Sick Pay Plans & Worksite Sick Pay Plans & Worksite Disability InsuranceDisability Insurance

By: Charles L. Westmoreland By: Charles L. Westmoreland CLU,ChFC,RHU,REBC,MSFSCLU,ChFC,RHU,REBC,MSFS

Boot CampBoot Camp

Payroll Deduction Disability Payroll Deduction Disability InsuranceInsurance

The Needs of Small & The Needs of Small & Medium Sized EmployersMedium Sized Employers

• Employee Benefit ExpertiseEmployee Benefit Expertise

• Big Company Benefits @Budget Big Company Benefits @Budget PricesPrices

• Knowledge GiversKnowledge Givers

• They need you!They need you!

Why Worksite ?Why Worksite ?

• Decline in personal insurance Decline in personal insurance coveragecoverage

• Rising cost of benefitsRising cost of benefits

• Competition for employeesCompetition for employees

• Pressure on insurance companies to Pressure on insurance companies to lower distribution costslower distribution costs

• Advantages for the employeeAdvantages for the employee

The Worksite MarketThe Worksite Market

$3 Billion and Growing$3 Billion and Growing

Mr. or Ms EmployerMr. or Ms Employer

• Who would pay you or your key Who would pay you or your key employees in the event of a employees in the event of a disability?disability?

• Have you informed the employees of Have you informed the employees of your decision?your decision?

EmployeesEmployees

• Who will pay you if you are sick or Who will pay you if you are sick or hurt and can not work?hurt and can not work?

Sources of Disability Sources of Disability BenefitsBenefits• Company sponsored Company sponsored

sick days or paid time sick days or paid time offoff

• Workers Workers CompensationCompensation

• Social SecuritySocial Security

• Employer sponsored Employer sponsored disability plansdisability plans

• Privately owned Privately owned disability plansdisability plans

• State sponsored State sponsored disability plansdisability plans

• Pension plansPension plans

• Accident coverageAccident coverage

• Specified Disease Specified Disease &Critical illness &Critical illness plansplans

• Long Term Care Long Term Care CoverageCoverage

Worksite DI MarketWorksite DI Market

• 90% of firms with less than 100 90% of firms with less than 100 workers have no disability coverage workers have no disability coverage for employees!for employees!

• Most small to medium sized Most small to medium sized employers do not have a properly employers do not have a properly formalized sick pay plan!formalized sick pay plan!

Sick Pay Plans (Short Term Sick Pay Plans (Short Term Disability)Disability)

• Sick Pay Plans -----refers to uninsured Sick Pay Plans -----refers to uninsured continuation of salary or wages for a continuation of salary or wages for a few days or weeksfew days or weeks

• Short Term Disability----- disability Short Term Disability----- disability insurance coverage with a short insurance coverage with a short elimination period (example 7 or 14 elimination period (example 7 or 14 days) and benefits of less than 6 days) and benefits of less than 6 monthsmonths

Sick Pay PlansSick Pay Plans

• The underlying principle of a sick pay The underlying principle of a sick pay plan is simple. An employer can plan is simple. An employer can deduct wages as an ordinary deduct wages as an ordinary business expense; however Ad Hoc business expense; however Ad Hoc payments to a disabled employee payments to a disabled employee can not be deducted as wages.can not be deducted as wages.

Sick Pay Plans Sick Pay Plans

• Section 104,105,106 and 162 of the Section 104,105,106 and 162 of the IRS regulations and Title 1of ERISA IRS regulations and Title 1of ERISA serve as the framework for serve as the framework for formalized Salary Continuation or formalized Salary Continuation or Sick Pay Plans.Sick Pay Plans.

IRC Section 104IRC Section 104

• Proceeds received from disability or Proceeds received from disability or income replacement insurance plans income replacement insurance plans are not included in a persons’ gross are not included in a persons’ gross taxable income. taxable income.

• The exclusion from gross income The exclusion from gross income assumes that the coverage is assumes that the coverage is purchased with after tax dollars !purchased with after tax dollars !

IRC Section 105IRC Section 105

• In order for a sick pay plan to be tax In order for a sick pay plan to be tax deductible it must be in place prior to deductible it must be in place prior to a disability.a disability.

• Employers do not have to give equal Employers do not have to give equal benefits to all employees.benefits to all employees.

• Requires the employee to include in Requires the employee to include in gross income the proceeds received gross income the proceeds received from employer purchased plans.from employer purchased plans.

IRC Section 106(a)IRC Section 106(a)

• Employer paid disability insurance Employer paid disability insurance premiums for individual or group premiums for individual or group policies are not included in an policies are not included in an employees taxable income.employees taxable income.

• Disability income benefits are tax Disability income benefits are tax exempt to the employee as long as exempt to the employee as long as the employee is paying the full the employee is paying the full premium.premium.

IRC Section 162 (Executive IRC Section 162 (Executive Bonus)Bonus)

• An employer can deduct a An employer can deduct a “reasonable allowance” for wages “reasonable allowance” for wages and other compensation for services and other compensation for services actually rendered. actually rendered.

ERISA (Title 1)ERISA (Title 1)

• The document must provide The document must provide sufficient information in order that sufficient information in order that employees can determine their rights employees can determine their rights and benefits under the plan.and benefits under the plan.

• A claims procedure must be A claims procedure must be established and maintained.established and maintained.

ERISA (Title 1)ERISA (Title 1)

• The plan must be in writing.(A board The plan must be in writing.(A board resolution)resolution)

• The plan and benefits must be The plan and benefits must be communicated to the employees communicated to the employees covered.covered.

• There must be a plan administrator.There must be a plan administrator.

• Fiduciary rules apply to the plan.Fiduciary rules apply to the plan.

Welfare Benefit PlanWelfare Benefit Plan

A disability wage continuation A disability wage continuation plan almost always plan almost always

constitutes an employer constitutes an employer welfare plan.welfare plan.

DISABILTY INSURANCEDISABILTY INSURANCE

Disability insurance is the Disability insurance is the simplest way to satisfy ERISA simplest way to satisfy ERISA

and IRS requirementsand IRS requirements

Formalized Sick Pay PlanFormalized Sick Pay Plan

• The Plan must be in writing and The Plan must be in writing and describe who is covered and what describe who is covered and what are the plan benefits.are the plan benefits.

• It must be communicated to the It must be communicated to the covered employees. covered employees.

• The benefits available should be put The benefits available should be put in writing in some form of business in writing in some form of business memo or letter.memo or letter.

Sample Board ResolutionSample Board Resolution

SAMPLE BOARD RESOLUTION

________________________________ then discussed the concept of establishing a formal Sick Pay Plan for certain employees of the Corporation. After due discussion and upon motion duly made, seconded and unanimously approved, the following resolution was adopted: WHEREAS, it is the desire of the Corporation to establish a Sick Pay Plan for certain employees by providing any such employee with an income during total disability and thereby providing any such employee with an added incentive to continue his services to the Corporation, and WHEREAS, the Internal Revenue Code in Sections 105 and 106 and under the Treasury Regulations pertaining thereto, and Revenue Ruling 58-90, offer an excellent method for accomplishing this purpose, BE IT RESOLVED, that a Sick Pay Plan for certain employees is hereby adopted in accordance with the aforesaid sections of the Internal Revenue Code, Treasury Regulations, and Revenue Ruling, subject to the terms of the forms exhibited in the meeting, attached to these minutes, and incorporated herein: BE IT FURTHER RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized and directed to execute and deliver any and all endorsements, instruments or power of attorney, and do any other things that they deem necessary in order to establish said Sick Pay Plan.

Letter of DeterminationLetter of Determination

Letter #1 SAMPLE LETTER TO EMPLOYEES STATING PAY DURING AN EXTENDED DISABILITY

Dear Employee: This letter is intended to clarify our position with regard to any extended period of illness or injury you might suffer. We have decided that it is in everyone’s best interest if salary is not continued during any extended illness or injury. Very likely, a replacement would have to be hired and the money will need to be spent there to assure a continued work flow. Sincerely,

Salary Continuation PlansSalary Continuation Plans

• One or more employees can be One or more employees can be covered.covered.

• Different plans can be used to cover Different plans can be used to cover different classes of employees.different classes of employees.

• The plan does not have to be funded.The plan does not have to be funded.

Formal or Informal FundingFormal or Informal Funding

• Formal (Insurance)Formal (Insurance)

• Disability insurance Disability insurance satisfies most of satisfies most of the requirements the requirements of a sick pay plan.of a sick pay plan.

• Premiums are Premiums are deductible in the deductible in the current tax yearcurrent tax year

• Informal(Employer)Informal(Employer)

• Most employers Most employers are not equipped are not equipped to be in the to be in the disability insurance disability insurance business.business.

• F.A.S.B. # F.A.S.B. # 112(future benefits 112(future benefits are a liability)are a liability)

F.A.S.B. #112F.A.S.B. #112

• Employers must use accrual accounting rules Employers must use accrual accounting rules for benefits provided to employees when for benefits provided to employees when they are terminated prior to retirement.they are terminated prior to retirement.

• Sick Pay Plans are included.Sick Pay Plans are included.

• Future disability benefits must be estimated Future disability benefits must be estimated and the present value established. This and the present value established. This value is deducted from earnings in the value is deducted from earnings in the reporting period when the disability occurs.reporting period when the disability occurs.

ExposureExposure

Transfer the risk of paying claims to Transfer the risk of paying claims to the insurance company.the insurance company.

TimingTiming

• It will take too long to accumulate It will take too long to accumulate sufficient reserves to meet sufficient reserves to meet obligations.obligations.

Cash Flow Cash Flow

• Claims payments may cause a Claims payments may cause a business serious cash flow problems.business serious cash flow problems.

ExpertiseExpertise

• The insurance company is The insurance company is experienced at paying claims.experienced at paying claims.

Employer Paid Disability Employer Paid Disability InsuranceInsurance• Employers can deduct disability Employers can deduct disability

insurance premiums used for the benefit insurance premiums used for the benefit of employees as a business expenseof employees as a business expense

• Disability benefits paid to employees are Disability benefits paid to employees are considered to be wages and are subject considered to be wages and are subject taxestaxes

• Employers are liable for payroll taxes Employers are liable for payroll taxes (matching FICA for six months) (matching FICA for six months)

Employee Paid DisabilityEmployee Paid Disability

• Employee receives disability Employee receives disability insurance proceeds income tax freeinsurance proceeds income tax free

• Employers do not have to pay Employers do not have to pay payroll taxes on the claim payments payroll taxes on the claim payments received by employeesreceived by employees

• Employee does not have to pay FICA Employee does not have to pay FICA taxes on benefits receivedtaxes on benefits received

Disability Insurance & Disability Insurance & Cafeteria PlansCafeteria Plans

• Disability insurance purchased under Disability insurance purchased under a 125 plan by an employee is a 125 plan by an employee is considered to be an employer paid considered to be an employer paid benefit by the tax people, therefore benefit by the tax people, therefore benefits received are considered benefits received are considered taxable.taxable.

Measuring Premium Measuring Premium ContributionContribution

• IRS regulations state the time period IRS regulations state the time period to be used to measure the to be used to measure the percentage of employer & employee percentage of employer & employee premium contribution.premium contribution.

• Generally the time period for group Generally the time period for group disability is 3 years prior to the disability is 3 years prior to the disability.disability.

• New letter rulingNew letter ruling

Section 162 Plan Section 162 Plan (Executive Bonus Plan)(Executive Bonus Plan)• In order to avoid taxation of employer In order to avoid taxation of employer

paid disability benefits to an employee paid disability benefits to an employee the employer can simply bonus the the employer can simply bonus the amount of premium to the employee .amount of premium to the employee .

• This avoids the back-end tax trap for This avoids the back-end tax trap for the employee and employer and the employee and employer and removes the employer form the” W-2 removes the employer form the” W-2 Business”. Business”.

Q & A on Section 105 Q & A on Section 105 Qualified Sick Pay PlansQualified Sick Pay Plans

What is a Qualified Sick Pay What is a Qualified Sick Pay Plan?Plan?

• It is a simple agreement providing for It is a simple agreement providing for a firm to continue some portion of an a firm to continue some portion of an employee’s wages during a disability.employee’s wages during a disability.

What type of firm or What type of firm or business entity may adopt a business entity may adopt a Sick Pay Plan? Sick Pay Plan?• Any corporation(C or S),professional Any corporation(C or S),professional

corporation,partnership,or sole corporation,partnership,or sole proprietorship.proprietorship.

When is a person When is a person considered to be an considered to be an employee?employee?• When the person is currently When the person is currently

performing services or when the performing services or when the person is receiving benefits under person is receiving benefits under the terms of a Qualified or the terms of a Qualified or Formalized Sick Pay Plan.Formalized Sick Pay Plan.

Is the money paid to a Is the money paid to a disabled employee under disabled employee under a sick pay plan classified a sick pay plan classified as wages?as wages?

• Yes, and such plan payments are Yes, and such plan payments are tax deductible by the firm as a tax deductible by the firm as a business expense. business expense.

When must a plan be When must a plan be adopted by a firm?adopted by a firm?

• Before the employee becomes Before the employee becomes disabled!disabled!

Is formalizing a sick pay Is formalizing a sick pay plan a complex procedure?plan a complex procedure?

• No,it simply requires adopting a plan No,it simply requires adopting a plan resolution and providing the resolution and providing the employee with a simple plan letter.employee with a simple plan letter.

Must the plan be in writing?Must the plan be in writing?

• Yes, and the employees must be Yes, and the employees must be made aware of the terms. (Title 1 of made aware of the terms. (Title 1 of ERISA)ERISA)

• There must be more than a There must be more than a statement that coverage exists.statement that coverage exists.

What’s the status of a What’s the status of a disabled person not disabled person not

covered by the plan before covered by the plan before the disability begins?the disability begins?

The person would be The person would be considered an ex-employee.considered an ex-employee.

If money is paid to an ex-If money is paid to an ex-employee,can it be called employee,can it be called wages?wages?• No,because wages can only be paid No,because wages can only be paid

to employees. to employees.

What term would be What term would be applied to money paid to a applied to money paid to a disabled ex-employee?disabled ex-employee?• The money has been described by The money has been described by

the Federal Tax Court as AD HOC the Federal Tax Court as AD HOC Payments.Payments.

Are Ad Hoc Payments tax Are Ad Hoc Payments tax deductible to employers?deductible to employers?

• No, the court has held them not to be No, the court has held them not to be a business expense!a business expense!

When can money paid to a When can money paid to a person be called wages?person be called wages?

• Only when the person is an Only when the person is an employee.employee.

How does eligibility enter into How does eligibility enter into the qualifications of a Plan?the qualifications of a Plan?

• There must be a bona-fide employer-There must be a bona-fide employer-employee relationship.employee relationship.

• The plan cannot be for an owner or The plan cannot be for an owner or stockholder who does not actively stockholder who does not actively work in or participate in the business.work in or participate in the business.

Do benefits have to be equal Do benefits have to be equal among employees?among employees?

• No , the employer can discriminate No , the employer can discriminate among employees!among employees!

On what basis can the On what basis can the employer determine who employer determine who receives what benefits?receives what benefits?• Employment ClassEmployment Class

• Salary LevelSalary Level

• Length of ServiceLength of Service

What is the one caveat to the What is the one caveat to the discrimination rules?discrimination rules?

• A plan cannot exclude an employee A plan cannot exclude an employee from coverage just because he or from coverage just because he or she is not an owner or stockholder if she is not an owner or stockholder if the employee meets all the other the employee meets all the other requirements for coverage.requirements for coverage.

They Can’t Catch ME!They Can’t Catch ME!

• A firm doesn’t have A firm doesn’t have a plan, a key a plan, a key employee becomes employee becomes disabled and the disabled and the firm continues to firm continues to pay them. The firm pay them. The firm deducts the deducts the payments as payments as wages.What is the wages.What is the red flag to the IRS?red flag to the IRS?

• When the Ex-When the Ex-Employee applies Employee applies for Social Security for Social Security Disability,or when Disability,or when an audit is an audit is conducted by the conducted by the IRS, the subterfuge IRS, the subterfuge will be obvious.will be obvious.

Communicating To Communicating To EmployeesEmployees

• Speak in the vernacularSpeak in the vernacular

• Explain how new coverage fits with Explain how new coverage fits with the existing benefitsthe existing benefits

Who Pays You When You Who Pays You When You Are Sick Or Hurt ?Are Sick Or Hurt ?

Company Sick Pay Plan?Company Sick Pay Plan?

Most sick pay plans are Most sick pay plans are limited to a few days or limited to a few days or

weeks.weeks.

Vacation Days Vacation Days

Workers Compensation Workers Compensation ( The Plan that ( The Plan that Employees Remember !)Employees Remember !)

Social Security Social Security ( The ( The Forgotten LTD Plan !)Forgotten LTD Plan !)Social Security benefits are Social Security benefits are difficult to qualify for and difficult to qualify for and usually do not begin for at usually do not begin for at

least six months. least six months.

““Total & Permanent Disability” Total & Permanent Disability” (The Social Security (The Social Security definition)definition)• A condition under which the individual is A condition under which the individual is

“unable to engage in any substantial gainful “unable to engage in any substantial gainful activity by reason of any determinable activity by reason of any determinable physical or mental impairment which can be physical or mental impairment which can be expected to result in death or which has expected to result in death or which has lasted for a continuous period of not less lasted for a continuous period of not less than 12 months”than 12 months”

• The strictest definition of disability that is The strictest definition of disability that is commonly used for any purpose.commonly used for any purpose.

Disability InsuranceDisability Insurance

Pay Check ProtectionPay Check Protection

Programming Disability Programming Disability BenefitsBenefits• Workers Workers

CompensationCompensation• Social SecuritySocial Security• State Disability PlansState Disability Plans• Pension PlansPension Plans• Medical Medical

Plans(Supplemental Plans(Supplemental Accident Coverage)Accident Coverage)

• Specified Disease Specified Disease CoverageCoverage

• Sick Pay PlansSick Pay Plans

• STDSTD

• LTDLTD

• Accident CoverageAccident Coverage

• Long Term CareLong Term Care

• Critical IllnessCritical Illness

What type of Platform for the What type of Platform for the coverage ?coverage ?

• IndividualIndividual

• FranchiseFranchise

• GroupGroup

• BlendedBlended

What elimination period to What elimination period to use?use?

• The shorter the better for blue collar The shorter the better for blue collar groups!groups!

• Avoid elimination periods of less Avoid elimination periods of less than 7 days for both accident or than 7 days for both accident or sickness!sickness!

• Avoid overlaps of coverage and other Avoid overlaps of coverage and other employee benefits.employee benefits.

What benefit period to use?What benefit period to use?

• The one that is best for the employer The one that is best for the employer and the employees.and the employees.

• Fill the gaps and avoid overlaps of Fill the gaps and avoid overlaps of coverage if at all possible.coverage if at all possible.

• Remember how benefits and Remember how benefits and premiums are taxed.premiums are taxed.

Obstacles or Opportunity?Obstacles or Opportunity?

• ADA &FMLAADA &FMLA

• Economic ConditionsEconomic Conditions

• Rising Employee Benefit CostRising Employee Benefit Cost

• Monday Morning Workers Monday Morning Workers Compensation ClaimsCompensation Claims