Employee status and health insurance — Exempt vs. Non-Exempt Employees

Categorizing employees, whether full-time, freelance, hourly, or salaried, can be confusing. One important distinction is between exempt and non-exempt employment, which affects payroll practices, compliance with labor laws, and overall workforce management. Misclassifying employees can lead to legal repercussions, including fines and back pay for unpaid overtime.

The Fair Labor Standards Act (FLSA) protects employees and helps ensure fair treatment. The FLSA categorizes employees into exempt and non-exempt categories. 

Below, we’ll explain the difference between exempt and non-exempt employees and how they can both be covered under an employer-sponsored healthcare plan.

What does exempt mean?

Exempt employees are not entitled to overtime and are typically paid an annual salary, not hourly wages. They are not subject to FLSA protections but may benefit from steady salaries and other minimum pay thresholds outlined by the Department of Labor. 

According to the Department of Labor, some examples of exempt positions may include, but are not limited to:

• Executive, administrative, or professional roles

• Teachers and academics in elementary and secondary school roles

• Computer programmers and system analysts

• Sale roles

(Note: these roles do not define the exemption conditions by virtue of their job type.)

If a job is exempt under FLSA, the pay must still meet federal earnings thresholds as outlined by the Department of Labor. As of July 1, 2024, the minimum salary amount for an exempt employee is $844 a week, equal to $43,888 annually. 

Additionally, if the employee resides in one of the 30 US states with its own minimum wage laws, the employer typically must meet the threshold local laws. 

What does non-exempt mean

Non-exempt employees are subject to minimum hourly wage and overtime requirements under the FLSA. Generally overtime pay under the FLSA is time-and-a-half an employee’s hourly wage, once they’ve surpassed 40 hours of work a week.

Some non-exempt roles may include:

• Freelancers and contractors

• Maintenance workers

• Construction workers

• Retail employees

• Hospitality workers

Non-exempt employees are typically paid by the hour, but they don’t need to be paid by the hour to be considered non-exempt employees. Depending on their role, they might qualify for bonuses or commissions. 

Status and health insurance: Exempt vs. non-exempt employees

For companies that have both exempt and non-exempt employees, figuring out benefits like health insurance can feel intimidating, especially when considering fair workplace laws. 

As a reminder, employers are not legally obligated to provide health insurance if they employ fewer than 50 full-time equivalent employees in the prior calendar year, regardless of exempt or non-exempt status. 

But, if your company offers health insurance coverage for employees, exempt and non-exempt employees may receive different healthcare provided that you can classify them using nondiscriminatory criteria. For example, some employers will offer different levels of coverage based on some of the following qualifications:

• Full-time or part-time, depending on the average hours of work expected per week

• Salaried or hourly,

• State, which could influence the cost of coverage in each location

• Job or office location, which can also impact the cost of health insurance coverage

Exempt employees, typically salaried and not eligible for overtime pay, often hold managerial or professional positions. These roles might come with more comprehensive health insurance benefits as part of a broader executive or professional package. This could include lower premiums, higher employer contributions, or access to additional health services such as wellness programs and mental health support.

Non-exempt employees, who are usually paid hourly and eligible for overtime pay, might receive a different tier of health insurance benefits. While they are entitled to the same basic health insurance coverage under employer-sponsored plans, the specifics of their benefits might not be as extensive as those offered to exempt employees. This could manifest in higher out-of-pocket costs, fewer plan options, or limited access to supplemental health services.

Employers must ensure that any differences in health insurance benefits do not violate non-discrimination laws. The Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA) impose regulations to prevent employers from offering health benefits that could be deemed discriminatory.

While it’s okay to change coverage based on classification, a company can’t base employee coverage off of age, sexuality, gender, or disability. This would be considered discriminatory behavior. 

ICHRAs

From an administrative perspective, managing health insurance benefits for exempt and non-exempt employees can be complex. Employers must balance legal compliance with the desire to attract and retain talent in both categories. This often involves careful planning and communication to ensure that all employees understand their benefits and feel valued.

The ICHRA has 11 different classes for coverage. Under these different classes, an employee can offer employees different levels of tax-free contributions to cover their health insurance premiums or other eligible medical expenses. Instead of offering a policy directly to employees, an employer offers a reimbursement allowance for employees to spend on individual healthcare, either on the marketplace or through a platform such as Thatch. 

Interested in learning more? Thatch is democratizing health insurance for emerging companies, offering a more cost-effective way to provide flexible coverage to your team. Learn more about Thatch can transform your team’s health care.