I think we can establish that each of these points is almost necessarily true:

1. Each ACO will try to reduce its own contribution to medical inflation.
2. There are practical limits to how much that medical inflation can be reduced.
3. When many organizations are simultaneously working to control TCC, the average increase in TCC will come down.
4. If 2. and 3. above are true, then it will become virtually impossible to achieve the financial goals necessary to have reimbursements large enough that an ACO gets a positive return on their investment (ROI).

You don't agree with the fourth point:? Think about it. If the target TCC increase gets low enough (because the average does) and a particular ACO has already gotten to the asymptotic point of its efficiency, then they have likely reached the point where they cannot win anymore. Because the competition had enough room to improve and that one ACO had reached the point where it didn't have enough room for improvement, it will have lost its chance to win (at least for a while).

There are presumably good things that will happen out of this model. Notice that the game breaks down because each organization is striving to reduce TCC. That's a good thing. But, at some point, ACOs that can no longer win may just stop playing the game. When they do that, what will happen to their TCC?

Can anybody win the game?

Treasury Modifies Section 83 Regulations

The Treasury Department recently issued revised final regulations under Code Section 83. While Section 83 regulations are longer and more complex, this was a short document that focuses specifically on "substantial risk of forfeiture."

So, what do these new regulations do? They add a paragraph that explains that you cannot create substantial risk by putting something in a plan document that is not going to happen and say that it creates substantial risk. In fact, they specifically say that a forfeiture provision that is not likely to be enforced (based on all the underlying facts and circumstances) does not create substantial risk.

Generally, the litmus test that is being applied is whether receipt of the property is conditioned upon performance of future services. So, for example, if nonstatutory stock options vest only if the executive works for the company for 5 years after the grant date, then there would (my read, but not a legal opinion by any means) be substantial risk of forfeiture until the options vest.

Interestingly, this regulation has retroactive applicability relating to property transferred after January 1, 2013.

Tax Reform on the Horizon ? Probably Not

Representative Dave Camp (R-MI) has just introduced into the House Ways and Means Committee which he happens to chair the Tax Reform Act of 2014. You can read it here. Given that the Republicans only control one house of Congress and do not control the White House, the bill has little likelihood of passing. However, it gives notice as to where the party leadership may want to take tax policy.

After I've done my skim-through of the roughly 1000 pages, I'll try to comment here if it's worthy of any such comment.

It May Not be Politically Correct, but There are Gender Differences

It shouldn't come as a surprise to us that men and women are physiologically different. Come on now, I know my readers are smart. All of you worked this out before I said anything. But, lots of people have been surprised by this article and the FDA recommendations in it.

The FDA, for the first time, is recommending a different drug dosage for women than for men, although they go on to say that perhaps the reduced dosage is appropriate for men as well.  What surprises me is not that this happened, but that it took so long to happen.

Let's consider why.

Before drugs go on the market in the US, the FDA requires that they go through extensive research and clinical trials. Those are done almost exclusively on men. Why? To quote an FDA official whose name I cannot remember, "Women are hormonally inconvenient." In other words, because women monthly have significant hormonal swings, it is much more difficult to filter out the noise in the data.

Unfortunately, this means that much of the data that we actually have collected on drug efficacy and drug interaction may be somewhat accurate for men, but it's probably less accurate for women. And, as long as I am being politically incorrect, I would hypothesize that the same efficacy and interaction deficiencies that result from gender specific studies also result from the fact that studies have generally not been filtered by data such as ethnicity and blood type.

I've not done the research, so I am just guessing. But, my guess would be that people of different ethnicities and people of different blood types (among other differences) handle different drugs differently. It just makes sense.

So, what's in the future?

I don't really know, but this is my blog, so I get to hazard a guess.

Today, one of the current trends is genome mapping. Without having any particular expertise in the field, I understand that each of us has our own individual genetic map (perhaps monozygotic twins (identical) have the same genetic map, I just don't know). Surely then, the ideal medical treatment of each of us for a specific condition is different than for anyone else and those differences are based on our genetic maps. The data to develop these new medical plans of action will be here soon. Are we going to let hormonal inconveniences get in the way of better treatment plans?

401(k) Plans Without Matching Contributions Will Not Allow the Masses to Retire

I read an article this morning entitled "Encouraging Savings Without a Match." The article was informative enough and it did discuss the importance of getting workers to save. It discussed how auto features (auto-enrollment and auto-escalation) will have positive effects in allowing workers to accumulate balances large enough to retire someday.

The author and her sources are correct. Auto features will help, but they are not enough.

Why not?

Suppose I am a participant in a 401(k) plan and you are my employer. Suppose that in that plan, you provide me with a fairly measly (by today's standards) match of 25 cents on the dollar for the first 4% of pay that I contribute. That's not much; you're only contributing as much as 1% of my pay, but you are motivating (note the lack of use of the non-word incentivize) me to defer at least 4% of my pay. That means that 5% of my pay will go into my account. It's also a first-year return on my investment of 25% before I have even a bit of positive investment performance.

If instead, you provide me with a more generous match of 50 cents on the dollar for my first 6% of pay, the motivation for me to defer at least that 6% is even greater. And, of course, if you provide me with one of the nice safe harbor matches that are even more generous, I am motivated still further.

Auto-enrollment provides no such motivation. Without that motivation, when I hit a financial crunch (perhaps my new-fangled high-deductible health plan is not providing me with the risk management tools that I really need), the first place I may look to for an extra source of weekly or monthly cash is those 401(k) deferrals. Perhaps stopping them allows me to pay my rent or mortgage on time. Perhaps it allows me to make my car payments. Because I don't have an additional incentive beyond the holy grail of retirement to continue saving, ceasing my 401(k) deferrals sure feels like a good idea. And, once I stop, I probably won't start again.

From where I sit, most people today seem to live at or above their means where their means are characterized by their take-home pay. The old defined benefit-based system allowed people to retire because their take-home pay was perhaps a little bit less in order to pay for their retirement benefit which could be a fair amount more. The discipline in that was not employee-driven, but plan design and ERISA-driven.

Now, the motivation is largely gone and the discipline is largely gone. People are living longer and a lot of them are going to have to work for a long, long time.

AOL Reacts to Media and Employee Pressure

AOL had made a decision to follow in what many were calling the IBM mold. Rather than providing matching contributions in its 401(k) plan on a payroll period basis, it had decided to make single matching contributions after the end of the plan year. Therefore, employees who left during the year would not receive matching contributions.

The media were up in arms. Employees were up in arms. AOL gave in and is returning to its former policy of matching on a payroll period by payroll period basis.

And, this is big news!?

What really got to me about the media coverage was the spin that they managed to put on it. Employees could be losing out on the massive run-up on the matching contributions. Not said was that those balances could lose money as well. It's not fair that employees who leave during the year won't get matching contributions. What makes this fair or unfair? If you know the rules up front and you are evaluating leaving during the year, this should be one of your considerations.

How bad is it really? I'm going to oversimplify my example so that the math doesn't strain my brain. Suppose Employee Z has wages of $100,000 per year and a company matches 50 cents on the dollar on the first 6% of pay contributed. This is not an unusual design. Further suppose (and this is not quite right) that matching contributions are usually made on average exactly halfway through the year. Also assume that under the IBM design that matching contributions are made on the January 1 after the end of the year. Finally, assume that balances earn, on average, 10% returns (I want that investment adviser).

Suppose Z does not leave the company during the year. Then the difference during that year is is approximately 5% of $3,000. In other words, under the more traditional design, Z will have an account balance that is $150 larger. Yes, there are the effects of compounding, but this is really not as big a deal as the media made it out to be.

Surely, AOL has already determined how much money it plans to spend on its employees. if it spends more on the 401(k) plan, rest assured it will spend less somewhere else. It all comes out in the wash. But, it sure does make for an exciting story when a bunch of reporters, many of who think the plan is called a 401 [without the (k)], get a hold of it.

Really, it isn't.