1. GOVERMENTAL DISABILITY PROGRAMS

2. 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

3. Why the Need? 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!

4. 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

5. 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.

6. 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.

7. 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 !

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. Sample Board Resolution

14. Letter of Determination

15. 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.

16. 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)

17. 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.

18. 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)

19. 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

20. 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.

21. 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

22. 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.

23. Workers Compensation ( The Plan that Employees Remember !)

24. Role of Workers Comp Six Basic Principles Six Basic Principles –Provide sure, prompt and reasonable income and medical benefits to work-accident victims, or income benefits to their dependents regardless of fault –Provide a single remedy and reduce court delays, costs, and workloads arising out of personal injury litigation

25. Role of Workers Comp Six Basic Principles (cont.) Six Basic Principles (cont.) –Relieve public and private charities of the financial drain of uncompensated industrial accidents –Eliminate payment of fees to lawyers and witnesses involved in trials and appeals –Encourage maximum employer interest in safety and rehabilitation –Promote the study of causes of accidents and work to reduce preventable accidents and human suffering

26. Breadth of Coverage All 50 states, the District of Columbia and the territories of American Samoa, Guam, Puerto Rico and the U.S. Virgin Islands All 50 states, the District of Columbia and the territories of American Samoa, Guam, Puerto Rico and the U.S. Virgin Islands The number of claims, duration of claims, and the cost of the claims has jumped dramatically over the last couple of years The number of claims, duration of claims, and the cost of the claims has jumped dramatically over the last couple of years Typically, the covered benefit will be far less then what the person might expect if disabled and covered by group short and/or long-term disability insurance Typically, the covered benefit will be far less then what the person might expect if disabled and covered by group short and/or long-term disability insurance

27. State Cash Sickness Benefits Alternative to Workers Compensation Alternative to Workers Compensation Available in 5 states; California, Hawaii, New Jersey, New York, and Rhode Island Available in 5 states; California, Hawaii, New Jersey, New York, and Rhode Island Provides cash payments during short-term periods of sickness or illness due to injury or disease, and not by employment situations Provides cash payments during short-term periods of sickness or illness due to injury or disease, and not by employment situations Purpose is to provide temporary replacement of lost earnings because of a workers off the job disability Purpose is to provide temporary replacement of lost earnings because of a workers off the job disability

28. State Cash Sickness Benefits The elimination period for benefits is typically 1 week The elimination period for benefits is typically 1 week Benefits are usually payable for up to 26 weeks. Benefits are usually payable for up to 26 weeks. In California, benefits may commence upon actual hospitalization and continue for up to 39 weeks In California, benefits may commence upon actual hospitalization and continue for up to 39 weeks

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

30. Social Security 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.

31. The Social Security Definition A person must not only be unable to his/her previous work or work commensurate with the previous work in amount of earnings and utilization of capacities, but also be unable, considering age, education, and work experience, to engage in any other kind of substantial work which exists in the national economy. A person must not only be unable to his/her previous work or work commensurate with the previous work in amount of earnings and utilization of capacities, but also be unable, considering age, education, and work experience, to engage in any other kind of substantial work which exists in the national economy.

32. Social Security Facts One can claim following 6 months of total disability One can claim following 6 months of total disability 1:3 claims are payable 1:3 claims are payable Typically, many payments are only paid following lengthy appeals Typically, many payments are only paid following lengthy appeals

33. 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

34. Questions??????