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Sick Pay Plans & Worksite Disability Insurance. By: Charles L. Westmoreland CLU,ChFC,RHU,REBC,MSFS. Boot Camp. Payroll Deduction Disability Insurance. The Needs of Small & Medium Sized Employers. Employee Benefit Expertise Big Company Benefits @Budget Prices Knowledge Givers

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Sick pay plans worksite disability insurance l.jpg

Sick Pay Plans & Worksite Disability Insurance

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


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Boot Camp

Payroll Deduction Disability Insurance


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The Needs of Small & Medium Sized Employers

  • Employee Benefit Expertise

  • Big Company Benefits @Budget Prices

  • Knowledge Givers

  • They need you!


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Why Worksite ?

  • Decline in personal insurance coverage

  • Rising cost of benefits

  • Competition for employees

  • Pressure on insurance companies to lower distribution costs

  • Advantages for the employee


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The Worksite Market

$3 Billion and Growing


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Mr. or Ms Employer

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

  • Have you informed the employees of your decision?


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Employees

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


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Company sponsored sick days or paid time off

Workers Compensation

Social Security

Employer sponsored disability plans

Privately owned disability plans

State sponsored disability plans

Pension plans

Accident coverage

Specified Disease &Critical illness plans

Long Term Care Coverage

Sources of Disability Benefits


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Worksite DI Market

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

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


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Sick Pay Plans (Short Term Disability)

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

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


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Sick Pay Plans

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


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Sick Pay Plans

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


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IRC Section 104

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

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


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IRC Section 105

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

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

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


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IRC Section 106(a)

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

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


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IRC Section 162 (Executive Bonus)

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


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ERISA (Title 1)

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

  • A claims procedure must be established and maintained.


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ERISA (Title 1)

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

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

  • There must be a plan administrator.

  • Fiduciary rules apply to the plan.


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Welfare Benefit Plan

A disability wage continuation plan almost always constitutes an employer welfare plan.


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DISABILTY INSURANCE

Disability insurance is the simplest way to satisfy ERISA and IRS requirements


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Formalized Sick Pay Plan

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

  • It must be communicated to the covered employees.

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




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Salary Continuation Plans

  • One or more employees can be covered.

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

  • The plan does not have to be funded.


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Formal (Insurance)

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

Premiums are deductible in the current tax year

Informal(Employer)

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

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

Formal or Informal Funding


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F.A.S.B. #112

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

  • Sick Pay Plans are included.

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


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Exposure

Transfer the risk of paying claims to the insurance company.


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Timing

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


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Cash Flow

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


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Expertise

  • The insurance company is experienced at paying claims.


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Employer Paid Disability Insurance

  • Employers can deduct disability insurance premiums used for the benefit of employees as a business expense

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

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


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Employee Paid Disability

  • Employee receives disability insurance proceeds income tax free

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

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


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Disability Insurance & Cafeteria Plans

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


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Measuring Premium Contribution

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

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

  • New letter ruling


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Section 162 Plan (Executive Bonus Plan)

  • In order to avoid taxation of employer paid disability benefits to an employee the employer can simply bonus the amount of premium to the employee .

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



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What is a Qualified Sick Pay Plan?

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


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What type of firm or business entity may adopt a Sick Pay Plan?

  • Any corporation(C or S),professional corporation,partnership,or sole proprietorship.


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When is a person considered to be an employee? Plan?

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


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

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


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When must a plan be adopted by a firm? plan classified as wages?

  • Before the employee becomes disabled!


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Is formalizing a sick pay plan a complex procedure? plan classified as wages?

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


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Must the plan be in writing? plan classified as wages?

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

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


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What’s the status of a disabled person not covered by the plan before the disability begins?

The person would be considered an ex-employee.


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If money is paid to an ex-employee,can it be called wages? plan before the disability begins?

  • No,because wages can only be paid to employees.


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What term would be applied to money paid to a disabled ex-employee?

  • The money has been described by the Federal Tax Court as AD HOC Payments.


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Are Ad Hoc Payments tax deductible to employers? ex-employee?

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


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When can money paid to a person be called wages? ex-employee?

  • Only when the person is an employee.


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How does eligibility enter into the qualifications of a Plan?

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

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


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Do benefits have to be equal among employees? Plan?

  • No , the employer can discriminate among employees!


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On what basis can the employer determine who receives what benefits?

  • Employment Class

  • Salary Level

  • Length of Service


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

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


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

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

They Can’t Catch ME!


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Communicating To Employees disabled and the firm continues to pay them. The firm deducts the payments as wages.What is the red flag to the IRS?

  • Speak in the vernacular

  • Explain how new coverage fits with the existing benefits


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Who Pays You When You Are Sick Or Hurt ? disabled and the firm continues to pay them. The firm deducts the payments as wages.What is the red flag to the IRS?


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Company Sick Pay Plan? disabled and the firm continues to pay them. The firm deducts the payments as wages.What is the red flag to the IRS?

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


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Vacation Days disabled and the firm continues to pay them. The firm deducts the payments as wages.What is the red flag to the IRS?


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Workers Compensation ( The Plan that Employees Remember !)


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Social Security ( The Forgotten LTD Plan !)

Social Security benefits are difficult to qualify for and usually do not begin for at least six months.


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“Total & Permanent Disability” (The Social Security definition)

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

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


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Disability Insurance Security definition)

Pay Check Protection


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Workers Compensation Security definition)

Social Security

State Disability Plans

Pension Plans

Medical Plans(Supplemental Accident Coverage)

Specified Disease Coverage

Sick Pay Plans

STD

LTD

Accident Coverage

Long Term Care

Critical Illness

Programming Disability Benefits


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What type of Platform for the coverage ? Security definition)

  • Individual

  • Franchise

  • Group

  • Blended


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What elimination period to use? Security definition)

  • The shorter the better for blue collar groups!

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

  • Avoid overlaps of coverage and other employee benefits.


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What benefit period to use? Security definition)

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

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

  • Remember how benefits and premiums are taxed.


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Obstacles or Opportunity? Security definition)

  • ADA &FMLA

  • Economic Conditions

  • Rising Employee Benefit Cost

  • Monday Morning Workers Compensation Claims


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