First of all, the odds are overwhelming that you or one of your key employees will become disabled before age 65. Think about how that could disrupt your business. Most business owners feel that they have a moral responsibility to their key people to assure that their income is continued despite a disabling injury or sickness.
If your firm is going to pay you - or a disabled employee - anyway, doesn't it make sense to ensure the tax deduction by establishing a plan?
| Odds of a 90-day disability occurring before age 65 |
| |
Number in a group |
| Age |
2 |
3 |
4 |
| 30 |
55.2% |
70.0% |
79.9% |
| 40 |
49.7% |
64.3% |
74.7% |
| 50 |
40.1% |
53.7% |
64.2% |
| Source: 1985 CIDA and 1980 CSO. Based on a 30 day elimination period for a male in the top occupation class. Statistics vary by occupation and sex. |
How To Establish A Plan
You can establish a plan by means of a simple agreement that sets company policy before a disability occurs. It establishes who to pay; how much to pay; when to start payments; and how long to pay. Your plan must be adopted before an employee becomes disabled, and the employee must be aware of the terms of the plan.
Who decides which employees are to be covered? You do. One or more employees can be covered, and you may be very selective in determining the criteria for each class of employee.
When should a plan be put into effect? Immediately. The plan must be in effect and communicated to covered employees before a disability occurs.
Should a plan be in writing? Yes. There should be a simple plan resolution in the minutes of the firm, adopting the plan and defining the benefits. In addition, a notification letter should be sent to the covered employees.
Considerations In Funding A Plan
Although the existence of a Qualified Sick Pay Plan solves the tax problem, the questions of funding and administration still need to be addressed. Should you retain the entire risk of having to pay disability benefits out of your firm's assets, or should you transfer most of that risk to an insurance company? Considerations which may influence your decision are summarized in the following table.
| Considerations |
Retain |
Transfer |
| ERISA Requirements |
Summary Plan Document |
Insurance Policy and Plan Document |
| Claims Determination |
You |
Insurance Company |
| Last Payment |
You decide if person has recovered |
Insurance Company |
| Cost/Timing |
Large benefit checks at worst possible time |
Small premium payments at best possible time |
| Liability |
You |
Insurance Company |
If your firm uses Generally Accepted Accounting Principles (GAAP) to prepare annual statements, then self-insuring long-term disability plans can be very costly because of FAS 112.
For all fiscal years beginning after December 15, 1993, Financial Accounting Standard 112 requires companies that self-insure their disability plans to declare the net present value of all future payments for them, as a balance sheet liability. The increase in this liability must also be charged to earnings.
The result is that the liability that companies must now post will be dramatically higher than the annual claims expense they reported in the past, under the old pay-as-you-go self-insured arrangement.
An Insured Sick Pay Plan
Most business owners choose to transfer some or all of the liability for plan funding. By transferring the risk from your business to an insurance company you can make small premium payments at the best possible time - when everyone is healthy and working. Not only can you budget a pre-determined amount of money, but you can deduct the premium as a necessary business expense.
What Are The Advantages Of An Insured Plan?
Certainly, the benefits that a Qualified Sick Pay Plan provides to your firm cannot be disregarded, and become even more valuable when the plan is insured:
- The premiums are a tax-deductible corporate business expense (IRC 162).*
- Premiums are not considered as additional taxable compensation to the employee (IRC 106).
- The insurance company assumes the responsibility for claims determination.
- The costly drain on assets is replaced with modest budgetable expenses.
You have everything to gain and nothing to lose by establishing an insured Qualified Sick Pay Plan.
*Premium payments made by Corporation, Partnerships, Sole Proprietors, or S Corporations on behalf of employees are tax-deductible.
|
