10844PPT (Rev 11/13) SI/SNY About Salary Continuation Plans Presentation For Employers Standard Insurance Company | The Standard Life Insurance Company of New Standard Insurance Company is licensed to issue insurance in all states except New York. The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York.. Individual Disability Insurance

10844PPT (Rev 11/13) SI/SNY Tough Decision: Do you continue to pay key employees who are unable to work while they recover from a disability? Discontinue compensation Continue compensation Ad hoc payments Salary continuation plans Self-funded plans Insured plans Who pays? Topics

10844PPT (Rev 11/13) SI/SNY Chism Ice Cream Company vs. IRS Considerations Relevant Laws Getting Started with a Salary Continuation Plan Sample Board of Directors Resolution Sample Salary Continuation Plan Resolution Topics (cont’d)

10844PPT (Rev 11/13) SI/SNY Just over one in four of today’s twenty year-olds will become disabled before reaching age 67.* If one of your key employees was unable to work for an extended period of time, would you continue to pay compensation to that employee? *Social Security Basic Facts, July 26, 2013 Tough Decision

10844PPT (Rev 11/13) SI/SNY If you choose to discontinue your key employee’s compensation, How do you communicate your decision? What impact will your decision have on employee morale? What is the net effect on your business? Discontinue Compensation

10844PPT (Rev 11/13) SI/SNY If you choose to continue your employee’s compensation How soon will payments start? How much will payments be? Who defines disability? Who do you pay? Will you provide purely ad hoc (discretionary) payments? Continue Compensation

10844PPT (Rev 11/13) SI/SNY Ad hoc payments are those made by employers to sick or injured employees on a discretionary basis and not according to any pre-existing plan. Ad hoc payments can create serious income tax issues. If the IRS determines that payments to a disabled employee are ad hoc payments, any employer deductions for these payments will almost certainly be denied. If the disabled employee is also a stockholder in the employer’s business, the payments may be recharacterized as dividends, with dramatic results. Ad Hoc Payments

10844PPT (Rev 11/13) SI/SNY Consider the case of Chism Ice Cream Company vs. Commissioner* A long line of Federal Court decisions support the IRS position on ad hoc payments. The underlying message of these rulings is clear: If you intend to deduct payments made to a disabled employee, you must have a salary continuation plan in place before the payments begin. Ad Hoc Payments *TC Memo , aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY You can avoid the problems associated with ad hoc payments and resolve all of the issues with a salary continuation plan, if the plan is in writing, in place “before the fact”, communicated to employees, and authorized in writing by a company resolution or other documentation. Salary Continuation Plan

10844PPT (Rev 11/13) SI/SNY How would you fund your plan? Would it be self-funded or insured? Funding Your Plan

10844PPT (Rev 11/13) SI/SNY To fund your own plan, consider Liability Timing Budgeting (FAS 112 * ) Reporting Rules Definition of Disability Fiduciary Responsibility Claim and Rehabilitation.Administration *Financial Accounting Standards Board Statement No. 112 (FAS 112) requires employers who provide self-funded benefits, including salary continuation benefits to disabled employees, to recognize and account for those benefits. Self-Funded Plan

10844PPT (Rev 11/13) SI/SNY The same considerations exist with a insured plan as with a self-funded plan. Timing Budgeting (FAS 112) Reporting Rules Definition of Disability Fiduciary Responsibility Claim and Rehabilitation.Administration When you fund the plan with an individual disability insurance contract, all of the above considerations are addressed. Insured Plan *Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY Who pays the premiums? Consider the impact of taxation. Who Pays? If premiums are paid by: Employer Employee 162 bonus Split premium Split benefit duration Benefits received are: …taxable to employee …tax free to employee …partially tax free

10844PPT (Rev 11/13) SI/SNY Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C. Memo , aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many federal tax court rulings that show ad hoc payments do not work. E.W. Chism founded Chism Ice Cream Company in 1905 and was the driving force behind the business throughout his life. Mr. Chism became the primary shareholder of the company when it was incorporated in 1933, and served as president of the company until his death in Chism Ice Cream Company v. Commission of Internal Revenue

10844PPT (Rev 11/13) SI/SNY Mr. Chism was seriously incapacitated in 1952 and was no longer able to run the day to day operations of the company. Despite his incapacity, the company continued to pay Mr. Chism either the same or increased amounts of salary. Because Chism Ice Cream Company had an informal policy of paying employees while they recovered from illnesses and injuries, the company’s management assumed there was a sick- pay plan in place. The company continued to deduct the payments to Mr. Chism as a legitimate business expense, and these payments were treated by the company as “salary” on its books and in its corporate income tax returns. Chism (cont’d)

10844PPT (Rev 11/13) SI/SNY The IRS did not agree. Rather, the service denied the deductions claimed by the company for salary paid to Mr. Chism. The company took the case to the Tax Court, which held in favor of the IRS. The Tax Court ruled that no sick-pay plan had ever been put in place, no employees had been notified or advised of the existence of any such plan, nor did they have the right to demand benefits under such a plan. In other words, a portion of the “salary” paid to Mr. Chism represented excessive compensation for services rendered, which is not deductible by the company. Chism (cont’d)

10844PPT (Rev 11/13) SI/SNY The end result? Instead of deductible salary, the company had paid Mr. Chism non-deductible excessive compensation and dividends from 1952 to As a result of these non-deductible payments, the IRS collected a combined total of $45,000 in back taxes, penalties and interest. Chism (cont’d)

10844PPT (Rev 11/13) SI/SNY Chism Ice Cream v. Commissioner, T.C. Memo , affirmed 322 F. 2d 956 (9th Cir. 1963) USCA 1963 income continued during disability was considered dividends instead of salary and not deductible because there was no evidence of a formal plan and nothing had been communicated to the employees. Case Considerations

10844PPT (Rev 11/13) SI/SNY Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494 (1st Cir. 1968) The court held that payments were not deductible to the employer as payments under a sick-pay plan. The court found that no plan had been communicated to employees and the ad hoc payments made by the company benefited shareholders rather than employees. Occhipinti v. Commissioner, T.C. Memo The court denied any tax exclusion for payments to an employee under a company accident or health plan. The court found that there was a complete absence of evidence of a plan, formal or informal, maintained by the company for paying its employees during an illness. Case Considerations (cont’d)

10844PPT (Rev 11/13) SI/SNY IRC, section Describes rules for taxation of amounts received by an employee under accident and health plans. IRC, section Provides that gross income of an employee does not include employer-provided coverage under an accident or health plan. IRC, section Describes ordinary and necessary business expenses, which may include bonus payments used to fund an accident and sickness plan. Relevant Laws

10844PPT (Rev 11/13) SI/SNY Employee Retirement Security Act of 1974 (ERISA) - Written plan must adhere to plan document requirements, reporting and disclosure rules, and fiduciary standards. Financial Accounting Standards Board Statement No.112 (FAS 112) - Requires self-funded accident and sickness plans to recognize and account for salary continuation benefits. Relevant Laws (cont’d)

10844PPT (Rev 11/13) SI/SNY Obtain census information Make decisions about who to insure, for how much, and when to start and stop benefits Consider premium and benefits tax considerations See sample resolution and sample plan to attorney on following slides How to Get Started

10844PPT (Rev 11/13) SI/SNY A special meeting of the Board of Directors of _______was held at ________on ________at ______ o’clock. The following directors, constituting a quorum, were present:____________ The president of the corporation acted as chairman of the meeting, and the secretary of the corporation acted as secretary of the meeting. The chairman stated that the purpose of the meeting was to consider the adoption of Sick Pay Plans for certain key employees. After due discussion and upon motion made, seconded and approved, the following resolution was duly adopted: WHEREAS it is the desire of the corporation to establish Sick Pay Plans for certain key employees by providing any such employee with an income during disability due to sickness or injury, and thereby providing any such employee with an added incentive to continue his or her services to the corporation, and Sample Resolution Of Board of Directors

10844PPT (Rev 11/13) SI/SNY WHEREAS a method for accomplishing this purpose is provided for under Sections 105, 106 and 162 of the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of 1976, the Social Security Amendments of 1983, and all rules, regulations and amendments pertaining to the aforesaid Code and Acts, BE IT RESOLVED that Sick Pay Plans for certain key employees are hereby adopted in accordance with the aforesaid Code, Acts, rules, regulations and amendments, subject to the terms of the forms exhibited to the meeting, attached to these minutes, incorporated herein by this reference and made part hereof as if fully set out herein, and covering the following key employees: Sample Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY BE IT FURTHER RESOLVED that the appropriate officers of the corporation be, and they hereby are authorized and directed to take such steps as they deem necessary to establish said Sick Pay Plans and to make payments from the funds of the corporation each year as may be required thereunder. There being no further business before the meeting, the same was, upon motion made, seconded and carried, duly adjourned. DateSecretary This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the client’s legal and tax counsel. Sample Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY The undersigned secretary of _______, does hereby certify that: A special meeting of the Board of Directors of ________, was held at the office of the corporation at ________, on ________, ______ at ______ o’clock for the purpose of acting upon a proposal that the corporation establish a Salary Continuation Plan for certain employees of the firm. ___________ was Chairperson of the meeting and ___________ acted as Secretary. The meeting was called to order by the Chairperson and minutes were recorded by the Secretary. A waiver of notice of the meeting, duly executed and dated ____, ___ was presented. A quorum of Directors was present. Sample Salary Continuation Plan Resolution

10844PPT (Rev 11/13) SI/SNY The Chairperson stated that the purpose of the meeting was to authorize and direct that the necessary steps be taken to place in operation a Salary Continuation Plan for certain valuable employees. Discussion followed, and thereafter, upon motion duly made and seconded, the following resolution was adopted by unanimous vote. RESOLVED, that the Corporation establish a Salary Continuation Plan to pay the following benefits to the following eligible employees: Group I Employees: [list employee names] The Corporation will pay all employees in Group I full (100%) salary for the initial_____ weeks/months of total disability and three-fourths (75%) salary for the next _____ weeks/months of continuing total disability and one-half (50%) salary for the next _____ weeks/months of continuing total disability. Sample Salary Continuation Plan Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY Group II Employees: [list employee names] The Corporation will pay all employees in Group II full (100%) salary for the initial_____ weeks/months of total disability and one-half (50%) salary for the next _____ weeks/months of continuing total disability. Group III Employees: [list employee names] The Corporation will pay all employees in Group III full (100%) salary for the initial_____ weeks/months of total disability and ____ % salary for the next _____ weeks/months of continuing total disability. This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the client’s legal and tax counsel. Sample Salary Continuation Plan Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY BE IT FURTHER RESOLVED, that the Corporation shall satisfy these obligations by purchasing appropriate disability income insurance policies from The Standard, on the lives of all eligible employees who are insurable at rates not exceeding ___ % of standard premiums. If an eligible employee is not so insurable, the Corporation shall create a sinking fund for future use by periodically contributing an amount equal to ____% of standard premiums on that employee. Corporate officers are authorized and instructed to pay the premium on all policies as they become due. Sample Salary Continuation Plan Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY Also, any insured employee shall be notified that he or she has the option of having all, or part, of the cost of any such policies on his or her life treated as additional compensation. Should this option not be selected by the employee, it shall be made clear that all premium payments will be made as part of this plan and not treated as additional compensation. Benefits paid to the employee in this case will be taxable. For purposes of this plan, the definition of total disability shall be as defined in the above policies. Sample Salary Continuation Plan Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY The funds necessary to pay benefits under this plan shall come from disability income insurance contracts and the general assets of the Corporation, as necessary. Each insured employee shall be the Owner and Loss Payee of all insurance contracts purchased under this plan. Dated Secretary On this date I have read and understand the above plan and the benefits provided for me. Dated Employee This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the client’s legal and tax counsel. Sample Salary Continuation Plan Resolution (cont’d)

10844PPT (Rev 11/13) SI/SNY The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of each subsidiary. Each company is solely responsible for its own financial condition. Standard Insurance Company is licensed to solicit insurance business in all states except New York. The Standard Life Insurance Company of New York is licensed to solicit insurance business in only the state of New York. These policies have exclusions and limitations and terms under which the policies may be continued in force or discontinued. Some policy provisions and available riders may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical exam may be required upon application. For complete cost and coverage details, please contact your insurance representative or The Standard at ( in New York.) The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of each subsidiary. Each company is solely responsible for its own financial condition. Standard Insurance Company is licensed to solicit insurance business in all states except New York. The Standard Life Insurance Company of New York is licensed to solicit insurance business in only the state of New York. NOTE: For policies issued in New York: This policy would provide disability income insurance only. It does not provide basic hospital, basic medical or major medical insurance as defined by the New York State Department of Financial Services. The expected benefit ratio is at least 55% for individual coverage and at least 60% for franchise coverage. This ratio is the portion of future premiums which The Standard expects to return as benefits, when averaged over all people with the applicable policy. The policy has exclusions and limitations and terms under which the policy may be continued or discontinued. For costs and complete details of coverage, please contact your insurance representative or The Standard.