That is a very interesting question. From the perspective of the government, and the statutes that mandate overtime for non-exempt employees or hourly employees, they don't care where the overtime money comes from as long as it is paid to the employees that have worked the overtime (as long as the money is not derived from illegal/criminal means).
I will say that it is highly unusual for a company to take this stance. It is an obvious attempt to force direct supervisors to prevent overtime work from taking place. It is also a mechanism to set aside more pre-tax money to pay for their overtime work.
It does technically meet the standards for deductible pay from the employer perspective - which is odd. However, this is normal and reasonable (overtime, that is).
I believe this to be a legal activity. Better stated, I am unaware of any federal law, rule or regulation which would preclude this activity. However, this is also, admittedly, a case of first impression for me. I have never seen this...though I have practiced employment law for over a dozen years. I am very familiar with the laws that surround this area and I think this falls within allowable guidelines.
Let me know if you have any other questions or comments.
Please also rate my answer positively.
Best wishes going forward!