Protect Your Business, Your Employees AND Get a Tax Deduction

Woman working from home with teaBusiness owners face a number of challenges running their business and making sure their employees are productive and happy. One of the areas of concern that many small business owners have is the unexpected disability of one of their employees. Disability of a key employee can have significant consequences on the productivity of the business, not to mention the welfare of the valued employee. 

Many believe that they can simply make the decision to continue the salary of the disabled employee. This decision can have adverse tax consequences and can put the financial welfare of the business at risk. There is a better way to protect your employees while making sure that the business continues to operate in the best possible way. 

Many business owners are surprised to learn that wages paid to a disabled employee, not subject to a written formal plan authorizing such payments, are not tax-deductible business expenses. And, business owners may unknowingly expose themselves to claims of discrimination by such “ad hoc” payments. 

A Qualified Sick Pay Plan (QSPP) funded with disability income insurance, however, identifies employees entitled to disability compensation by objective criteria and enables a business to pay wages to a disabled employee in a tax-efficient manner. A QSPP funded with disability insurance is a valuable employee benefit and business protection tool – a plan that promotes employee loyalty protects a disabled employee’s (and your business’) financial well-being and can provide your business with a tax deduction.

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What is a Qualified Sick Pay Plan? 

A QSPP enables a business to continue some portion of an employee’s wages during a disability. It is the company’s official plan to continue wages for certain ill and/or injured employees.

A QSPP funded with disability income insurance shifts the burden of providing a disabled employee’s wages from the company to the insurance carrier. Instead of drawing from cash flow or reserves to pay the wages, the business commits itself to known and consistent premium payments. A funded plan also improves the business’ balance sheet because of certain accounting benefits. Depending upon the design of the plan, premiums may be employer-paid, which is typical, or can be bonused to the employee. 

A QSPP funded with disability income insurance answers all your employee disability questions:

  • Is this employee disabled?
  • How much is this employee going to be paid?
  • Which employees will be covered?
  • Will all employees get the same benefits?
  • Has this employee recovered?
  • How long is this employee going to be paid?

Implementing a QSPP is a simple, smart, and cost-effective business strategy. Before getting into how it is done, let’s first explore why it is so attractive and the benefits it provides your employees and your business.

Keeping Your Workforce in Top Form

Diverse group of employees at deskYou likely have certain key employees whose absence from the business would disrupt normal business operations and hurt profitability. They may have been with your business for some time and you have formed strong relationships with them and their families. An accident or unexpected illness may be detrimental to their personal and professional lives. 

Indeed, the decision to stay with your business--and the ability to return to your business--can be influenced by an attractive employee benefits package. When an accident or unexpected illness strikes your key people, you are going to want to help. 

A QSPP Funded with Disability Insurance Offers Strategic Business Advantages

Without a QSPP, wages paid to disabled employees are not deductible business expenses. These “ad hoc” payments also come at the worst possible time--when you are down an employee-- placing additional strain on your business. With a QSPP funded with disability insurance, the insurance company will pay your employees’ wages and administer all claims, thus keeping valuable business dollars within your business at a critical time.

The terms of your QSPP should align with the terms of the disability insurance policy, and relieve you from making subjective judgments about the validity of an employee’s disability and other decisions which could potentially expose you to liability.

Attractive policy options can also help to shape the most suitable and attractive benefits package for your business and your employees (i.e. partial disability benefit rider, social insurance substitute rider). A Guardian disability insurance policy can come with up to 13 different and currently available riders.

The plan design will also determine if the business or the employee will own the policy. If the business owns the policy, there is no tax deduction for the premium, but benefits are received tax-free by the business, and payments to the disabled employee are tax-deductible. 

If the employee owns the policy but the business pays for it, then there are a couple of options. Premiums may be tax-deductible to the business depending upon whether the business claims the premium as a business expense or as a compensation bonus to the employee. That will also determine if the premiums and benefits are taxable to the employee. 

Different rules apply for owners of pass-through entities (e.g., sole proprietors, more than 2% shareholders of S-corporations, partners of partnerships, and members of limited liability companies).1Clearly, you should consult with your tax and legal advisors on the plan design since there are several ways to do this, each having its own advantages and disadvantages. 

Getting Started: Implementing the QSPP with Disability Income Insurance 

A QSPP must be in place before an employee’s disability in order to obtain favorable tax treatment. To start a plan:

1Select the employees to participate.

 2Select the disability insurance policy features to include in your QSPP.

3Create a QSPP plan document.

4Pass a corporate resolution, if required, adopting the QSPP.

Communicate the QSPP provisions to participating employees.

When choosing which employees you want to participate in the QSPP, employees can be divided into different employee classes (i.e. management, key employees, support staff, etc.) with different salary continuation benefits. You select the disability insurance policy features available for each class of employees. 

Premium structures, option selections, and benefit payment options can vary between different classes of employees. Premium discounts may be available if there are more than three participants. 

Finally, because a QSPP is considered a welfare benefit plan, it is subject to certain ERISA2regulations. Employees must receive a “statement of rights” under ERISA. And, in addition to a written plan document, plan specifications must be communicated to all covered employees. Plans with fewer than 100 participants are exempt from ERISA’s annual filing requirement (Form 5500-EZ). 


Tax deductions appeal to all business owners. But a QSPP funded with disability insurance is about more than just deductions—it’s about doing right by your employees and protecting your business's most valuable assets. You probably will do what you can to help your employees get through a difficult time, but with a QSPP funded with disability insurance, you have gained a leg-up on the competition who will be scrambling when an employee disability strikes.


1Premiums are not deductible for sole proprietors, partners, members of LLCs, or S corporation shareholders ( > 2% owners). 

2The Employee Retirement Income Security Act of 1974. 

This publication is provided for informational purposes only and should not be considered tax or legal advice. Please contact your tax or legal advisor regarding the tax treatment of the policy and policy benefits. You should consult with your own independent tax and legal advisors regarding your particular set of facts and circumstances. 

The information provided is not intended or written to be used, and cannot be relied upon, to avoid penalties imposed under the Internal Revenue Code or state and local tax law provisions. The information displayed on this page are the opinions and views of the author and are not necessarily the opinions and views of The Guardian Life Insurance Company of America (Guardian), or any company that is an affiliate or subsidiary of Guardian.

This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.

Qualified Sick Pay Plans

By : Bill Olmsted

(301) 970-4616

2022-140682 Exp: 7/26/24