Ad Hoc Payments - Qualified Sick Pay Plan

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Ad Hoc Payments

The following list of questions and answers is designed to educate business owners about the dangers of ad-hoc payments. Establishing a qualified sick pay plan is a simple solution to protect a business owner from having to pay fines do to ad-hoc payments. Talk to one of our disability income insurance specialists today about establishing a qualified sick pay plan for your business. You may call us toll free at 888-513-2300 or request a disability insurance proposal online.

1.	Q:	When can money paid to a person be called Wages?
	A:	Only when the person is an Employee.
2.	Q:	When is a person considered to be an Employee?
	A:	When the person is currently performing services - or - when the person is on leave of absence under the terms of a bona fide Wage Continuation Plan (pursuant to Section 105 of the Internal Revenue Code).
3.	Q:	What is a Wage Continuation Plan?
	A:	It is a simple agreement providing for a Firm to continue some portion of an Employee's wages during a disability.
4.	Q:	What kind of Firms may adopt a Plan?
	A:	Any Corporation, Professional Corporation, Partnership, or Sole Proprietorship.
5.	Q:	Is the money paid to a disabled Employee under a Plan classified as Wages?
	A:	Yes, and such Plan Payments are tax-deductible by the Firm as a Business Expense (under Section 162 of the Internal Revenue Code).
6.	Q:	When must a Plan be adopted by the Firm?
	A:	Before the Employee becomes disabled.
7.	Q:	Must the Plan be in writing?
	A:	Yes, and the Employee must be aware of its terms (as required by the Employee Retirement Income Security Act of 1974).
8.	Q:	Is the necessary documentation required for a Plan a complex arrangement?
	A:	No, it consists of adopting a simple Plan Resolution and then providing the Employee with a simple Plan Letter.
9.	Q:	What would be the status of a disabled person who is not covered by a Plan before the disability begins?
	A:	Such a person would be considered an Ex-Employee.
10.	Q:	If money is paid to an Ex-Employee can it be called Wages?
	A:	No, because Wages can only be paid to Employees.
11.	Q:	What term would be applied to money paid to a disabled Ex-Employee?
	A:	The money has been described by the Federal Courts as Ad Hoc Payments.
12.	Q:	Are Ad Hoc Payments tax-deductible to the Firm?
	A:	No, the courts have held them not to be a Business Expense, and the Firm has lost the deduction. In addition, when the Ex-Employee was also a shareholder the courts have held such payments to be dividends.
13.	Q:	Suppose a Firm does not have a Plan, and then a key person becomes disabled. And suppose the Firm decides to continue to pay some income to the key person. Now let's suppose the Firm fails to disclose that it is actually paying "wages" to a disabled Ex-Employee -- how is this likely to come to the attention of the Internal Revenue Service?
	A:	When the Ex-Employee applies for the Social Security Disability Benefit, or when an audit is conducted by the Internal Revenue Service, the subterfuge will be obvious.