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 Employee Benefit Expertise Big Company Prices Big Company Prices Knowledge Givers Knowledge Givers They need you! They need you!

Why Worksite ? Decline in personal insurance coverage Decline in personal insurance coverage Rising cost of benefits Rising cost of benefits Competition for employees Competition for employees Pressure on insurance companies to lower distribution costs Pressure on insurance companies to lower distribution costs Advantages for the employee Advantages for the employee

The Worksite Market $3 Billion and Growing

Mr. or Ms Employer Who would pay you or your key employees in the event of a disability? Who would pay you or your key employees in the event of a disability? Have you informed the employees of your decision? Have you informed the employees of your decision?

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

Sources of Disability Benefits Company sponsored sick days or paid time off Company sponsored sick days or paid time off Workers Compensation Workers Compensation Social Security Social Security Employer sponsored disability plans Employer sponsored disability plans Privately owned disability plans Privately owned disability plans State sponsored disability plans State sponsored disability plans Pension plans Pension plans Accident coverage Accident coverage Specified Disease &Critical illness plans Specified Disease &Critical illness plans Long Term Care Coverage Long Term Care Coverage

Worksite DI Market 90% of firms with less than 100 workers have no disability coverage for employees! 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! Most small to medium sized employers do not have a properly formalized sick pay plan!

Sick Pay Plans (Short Term Disability) Sick Pay Plans -----refers to uninsured continuation of salary or wages for a few days or weeks 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 Short Term Disability----- disability insurance coverage with a short elimination period (example 7 or 14 days) and benefits of less than 6 months

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. 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.

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. 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.

IRC Section 104 IRC Section 104 Proceeds received from disability or income replacement insurance plans are not included in a persons gross taxable income. 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 ! The exclusion from gross income assumes that the coverage is purchased with after tax dollars !

IRC Section 105 In order for a sick pay plan to be tax deductible it must be in place prior to a disability. 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. 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. Requires the employee to include in gross income the proceeds received from employer purchased plans.

IRC Section 106(a) Employer paid disability insurance premiums for individual or group policies are not included in an employees taxable income. 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. Disability income benefits are tax exempt to the employee as long as the employee is paying the full premium.

IRC Section 162 (Executive Bonus) An employer can deduct a reasonable allowance for wages and other compensation for services actually rendered. An employer can deduct a reasonable allowance for wages and other compensation for services actually rendered.

ERISA (Title 1) The document must provide sufficient information in order that employees can determine their rights and benefits under the plan. 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. A claims procedure must be established and maintained.

ERISA (Title 1) The plan must be in writing.(A board resolution) The plan must be in writing.(A board resolution) The plan and benefits must be communicated to the employees covered. The plan and benefits must be communicated to the employees covered. There must be a plan administrator. There must be a plan administrator. Fiduciary rules apply to the plan. Fiduciary rules apply to the plan.

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

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

Formalized Sick Pay Plan The Plan must be in writing and describe who is covered and what are the plan benefits. 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. It must be communicated to the covered employees. The benefits available should be put in writing in some form of business memo or letter. The benefits available should be put in writing in some form of business memo or letter.

Sample Board Resolution

Letter of Determination

Salary Continuation Plans One or more employees can be covered. One or more employees can be covered. Different plans can be used to cover different classes of employees. Different plans can be used to cover different classes of employees. The plan does not have to be funded. The plan does not have to be funded.

Formal or Informal Funding Formal (Insurance) Formal (Insurance) Disability insurance satisfies most of the requirements of a sick pay plan. Disability insurance satisfies most of the requirements of a sick pay plan. Premiums are deductible in the current tax year Premiums are deductible in the current tax year Informal(Employer) Informal(Employer) Most employers are not equipped to be in the disability insurance business. Most employers are not equipped to be in the disability insurance business. F.A.S.B. # 112(future benefits are a liability) F.A.S.B. # 112(future benefits are a liability)

F.A.S.B. #112 Employers must use accrual accounting rules for benefits provided to employees when they are terminated prior to retirement. Employers must use accrual accounting rules for benefits provided to employees when they are terminated prior to retirement. Sick Pay Plans are included. 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. 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.

Exposure Transfer the risk of paying claims to the insurance company.

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

Cash Flow Claims payments may cause a business serious cash flow problems. Claims payments may cause a business serious cash flow problems.

Expertise The insurance company is experienced at paying claims. The insurance company is experienced at paying claims.

Employer Paid Disability Insurance Employer Paid Disability Insurance Employers can deduct disability insurance premiums used for the benefit of employees as a business expense 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 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) Employers are liable for payroll taxes (matching FICA for six months)

Employee Paid Disability Employee receives disability insurance proceeds income tax free Employee receives disability insurance proceeds income tax free Employers do not have to pay payroll taxes on the claim payments received by employees 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 Employee does not have to pay FICA taxes on benefits received

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. 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.

Measuring Premium Contribution IRS regulations state the time period to be used to measure the percentage of employer & employee 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. Generally the time period for group disability is 3 years prior to the disability. New letter ruling New letter ruling

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

Q & A on Section 105 Qualified Sick Pay Plans

What is a Qualified Sick Pay Plan? It is a simple agreement providing for a firm to continue some portion of an employees wages during a disability. It is a simple agreement providing for a firm to continue some portion of an employees wages during a disability.

What type of firm or business entity may adopt a Sick Pay Plan? Any corporation(C or S),professional corporation,partnership,or sole proprietorship. Any corporation(C or S),professional corporation,partnership,or sole proprietorship.

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

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

When must a plan be adopted by a firm? Before the employee becomes disabled! Before the employee becomes disabled!

Is formalizing a sick pay plan a complex procedure? No,it simply requires adopting a plan resolution and providing the employee with a simple plan letter. No,it simply requires adopting a plan resolution and providing the employee with a simple plan letter.

Must the plan be in writing? Yes, and the employees must be made aware of the terms. (Title 1 of ERISA) 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. There must be more than a statement that coverage exists.

Whats the status of a disabled person not covered by the plan before the disability begins? The person would be considered an ex-employee.

If money is paid to an ex- employee,can it be called wages? No,because wages can only be paid to employees. No,because wages can only be paid to employees.

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

Are Ad Hoc Payments tax deductible to employers? No, the court has held them not to be a business expense! No, the court has held them not to be a business expense!

When can money paid to a person be called wages? Only when the person is an employee. Only when the person is an employee.

How does eligibility enter into the qualifications of a Plan? There must be a bona-fide employer- employee relationship. 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. The plan cannot be for an owner or stockholder who does not actively work in or participate in the business.

Do benefits have to be equal among employees? No, the employer can discriminate among employees! No, the employer can discriminate among employees!

On what basis can the employer determine who receives what benefits? Employment Class Employment Class Salary Level Salary Level Length of Service Length of Service

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

They Cant Catch ME! A firm doesnt 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? A firm doesnt 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. When the Ex- Employee applies for Social Security Disability,or when an audit is conducted by the IRS, the subterfuge will be obvious.

Communicating To Employees Speak in the vernacular Speak in the vernacular Explain how new coverage fits with the existing benefits Explain how new coverage fits with the existing benefits

Who Pays You When You Are Sick Or Hurt ?

Company Sick Pay Plan? Most sick pay plans are limited to a few days or weeks.

Vacation Days

Workers Compensation ( The Plan that Employees Remember !)

Social Security ( The Forgotten LTD Plan !) Social Security benefits are difficult to qualify for and usually do not begin for at least six months.

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

Disability Insurance Pay Check Protection

Programming Disability Benefits Workers Compensation Workers Compensation Social Security Social Security State Disability Plans State Disability Plans Pension Plans Pension Plans Medical Plans(Supplemental Accident Coverage) Medical Plans(Supplemental Accident Coverage) Specified Disease Coverage Specified Disease Coverage Sick Pay Plans Sick Pay Plans STD STD LTD LTD Accident Coverage Accident Coverage Long Term Care Long Term Care Critical Illness Critical Illness

What type of Platform for the coverage ? Individual Individual Franchise Franchise Group Group Blended Blended

What elimination period to use? The shorter the better for blue collar groups! The shorter the better for blue collar groups! Avoid elimination periods of less than 7 days for both accident or sickness! Avoid elimination periods of less than 7 days for both accident or sickness! Avoid overlaps of coverage and other employee benefits. Avoid overlaps of coverage and other employee benefits.

What benefit period to use? The one that is best for the employer and the employees. The one that is best for the employer and the employees. Fill the gaps and avoid overlaps of coverage if at all possible. Fill the gaps and avoid overlaps of coverage if at all possible. Remember how benefits and premiums are taxed. Remember how benefits and premiums are taxed.

Obstacles or Opportunity? ADA &FMLA ADA &FMLA Economic Conditions Economic Conditions Rising Employee Benefit Cost Rising Employee Benefit Cost Monday Morning Workers Compensation Claims Monday Morning Workers Compensation Claims